Thank you for this opportunity to speak with you today. 1 With the new year, I thought I might use this opportunity to share what’s top of mind for me as we begin 2024.

Finalizing Endgame Reforms

Of course over much of this year we’ll all continue to discuss last July’s proposal to implement the Basel Committee’s Endgame capital standards. As I’ve said previously, I generally support efforts to enhance our regulatory capital framework. There is work to be done to improve risk sensitivity and address known weaknesses in the trading book framework, among other things.

However, I was not able to support our July proposal for two main reasons.

First, the banking regulators have not made a case for important aspects of the proposal. As I argued in my dissent and in October and December speeches, the Basel Committee did not offer any rationale for some of its key design decisions, and that has left us unable to defend or even understand important aspects of the Endgame standards that we have proposed to implement. The July proposal amounts to a big leap of faith in the Basel Committee, and if anything, the particulars of the Endgame standards should give us good grounds for skepticism and also potential grounds for some departures from those standards in our U.S. implementation.

Second, to the extent the July proposal did find cause to depart from the Endgame standards, it was only with an aim to engineer higher capital requirements. This reverse engineering of higher capital paid little heed to the associated economic costs and, if finalized, would result in a capital framework unmoored from the principles that have historically rationalized the framework.

But I’ve also argued that our Endgame debate need not be binary. I take others at their word that they’re interested in fostering more consensus than we had on the July proposal. I’ve tried to be constructive by offering up a phased approach that would finalize the less contested aspects of the Endgame standards and then later finalize the rest through future notice-and-comment rulemakings that can develop more defensible rationales for a U.S. implementation. 2

The key point here is that I do earnestly hope there will be a real effort to build consensus on this important rulemaking.

Investigating the Big Three

Another topic of interest to me is the role played by Vanguard, BlackRock, and State Street—the so-called “Big Three” asset managers—as some of the largest investors in many publicly traded U.S. banking organizations. At least with respect to their index funds, the Big Three purport to be merely passive investors, but a growing body of evidence suggests that’s not always the case. In light of the large and increasing role played by the Big Three, I think we at the FDIC, as well as the other banking regulators, should revisit the regulatory comfort that we have provided some of the Big Three as to how much they can own, and what activities they may engage in, without being found to “control” a banking organization.

Control is a foundational concept under the banking laws. If a company acquires direct or indirect control of a bank, that change in control generally is subject to regulatory review under the Bank Holding Company Act or the Change in Bank Control Act. If a company directly or indirectly controls a bank, that company typically is a bank holding company subject under the Bank Holding Company Act to (i) restrictions on its commercial activities, (ii) capital and liquidity requirements, and (iii) an obligation to serve as a source of strength to the controlled bank, among other things. If a company acquires more than 10 percent of a class of a bank’s voting securities, the bank generally is subject to restrictions on extensions of credit to the company and the company’s controlled affiliates under the Federal Reserve Board’s Regulation O.

These banking laws pose some real issues for the Big Three. Due to the popularity of their index funds, each of the Big Three has large equity stakes in many publicly traded banking organizations, 3 and some have speculated that that voting power could grow to perhaps 40 percent of shareholder votes. 4 Each has experimented with permitting some index fund investors to vote some of these shares, but the Big Three still exercise significant voting power.

The Big Three have shown a willingness to use this voting power to drive change. 5 Each even maintains an “investment stewardship” team to that end. This influence prompted Berkshire Hathaway’s late Charlie Munger to conclude: “We have a new bunch of emperors, and they’re the people who vote the shares in the index funds.” 6 This influence also raises the question whether any of the Big Three has control over any banking organization for purposes of the banking laws.

Given the significant implications for their business models, the Big Three are of course quite focused on avoiding a finding of control, and some of the Big Three have sought clarity as to what would trigger a control determination. The Federal Reserve Board has provided comfort to Vanguard and BlackRock that staff would not recommend a finding of control for purposes of the Bank Holding Company Act and the Change in Bank Control Act, provided that each complies with certain passivity commitments set forth in that regulatory comfort. 7 The banking regulators have jointly provided similar comfort under Regulation O. 8 The FDIC has also provided conditional comfort to Vanguard with respect to control determinations under the Change in Bank Control Act, again subject to certain passivity commitments. 9

These safe harbors have had a tendency to expand. Recently some of the Big Three have proposed increasing their equity interests in some banking organizations well above the thresholds contemplated by this regulatory comfort, even to as much as 24.99 percent of a class of voting stock. Some have even contemplated the right to appoint up to two directors to the boards of these banking organizations. It’s fair to say that these developments have prompted some scrutiny by FDIC staff.

