Why It’s Hard for Activists and Blockholders to Make a Difference in Banking

Activist investors and blockholders are unable to restructure and turnaround poorly performing banks, making it unlikely that they can enhance bank performance and contribute to financial stability. We argue that regulation and supervision hinder the flow of information needed to price risk effectively and as a result weaken the incentive and ability of activists and blockholders to turnaround poorly performing banks. We identify bank opacity due to regulation and supervision as the main cause of weak market discipline by banks (see Mehran and Spatt, 2024).[1] In a previous post, we noted that the regulatory environment in banking interferes with information production as disclosure of some information may be perceived by regulators as potentially causing bank runs. Weak market discipline due to regulation and supervision fuels the control market in bank restructuring, thus leading to larger institutions. In this post, we draw on examples of large investors in the banking industry.

In 1989, American businessman Laurence Tisch and his family acquired 8.9 percent of the Bank of Boston. In 1990, they made further disclosures of large investments in Continental Bank, Baybank, and Equimark. Each of these institutions had lost nearly 70 percent of its value following the savings and loan (S&L) crisis.[2] The share acquisitions by the Tisch family were the largest percentage investment in large, regional banks by individual investors and institutions at the time. The media reported in 1991 that the family reduced its investments in two of the banks,[3] selling the investments at a loss.

The Tisch family was not the only sophisticated investor to incur losses investing in bank stocks during a crisis. American hedge fund manager Bill Ackman invested about $1 billion in Citigroup for his firm, Pershing Square, following the 2007–2009 financial crisis. He concluded that Citigroup had already written down its bad loans and thus the bank’s stock price might be fair or even undervalued. Yet, the investment produced a loss of $400 million (see Partnoy and Eisinger, 2013).[4]

The Tisch and Ackman losses were not exceptions.[5] Investments in bank assets during crises are often underperforming (see Baron et al., 2021).[6] Bank charter value can dissipate when banks are in difficulty, even outside a crisis. Surprisingly, quickly restoring value even by a capital infusion or by changing the bank’s management is not easy. (The demise of the New York Community Bank provides a recent example.) Once risk is priced and opacity is partly removed, even government protection is not likely to bring back a bank’s lost charter value (at least in the short term). Equally important is that news of large, sophisticated investments in banks often has a muted price impact.

While blockholders have invested in weak banks, their presence is uncommon, and their impact is inconsequential. This is contrary to the view that, to protect their stake, large investors could be effective monitors and might exert pressure on management in poorly performing firms and influence firm corporate policies (see Shleifer and Vishny, 1986).[7] Yet, investors have little influence on corporate restructuring and other bank policies, particularly during a crisis period.

The focus of corporate restructuring is often about assets, capital structure, and labor, approaches which are not mutually exclusive. Any change in these methods, particularly in acquisition and disposition of assets, takes time and could require regulatory approval (see Adams and Mehran, 2003).[8] Potential acquirers are likely to opt out if they think that they might face regulatory opposition on quick asset restructuring. Blockholders also are less willing to invest in a share of a bank if they cannot get a fair assessment of the value of the company. The loss-sharing agreement of failed banks between acquirers and the Federal Deposit Insurance Corporation (FDIC) supports this argument (see Bennett and Unal, 2014).[9]

Bank valuation is hardly accurate as risk often is not effectively priced. Remaining unclear is whether regulators are aware of bank weak spots and, if they are, whether they would undertake corrective actions [see (Gallemore, 2016)[10] and (Mehran and Spatt, 2024)[11]]. Thus, the nature of bank assets and the role of regulation and supervision imply that very few blockholders invest in banks and attempt to turn around banking firms while they are in difficulty. The implication is that market discipline in banks would not benefit from the presence of sophisticated activist investors, unlike for non-financial companies (see Haubrich and Thomson, 1998).[12]

Another regulatory hurdle might seem to weaken the ability of blockholders and activist investors to control the banking firm’s operation. The reason was noted in the Tisch family disclosure: The purpose behind acquiring a large block of shares in the banks was purely for investment and not for control. The statement of purpose for investment was intentional as the banking rule at the time prohibited investments of more than 5 percent if the intent were to control the bank. Also, blockholders were required to contact the Federal Reserve Board for any additional investments beyond 5 percent. Investment beyond 5 percent with control intent effectively invites supervision of the investors by the Federal Reserve. Allowing regulators to examine investors’ financial data and being subject to supervision arguably is a big deterrent to becoming a large blockholder in a bank, particularly when it might be difficult to prove the intent as discussed later. The cutoff, while set arbitrarily, was intended to ensure the stability of bank operations in the presence of activist investors. Ensuring operational stability and preventing potential abuse through ownership control is also an issue in other settings, as when thrift institutions convert from mutual to stock ownership (see Cole and Mehran, 1998).[13]

Thus, blockholders’ ability and incentive to pressure management is limited, and the reward from doing so might be insufficient partly due to the banking rule on control. The 5 percent cutoff could be considered small, if investors’ desire to redirect the bank’s strategic direction or force out the management team. The Federal Reserve Board changed the cutoff to 10 percent on January 30, 2020.[14] The objective was to improve the flow of investment in bank equity and thus enhance banking firms’ capital. In the same spirit, following the financial crisis, the Federal Reserve Board and the FDIC allowed private equity firms to invest in equity of distressed banks (see Ross, et al., 2021).[15] Overall, which group of banks, large versus small, is most likely to be affected by the control rule, if at all, is unclear.

