BlackRock should show up on regulatory radars

May 19, 2011

Agnes T. Crane
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

BlackRock’s $2.5 billion stock buyback from Bank of America is the latest sign of its growing might. Boss Larry Fink doesn’t think his firm is too big to fail. And it’s not comparable to a bank. But BlackRock’s $3.65 trillion of assets and increasing influence still make it systemically important.

The ease with which Fink will fund the stake repurchase will be the envy of bank executives. It’s also a testament to how far BlackRock has come. The firm’s assets under management have nearly tripled in less than two years. The once sleepy fixed income shop also now sits atop one of the fastest growing segments in financial markets, exchange-traded funds. BlackRock has a 40 percent share of this booming business.

It has the ear of policymakers worldwide too. BlackRock’s risk management unit has helped the Federal Reserve sell toxic subprime assets and the Irish Central Bank make sense of its crippled financial institutions.

For all that, Fink has been incredibly successful keeping his firm under the radar. Unlike say, PIMCO, whose investment manager Bill Gross moves markets with the swipe of his pen, most investors would be hard-pressed to quote back weekly comments by BlackRock’s chief equity strategist Bob Doll. But with 80 percent more assets under management than the entire hedge fund industry, it couldn’t be more hidden in plain view.

U.S. regulators are beavering away to determine who will wear the scarlet SIFI badge. The designation as a “systemically important financial institution” will bring greater scrutiny and regulation. BlackRock doesn’t think it fits the bill, mainly because it manages others people’s money and doesn’t lever up its own balance sheet like a bank.

But a financial player of this scale has to matter. BlackRock isn’t just more than half as big again as State Street, its nearest rival. The amount of assets it manages is more than Germany, the world’s fifth biggest economy, produces in a year.

It’s true, BlackRock’s clients can transfer their assets elsewhere if trouble arises. But the blow to market confidence of such a large firm with such broad global ties stumbling — if it was to ever happen — could lead to unforeseen problems in the still complex, interconnected and not entirely understood financial markets. Regulators should keep that in mind when they finally define just what it means to be systemically important.

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