The Federal Deposit Insurance Corporation (FDIC) and BlackRock are at odds over proposed compliance measures targeting investors with significant stakes in small and midsized banks. With a moved back deadline to March 31, the FDIC continues to push BlackRock to accept these overzealous rules—which apply when it owns more than 10% of shares in FDIC-supervised banks—despite BlackRock’s efforts to propose an alternative agreement.

The crux of the issue lies in regulatory redundancy.

The Federal Reserve, which has the legal precedent and statute to be the primary regulator for bank holding companies, already enforces rules for asset managers with ownership stakes above 10%. These rules prohibit exerting control or influencing management policies, including decisions about capital raises and mergers. The FDIC’s attempt to impose its own oversight duplicates existing regulations, creating unnecessary compliance costs for small and mid-sized banks while stifling investment.

While I have previously highlighted four major flaws in the FDIC’s proposed rule—regulatory redundancy, the Federal Reserve’s effective enforcement history on this issue, harm to investment opportunities for smaller regional banks, and the lack of less heavy-handed alternative solutions—new information has emerged that heightens the urgency of addressing this matter.

Community banks, which are the backbone of small-business lending in America, are already struggling under the weight of regulatory burdens. A June 2024 report by the Independent Community Bankers of America (ICBA) found that more than 90% of community bankers find today’s regulatory environment more challenging than it was five years ago, with 71% identifying regulatory factors as a top challenge. Adding the FDIC’s proposed measures will exacerbate these challenges.

Beyond the immediate impact on community banks, the broader implications for the financial ecosystem are troubling. Allowing investment companies to passively hold client assets in banks without exerting control has historically encouraged capital investment in these institutions.

This arrangement benefits not only the banks but also millions of Americans who rely on diversified investment strategies to achieve their financial goals. By introducing regulatory hurdles that deter such investments, the FDIC risks destabilizing a system that has a long history of supporting economic growth, economic stability, and strong asset returns for future retirees.

Regardless of the deadline, industry leaders like BlackRock, Vanguard, and State Street have already demonstrated a willingness to adapt without government intervention. BlackRock’s Voting Choice initiative empowers investors to participate in the proxy voting process and added more proxy advisory firm options.

Similarly, Vanguard expanded its proxy voting options in 2024 and entered into its own controlled agreement with the FDIC. These voluntary efforts underscore that market-driven solutions can address concerns about shareholder influence without the need for heavy-handed regulation.

State Street, however, is classified as a bank and is subject to different rules that render the FDIC’s measures unnecessary in its case—a glaring inconsistency that highlights the political undertones of this proposal.

The FDIC’s insistence on these measures appears less about safeguarding the financial system and more about political posturing in the waning days of the Biden administration. With the incoming Trump administration, there has been an emphasis to refocus on pragmatic solutions that streamline financial regulations.

Alternatives such as modifying voting structures, requiring asset managers to relinquish voting rights, or enabling individual investors to retain voting rights could achieve the FDIC’s goals without duplicating the Federal Reserve’s oversight.

The current regulatory regime already provides robust safeguards and transparency. The Federal Reserve’s established role ensures that asset managers remain passive investors while maintaining accountability—a system that has proven effective. Introducing additional layers of oversight not only undermines this framework but also risks alienating the very investors who play a crucial role in the financial health of small and regional banks.

______________
Danielle Zanzalari is an assistant professor of economics at Seton Hall University, a Garden State Initiative contributor, and a former financial economist at the Federal Reserve Bank of Boston. She frequently researches and writes on bank regulation and public finance.