Some recent proposed regulatory changes by two key federal agencies are raising alarms among experts and former regulators, who warn that the moves could destabilize the banking sector and drive up energy prices.
The US Federal Deposit Insurance Corporation announced proposed rules on Regulations Implementing the Change in Bank Control Act that would tighten control over index fund managers’ investments in banks. The proposed rule would require asset managers who own more than a 10% stake in a regulated bank to secure FDIC approval through a written notice, adding a new layer of scrutiny on top of Federal Reserve Board oversight, which already reviews such investments.
Critics argue that the additional regulations could undermine banks’ ability to attract stable, low-cost capital from index funds managed by firms like BlackRock, Vanguard, and State Street, which invest in banks through passive index funds.
These funds are vital for banks, particularly small and regional ones, as they navigate the challenges of volatile interest rates and uncertainty.
The 2023 collapse of Silicon Valley Bank, Signature Bank, and First Republic Bank, are among the second, third, and fourth largest bank failures in US history, which shook up the banking system and amplified concerns over the sector’s vulnerability.
Karen Kerrigan, CEO of the Small Business & Entrepreneurship Council, warned that the FDIC’s proposal could hinder capital availability, especially for smaller institutions, stating that the proposed rules focus on “gaining agency influence and creating more complexity and confusion rather than upholding stability.”
At the same time, former acting Consumer Financial Protection Bureau Director Mick Mulvaney blasted the proposal in comments to Politico.
Meanwhile, the Federal Energy Regulatory Commission also pushed for a review of its blanket authorization policy for index fund managers investing in utilities in December of 2023. Historically, fund managers have been able to hold stakes in utilities without prior approval, provided they act as passive investors.
FERC argues that consolidated ownership could lead to anti-competitive practices and potential undue influence over utility operations.
Opposition to FERC’s proposed changes is growing among utilities, renewable energy developers, and asset managers. Critics, including the American Council on Renewable Energy and the Edison Electric Institute, contend that restricting index fund investments could cut off a critical source of low-cost capital, which, they argue, would jeopardize funding for the construction of new energy infrastructure needed to meet future demand.
ACORE stated, “altering this policy creates a risk of impeding financial investment in much needed energy infrastructure.”
Wayne Winegarden, a Senior Fellow in Business and Economics at the Pacific Research Institute and Director of the Center for Medical Economics and Innovation, cautioned that the changes could threaten energy reliability.
Kevin Kimble, CEO of the Financial Services Innovation Coalition, warned that underserved communities could bear the brunt of reduced investment in both the banking and energy sectors.
Kimble also questions how much the FDIC has “fully explored if they would create a rippling effect of restricted capital that will affect the entire market.”
While proponents of the rules cite concerns about market concentration and regulatory oversight, critics maintain that the proposals risk destabilizing two critical sectors of the US economy.