I support the FDIC staff’s work to address the risks in these requests for expanded regulatory comfort and also the FDIC staff’s interest in taking a more comprehensive approach to this regulatory comfort. We perhaps should consider replacing all these various articulations of FDIC regulatory comfort with FDIC Board-approved notice-and-comment rulemaking. 10 More urgently, we also need to revisit how we monitor compliance with the passivity commitments made as a condition to whatever regulatory comfort we provide. The FDIC currently relies primarily on self-certifications of compliance. 11 We should do more. We should consider taking a close look at the Big Three themselves, in particular the activities of their investment stewardship teams and their interactions with management of publicly traded banking organizations. 12 We should also scrutinize how the Big Three coordinate their voting and other investment stewardship activities with each other and with other activist shareholders, with an eye toward determining whether these asset managers are acting in concert with other shareholders. 13

Pulling back a bit, the Big Three insist their index funds are passive. If that were truly so, there might not be much issue under the banking laws. But to the extent the Big Three leverage their purportedly passive index funds to advance ESG objectives or otherwise influence corporate policy, then there is a real and significant problem here, and it’s one that the FDIC and the other banking regulators need to get in front of quickly before the influence of the Big Three grows even larger.

Updating Application Policy

On a different note, it might also be worth us revisiting how we consider the various applications that come before the FDIC, whether with respect to mergers, deposit insurance, or otherwise.

In my first year at the FDIC, I have been struck by the amount of time some applications have been under consideration. We have merger applications that have been with the FDIC for more than a year. We have deposit insurance applications by proposed industrial loan companies that have been pending with the FDIC for two or three years. As everyone’s favorite commentator wrote on the Bank Reg Blog in 2023, “In a post last year I wrote that 'at some point the time-honored FDIC tradition of simply ignoring industrial bank applications in the hope that they will go away is going to prove untenable,’ but I may have underestimated the FDIC’s power of will.” 14

To be clear, I’m not expressing a policy view on industrial loan companies or bank mergers. Regardless of one’s views on industrial loan companies or bank mergers, Congress has spoken, and we have an obligation to consider these applications in good faith.

Perhaps related to this, our statements of policy on applications for deposit insurance and bank merger transactions are 25 years old. 15 The FDIC’s views have evolved during that time to incorporate lessons learned from the 2007-2008 financial crisis and last year’s failures of SVB, Signature, and First Republic. For example, the FDIC may be more concerned now that certain business models or operational interdependencies with a parent organization could result in the destruction of significant franchise value in resolution, potentially exposing the Deposit Insurance Fund to loss. If so, we owe it to the public to articulate a revised policy framework for these applications and timely consider applications against that policy.

Enhancing the Resolution Framework

One lesson of the events of last March is that, despite 15 years of reform efforts, we still have a system that privatizes gains while socializing losses.

I understand of course that the shareholders of SVB and Signature were wiped out. I understand also that the banking industry absorbed the cost of making SVB and Signature’s uninsured depositors whole. Some argue there was no bailout. But private parties—namely the uninsured depositors—that were otherwise on the hook to absorb SVB and Signatures’ losses did not take those losses thanks to extraordinary action by the FDIC; instead, thanks to that extraordinary action, those losses were borne by others. That’s a bailout.

To be clear, I still believe our decision to invoke the “systemic risk exception” was the right decision given the apparent risks to financial stability and the economy at the time. 16 Even if it was the lesser of two evils, we should be honest about what we did with SVB and Signature, and we should acknowledge that that bailout has not only fostered moral hazard but also has undermined public confidence in the basic fairness of our banking system.

I take from the events of March that considerable work remains to be done to avoid future bailouts. The first step is to accept that bank failures are inevitable in a dynamic economy. We should then plan for those bank failures by focusing on strong capital requirements and an effective resolution framework as our best hope for eventually ending this practiced habit we’ve developed of privatizing gains while socializing losses.

That is why I supported our August proposal to require certain large banking organization to have outstanding a minimum amount of long-term debt. That is also why I have kept an open mind on proposals to enhance our regulatory capital framework.

