Yesha Yadav is Professor of Law at Vanderbilt Law School. This post is based on a recent paper by Professor Yadav.
Post-Financial Crisis regulatory reform requires banks to fund themselves more fully through common equity. By maintaining deeper equity buffers, banks are better positioned to absorb losses and to prevent the spread of contagion through the financial sector. [1] Under the Dodd-Frank Act’s Orderly Liquidation Authority, shareholders of a failing bank must pay for its risk-taking by seeing the value of their equity be extinguished to meet the bank’s obligations to short-term and secured creditors. [2] In this way, equity reserves can help stem the spread of losses.
My paper shows that the practical realization of this policy objective faces serious challenges when viewed from the standpoint of who actually supplies equity capital to banks. Surveying the 2016 proxy statements of the 25 publicly traded, U.S. bank and financial holding companies subject to the Federal Reserve’s stress tests, [3] I find that a handful of top asset managers—the Vanguard Group, BlackRock, Fidelity Investments, State Street Global Advisors and T. Rowe Price—are blockholders at multiple banks, meaning that each owns more than 5% of common equity across different firms. In 2015/6, for example, Vanguard and BlackRock were both blockholders at 22 out of these 25 banks, with BlackRock funds holding blockholder positions at 23 of these 25 banks and Vanguard funds at 22 of these 25 banks. This pattern of ownership showcases a marked percentage increase over the last five years. According to the 2011 proxy statements of these same banks, BlackRock was a blockholder at 10 out of (then) 24 banks; [4] and Vanguard was a blockholder at a single bank out of these 24 firms in 2010/11.
