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Should Asset Managers Like BlackRock be Under Higher Scrutiny?

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A disagreement took place between Treasury Secretary Janet Yellen and Senator Elizabeth Warren yesterday at the Senate Banking Committee hearing. Warren urged Yellen to designate the world’s largest asset manager as a systematically important financial institution (“SIFI”).

However, Yellen is of the opinion that while it is “important to look very carefully at the risk posed by the asset management industry”, particularly BlackRock Inc. (BLK - Free Report) , it is not correct to tag the firm as a SIFI.

Notably, a SIFI is a financial institution that according to the U.S. regulators is a firm that would pose a serious threat to the economy if it collapses. Hence, a SIFI is considered as being “too big to fail” and is imposed with extra regulatory burdens and scrutiny.

Following the 2008 financial crisis, under the 2010 Dodd-Frank Act, it was established that the Financial Stability Oversight Council (“FSOC”) could label banks and other firms as SIFIs. SIFIs are burdened with strict oversight by the Federal Reserve like higher capital requirements and periodic stress tests. Moreover, they have to produce plans on how they would wind up operations without triggering a financial crisis in case of a collapse.

U.S. banks with more than $250 billion in assets, including JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) and Bank of America (BAC - Free Report) , are automatically considered SIFIs.

However, for BlackRock, Yellen is of the opinion that it is not the right approach to tag it as a SIFI.

Per Yellen, the FSOC should focus more on specific activities instead of the size of the firms.

BlackRock said in a statement, “The past two administrations in the U.S., and numerous global regulators, have studied our industry for a decade and concluded that asset managers should be regulated differently from banks, with the primary focus being on the industry’s products and services.”

Yellen also said that while in 2016 and 2017 the FSOC “looked carefully” at the risks posed by asset managers, “the risks it focused on were ones having to do with open-end mutual funds that can experience massive withdrawals and be forced to sell off assets that could create fire sales. That is actually a risk we saw materialize last spring in March.”

She added, “I think that with respect to asset management, rather than focus on designation of companies, I think it is important to focus on an activity like that and consider what the appropriate restrictions are.”

BlackRock is the largest asset management company in the world, managing nearly $9 trillion in assets.

Notably, in the argument, Warren asked Yellen, “If a $9 trillion investment company failed, would that likely have a significant impact on our economy? How can you analyze what the risk is if you’re not actually doing the investigation through FSOC?”

However, Yellen still feels that it is “appropriate to designate institutions whose failure would pose material risk to U.S. financial stability.” Moreover, she said that asset managers are very different from big banks and that it is “not obvious to me that designation is the correct tool.”

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