But is that enough? No system is adequate if we ourselves do not have the courage and conviction to pull the trigger and impose losses on the private parties that are supposed to bear those losses. Credit Suisse had long struggled, its potential failure was long anticipated, and its regulators had a seemingly credible resolution strategy. 17 Yet Credit Suisse was resolved with government support outside resolution. 18

So I’ll amend my previous statements. To actually end our bailout culture, we have to not only accept the inevitability of bank failures and implement strong capital requirements and an effective resolution framework, we also must summon our own conviction and courage to push forward and actually privatize the losses when the time comes, as someday it most surely will.

* * *

With that, I’ll close by thanking you for your time. I’m looking forward to your reactions to these thoughts and also to your questions.

• 1

  The views expressed here are my own and not necessarily those of my fellow board members or the FDIC.

• 2

  See Remarks by Jonathan McKernan, Director, FDIC Board of Directors, at ISDA’s Conference on Trading Book Capital: Basel III Implementation (Dec. 12, 2023) .

• 3

  Lucian A. Bebchuk & Scott Hirst, Big Three Power, and Why It Matters , 102 B.U. L. Rev. 1547, 1552 (2022) (“[W]e estimate that, as of the end of 2021, the Big Three [Vanguard, BlackRock, and State Street] collectively held a median stake of 21.9% in S&P 500 companies, which represented a proportion of 24.9% of the votes cast at the annual meetings of those companies.”); Lucian A. Bebchuk & Scott Hirst, The Specter of the Giant Three , 99 B.U. L. Rev. 721, 736 (2019) (“[T]he average share of the votes cast at S&P 500 companies at the end of 2017 was 8.7% for BlackRock, 11.1% for Vanguard, and 5.6% for [State Street] . . . . As a result, for S&P 500 companies, the proportion of the total votes that were cast by the Big Three was about 25.4% on average . . . .”).

• 4

  Bebchuk & Hirst, The Specter of the Giant Three , supra note 3, at 739.

• 5

  See generally Minority Staff of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, The New Emperors: Responding to the Growing Influence of the Big Three Asset Managers 4–7 (Dec. 2022) .

• 6

  Editorial Board, Calling Out ’Emperor’ Larry Fink , Wall St. J. (Feb. 17, 2022) .

• 7

  See Letter from Mark E. Van Der Weide, General Counsel, Federal Reserve Board, to William J. Sweet, Jr., Retired Partner, Skadden, Arps, Slate, Meagher, and Flom LLP (Dec. 3, 2020) (BlackRock); Letter from Mark E. Van Der Weide, General Counsel, Federal Reserve Board, to Anne E. Robinson, Managing Director, General Counsel, and Secretary, The Vanguard Group, Inc. (Nov. 26, 2019) (Vanguard).

• 8

  See FIL-63-2023, Extension of the Revised Statement Regarding Status of Certain Investment Funds and Their Portfolio Investments for Purposes of Regulation O and Reporting Requirements under Part 363 of FDIC Regulations (Dec. 15, 2023) .

• 9

  The FDIC’s rule implementing the Change in Bank Control Act (but not the statute itself) exempts from the FDIC’s review the acquisition of voting shares of a depository institution holding company that the Federal Reserve Board reviews under the Change in Bank Control Act. 12 C.F.R. § 303.84(a)(8). An investor typically would acquire voting shares of a holding company of the bank, not the bank itself. Currently, with respect to publicly traded banking organizations, the FDIC may receive notice under the Change in Bank Control Act and the FDIC’s implementing rule in two main situations. The first is when the acquired voting shares have been issued by one of the few (less than 10) publicly traded banks that does not have a holding company, by a parent company of one of the 24 industrial loan companies, or by a parent company of one of the relatively few other insured depository institutions that is not a “bank” within the meaning of the Bank Holding Company Act. Second, even when the acquired voting shares are of a depository institution holding company, the FDIC may be entitled to a notice under the Change in Bank Control Act and the FDIC’s implementing rule if, as might often be the case for some of the Big Three, the Federal Reserve Board does not actually require and review a notice because, for example, the Federal Reserve Board has decided to rely instead on passivity commitments in lieu of a notice. See Filing Requirements and Processing Procedures for Changes in Control With Respect to State Nonmember Banks and State Savings Associations, 80 Fed. Reg. 65,889, 65,897 (Oct. 28, 2015) (“The final rule also continues the FDIC’s longstanding practice to recognize this exemption [under 12 C.F.R. § 303.84(a)(8)] only when the Board of Governors actually reviews a Notice under the Change in Bank Control Act and not when the Board of Governors does not require and review a Notice. Accordingly, if the Board of Governors determines to accept passivity commitments in lieu of a Notice, the FDIC will evaluate the facts and circumstances of the case to determine whether a Notice is required to be filed with the FDIC for the indirect acquisition of control of an FDIC-supervised institution.”).

