Markets Wired

I want to thank Directors Chopra and McKernan for these proposals. They shine much needed light on the evolving nature of bank ownership, control, and corporate governance.

As noted by my colleagues, the rise of index investing has changed the composition of bank ownership. This raises a host of important questions for bank regulators given the potential implications for safety and soundness, consumer protection, and resolvability.

These questions are relevant to all three of the federal banking agencies, not just the FDIC. To put this in context, of the more than 600 publicly traded banks, nearly all – over 95% – issue voting securities via a holding company, which is supervised by the Federal Reserve. In aggregate, of the 4,577 insured depository institutions (IDI) in the U.S., less than 20 are publicly traded and issue voting securities directly from the IDI. The statistics for OCC-supervised institutions tell a similar story of bank ownership via holding companies, with the addition that the FDIC also has backup supervisory authority for all OCC banks with insured deposits.

Thus, this issue of bank ownership and control is shared across the FDIC, OCC, and Federal Reserve. We are inextricably linked on it given how banking organizations have structured themselves. To address this effectively requires interagency coordination and, ideally, a shared understanding and approach to bank control, notices, and passivity agreements. In short, I believe we should work together to strengthen bank control assessments, instead of creating more process and opportunities for turf battles or fragmentation.

In addition, the issues at hand are novel and complex. The distinctions between proxy voting, stewardship, and control can be blurry. Opinions differ as to the impact and effectiveness of passivity mechanisms, such as mirror voting and choice voting. For us, as regulators, the key question centers on how these things impact the safety, soundness, and resolvability of banks. Further research, analysis, and debate are clearly needed. I believe any proposed rulemaking – which should be done on an interagency basis – would benefit from such discussion and debate occurring prior to its issuance, or prompted by an interagency Request for Information (RFI) or advanced notice of proposed rulemaking (ANPR).

Finally, to the extent the federal banking agencies are not coordinated or aligned on the issue of bank control, reallocating FDIC resources away from supervising banks to monitoring asset manager compliance with passivity commitments would be, at best, inefficient at this time.

For these reasons, I do not support either proposal.

To be clear, asset managers should continue their work of ensuring that their ownership stakes in banking organizations are truly passive and promote safety, soundness, and resolvability. Any evidence to the contrary will compel me to reconsider my posture on this issue.