Many Americans have benefited from the ability to invest our savings in index funds and similar low-fee passive investment vehicles, as opposed to actively managed investment funds. The market share of exchange-traded funds and passive mutual funds now exceeds the market share of actively managed funds.
Their growth is an American success story. However, this success has generated increased scrutiny from federal regulators and lawmakers that could threaten their future growth. In the banking sector, two Federal Deposit Insurance Corporation (FDIC) commissioners have called for new regulations on passive investors.
Currently, passive funds may own more than 10 percent of a bank as long as they certify they are not seeking to control the bank’s management and operations.
FDIC Director Jonathan McKernan has proposed ending self-certification by passive investors, and Director Rohit Chopra has proposed that the agency take a more active role in monitoring passive funds that invest in banks.
These proposals are solutions in search of a problem. There is no evidence that passive investors have engaged in activities in the banking sector that require additional regulatory oversight.
If imposed, these regulations would impose new costs on the U.S. economy. Any efforts that discourage investment in banks by index funds would deprive banks of an important source of capital.
Michael J. Hsu, Acting Comptroller of the Currency and FDIC Director, observed, “... reallocating FDIC resources away from supervising banks to monitoring asset manager compliance with passivity commitments would be, at best, inefficient at this time.”
The millions of Americans who have their savings invested through index funds should not be subjected to the higher costs of new regulations affecting how their dollars are invested, particularly when those regulations are based on speculative fears and not real-world abuses.
In the words of Director Hsu: “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.” Other FDIC Directors should follow his lead and resist calls to prematurely impose potentially costly and precedent-setting new regulations.