The big three fund managers that jointly manage more than $23 trillion in assets are coming under the scrutiny of federal regulators over their large holdings in many U.S. banks.

BlackRock Inc (NYSE:BLK), State Street Corp (NYSE:STT) and Vanguard run funds that passively track the performances of equity indexes such as the S&P 500. To achieve this, they attempt to match the weightings of stocks held in these funds, to the index weightings.

But in doing so, BlackRock and Vanguard have each built holdings of more than 10% of the shares at several banks, and this is worrying the Federal Deposit Insurance Corp (FDIC), one of the government institutions responsible for banking supervision.

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Ten Percent Rule

At present, 10% ownership of shares is considered a threshold at which point an investor is considered to have a controlling interest in a bank. Investors must then seek regulatory permission to acquire shares beyond this threshold.

But fund managers are largely exempt from this requirement given their passive investment roles, although they can still use their share ownership to vote in shareholder meetings.

Some board members of the FDIC, are becoming concerned that the big fund managers could overlook their commitment to passive investment and exert greater influence over banks, given the size of their stakes.

Board member Jonathan McKernan told the Wall Street Journal of his concerns and is seeking a curb on BlackRock and Vanguard from acquiring further shares above the 10% threshold while the FDIC investigates.

“We need to be doing more to actually confirm that the Big Three are not leveraging their large stakes to exert influence over FDIC-regulated banks,” he told the WSJ.

BlackRock owns the iShares series of exchange-traded funds. Its flagship ETF that follows the S&P 500 is the iShares Core S&P 500 ETF (NYSE:IVV). Vanguard, meanwhile, manages the Vanguard S&P 500 ETF (NYSE:VOO), while State Street runs the SPDR series and the SPDR S&P 500 ETF Trust (NYSE:SPY) is its big index tracker.

‘Problem Of Twelve’

It’s not only regulators who have concerns over the influence of the big funds. In his 2023 book “The Problem of Twelve,” Harvard law professor John Coates asserts that roughly 12 people will have effectively seized power over the majority of U.S. public companies in the future.

He issued similar warnings about “a small number of institutions [that] acquire the means to exert outsized influence over the politics and economy of a nation.”

He says in the book: “The Big Four index funds of Vanguard, State Street, Fidelity, and BlackRock control more than 20% of the votes of S&P 500 companies — a concentration of power that’s unprecedented in America.”

In its iShares US Financials ETF (NYSE:IYF) BlackRock’s biggest banking holdings are in JPMorgan Chase & Co (NYSE:JPM), Bank of America Corp (NYSE:BAC) and Wells Fargo & Company (NYSE:WFC). The Vanguard Financials ETF (NYSE:VFH) holds the same three stocks but with differing weightings.

Benzinga reached out to the FDIC for further details, but the agency said it was not commenting.

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The headline annual inflation rate, as measured by personal consumption expenditures (PCE), rose to 2.5% in February as expected, up from 2.4% in January as personal spending came in unexpectedly high.

While the monthly inflation rate, according to the Fed’s favored gauge of price increases, dipped from 0.4% to 0.3%, personal spending rose by 0.8% to $145.5 billion, more than the 0.5% expected and higher than the 0.2% increase seen in January.

While the core annual rate came in at 2.8% in February, as expected, January’s 2.8% rate was revised higher to 2.9%.

This leaves inflation still looking a little sticky, especially when taken together with February’s consumer price index (CPI) inflation data published earlier this month that saw the annual headline rate rise to 3.2% from 3.1% in the previous month and the producer price (PPI) data showing even stronger gains.

Also Read: Inflation Ticks Higher In February: Is A May Interest Rate Cut In The Cards?

Analyst Reactions

Analysts were mixed in their thoughts about inflation and its policy implications.

Ian Shepherdson, chief economist at Pantheon Macroeconomics, said: “Our base case is that the core PCE over the next few months will look much more like February than January.

“If we’re right about that, and the labor market weakens anything like as much as is implied by the ongoing drop in small firms’ hiring plans, the Fed will be easing in June.”

Jeffrey Roach, chief economist for LPL Financial, said: “The trajectory for consumer spending is weakening, especially since real disposable incomes declined in February. Core services inflation is slowing and will likely continue throughout the year.

“By the time the Fed meets in June, the data should be convincing enough for it to commence its rate normalization process.”

Joseph Brusuelas, chief economist at RSM U.S., noted a slowdown in spending on services, particularly mortgages and housing rentals, which have proved among the toughest areas of inflation to cool.

He said on X: “The 2.5% year over year increase is well within what a forward-looking central banker would consider tolerable and on way to the 2% target. In my estimation this is consistent with a June rate cut and three overall reductions in the federal funds policy rate this year.”

He added: “Inside the easing of services one can observe a modest slowing in housing-related inflation. We expect this slowing to accelerate in coming months in both the PCE and CPI which will support calls for relaxation of a restrictive policy rate by the Fed.”

Global Markets Investor took a different view of the data. Its analysts posted on X: “The Fed’s preferred inflation gauge Core PCE jumped well above the 2% target. The most watched by the Fed 3-month and 6-month annualized rates increased to 3.5% and 2.9%, respectively in February Sticky, sticky. Are the rate cuts really coming?”

Investor Tim Whelan held a similar view: “Seems like inflation has ‘stabilized’ at around 3% depending on what measure you watch (CPI/PCE)… well above the 2% target. Unclear to me how the Fed could contemplate decreasing rates in 2024.”

Meanwhile, the Kobeissi Letter said: “We now officially have rising CPI, PPI and PCE inflation. Is higher for longer back?

Now Read: Inflation Rises More Than Expected To 3.2% In February, Rebuffs Expectations Of June Fed Rate Cut

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