• 10

  The Economic Growth and Regulatory Paperwork Reduction Act of 1996 requires the FDIC and the other banking regulators to review their rules every 10 years to identify outdated or otherwise unnecessary regulatory requirements. The banking regulators will soon kick-off their statutorily-required EGRPRA review, which will be a multi-year process soliciting public comment and amending regulations as necessary. The rapid growth of the Big Three in recent years might suggest that the FDIC’s framework for control determinations under our various rules might be outdated and should be updated to reflect the new and unique issues posed by the Big Three. I would be interested to hear commenters’ views on this issue.

• 11

  The FDIC might also examine decision making at the largest banks to assess who is involved in those processes, but such examinations are perhaps of limited value given that most corporate policy is made at the holding company.

• 12

  The FDIC has broad investigatory powers under the Change in Bank Control Act. See 12 U.S.C. § 1817(j)(15). To the extent those authorities are inadequate, the FDIC could add as conditions to future regulatory comfort appropriate commitments by the asset managers to facilitate the FDIC’s monitoring of compliance with the other conditions.

• 13

  Under the Change in Bank Control Act, the FDIC can base a control determination on whether shareholders are acting “in concert.” See 12 U.S.C. § 1817(j)(1). Perhaps relevant to this inquiry, the Big Three and other activist shareholders appear to have some record of entering into joint commitments and similar agreements, for example as part of the Net Zero Asset Managers Initiative, which, as of December 4, 2023, has more than 315 asset managers, with $57 trillion in assets, committed to achieve net zero alignment by 2050 or sooner. See Signatories, The Net Zero Asset Managers Initiative (last visited Jan. 5, 2024) . Coordinating voting policies through proxy advisory services might support a similar finding.

• 14

  Catching Up , Bank Reg Blog (July 10, 2023) .

• 15

  The FDIC’s current statement of policy on applications for deposit insurance was published in 1998. Applications for Deposit Insurance, 63 Fed. Reg. 44752 (Aug. 20, 1998). The FDIC’s current statement of policy on bank mergers was published in 1998, and has been amended several times, most recently in 2008. Statement of Policy on Bank Merger Transactions, 73 Fed. Reg. 8870 (Feb. 15, 2008); FDIC Statement of Policy on Bank Merger Transactions, 67 Fed. Reg. 79,278 (Dec. 27, 2002); FDIC Statement of Policy on Bank Merger Transactions, 67 Fed. Reg. 48,178 (July 23, 2002); Bank Merger Transactions, 63 Fed. Reg. 44,761 (Aug. 20, 1998). An unofficial consolidated version of the statement of policy can be found as Exhibit B to the memorandum sent to the FDIC Board to approve the most recent amendments. Memorandum from Sandra L. Thompson, Director, Division of Supervision and Consumer Protection, FDIC to Board of Directors, FDIC on Amendments to Statement of Policy on Bank Merger Transactions (Dec. 7, 2007) .

• 16

  As discussed in my statement on the proposed special assessment, my vote in favor of the “systemic risk exception” was intended to exempt the resolution of SVB and Signature from the least-cost-resolution requirement so as to facilitate sales of the failed banks that hopefully would mitigate a wide range of serious adverse effects on economic conditions and financial stability that could have arisen out of winding down SVB and Signature in the normal course through a series of asset sales and deposit payouts.

• 17

  See , e.g. , Financial Stability Board, 2023 Bank Failures: Preliminary lessons learnt for resolution 16 (Oct. 10, 2023) (“In the months preceding Credit Suisse’s failure, FINMA, together with its domestic and foreign counterparts, prepared a resolution plan that was ready to be executed if so decided.”). The Financial Stability Board estimates that had Swiss regulators triggered the long-planned single-point-of-entry resolution Credit Suisse would have re-opened on March 20 with a common equity tier 1 ratio of 44% of risk-weighted assets, in addition to having access to a public liquidity backstop of CHF 100bn. Id. at 9.

• 18

  See , e.g. , id. at 1 & 7–8.