To study the market assessment of lifting the ownership cutoff to 10 percent, we conducted an event study. An announcement effect was estimated for listed banks from March 29 to March 30, 2020. Five groups were created based on bank book-asset size at the end of the last quarter of 2019, and announcement returns were calculated for banks in each group. If weaker banks were insulated from market discipline, lifting the control threshold to 10 percent would make it easier for activists to influence governance of banks, and the gain would likely to be captured in equity prices. The announcement effect for the three groups with the largest book-assets is significant and positive, while banks in the two small asset groups suffered losses.

Explaining the findings is difficult, particularly in the case of small banks. If the rise in the cutoff would have increased the likelihood of acquisition of small banks, then their stock price should have increased due to the present value of the acquisition premium. The loss then could be the result of interference on bank operations by future activist investors. The gain to large banks is likely due to potential merger and acquisitions and new investments in bank equity.

Evidence on Activism

Although there are reports of block acquisitions in small and community banks since the 2020 relaxation of the control role, there is little evidence of significant share acquisitions of large banks. Also, while 217 instances of activism were reported between 2019 and 2024, only a few large institutions were a target, such as Bank of America, Bank of New York Mellon Corporation, and State Street. Bank of America agreed to some minor changes in its governance. The other institutions are in effect custodians with very little commercial banking activities, and they agreed to some cost cutting (see for example, Benoit, 2014).[16]

Activist investors have little influence in large banks in Europe as well (see Sweney and Makortoff, 2021).[17] Overall, most activist investors have targeted small and community banks (see Graf, 2023).[18] As expected, most of the demands of activist investors are for changes in governance rather than operations of banks (see Graf and Clark, 2024).[19] Thus, in light of the influence of regulators and supervisors on bank governance, the potential impact of activist investors on bank performance and stability is likely limited. This is not the case for activist investors in non-financial firms (see Gow, et al. (2023).[20] Thus, activist investors in banking probably are just as uninformed about their ability to influence bank governance as they are about the potential for windfall gains in distressed bank stocks, at least in the short term. The takeaway is that regulation and supervision are the most likely reasons that large investors are unable to influence bank operations.

Emerging Area of Activism and Potential Control

Institutional investors hold most of banks’ equity, and the trend is continuing. For example, at the end of 2024, institutions held about 76 percent of the shares of large banks in the U.S., and the percentage is higher for the largest commercial banks. Among the largest holders are BlackRock and Vanguard, which hold large blocks of shares in major banks, such as JPMorgan Chase. Vanguard held 9.74 percent, and BlackRock 6.89 percent at the end of 2024, according to a 2025 proxy filing with SEC. Both institutions held more than the control threshold of 5 percent in the bank at the end of 2019. While below the 10 percent threshold, these holdings raised concerns among regulators about the potential influence of large institutional investors to control and thus direct bank governance in ways that might be anticompetitive or even adversely affect the goal of financial stability. The FDIC, for example, reached an agreement with Vanguard on investment passivity last year.[21]

The consequences of high institutional ownership on bank conduct are complex. Institutional ownership induces common ownership. While common ownership is considered very large in the banking industry, there is no evidence that it is anticompetitive (see Gramlich and Grundl, 2020).[22] Further, the evidence suggesting that institutional holdings induce anticompetitive behavior outside the financial industry is inconclusive (see Gerardi, et al., 2023).[23]

Thus, much more work on the topic in the banking sector might be needed to draw public policy lessons. For example, common ownership has been shown to prompt more disclosure by non-financial firms (see Park et al., 2019).[24] But, it is unlikely to enhance more disclosure by banking firms for a number of reasons: presence of a significant amount of soft information in banks, proprietary nature of borrower information (see Bhattacharya-Chiesa, 1995),[25] risk sharing (see Dang et al., 2025),[26] and reluctance of banks to disclose any information without knowing how it would be perceived by supervisors and regulators. A potential area of financial stability concerns that has not received attention by regulators and academics is concentration of holdings of bank credit by institutional investors (see Mehran and Mollineaux, 2012).[27] How institutions would manage their bank credit holdings is an important financial stability issue, particularly in a crisis period. To our knowledge, this issue has not been studied by regulators.

To underscore the benefit of effective banking activism on financial stability, we also focus on banks rather than investors. Due to weak economic conditions in New England following the S&L crisis, the Bank of Boston (established in 1784) and Baybank were forced to merge in 1996 to operate more effectively. The new entity, BankBoston, was acquired in 1999 by FleetBoston Financial. That, too, was absorbed, by Bank of America in 1999, an entity that exists today due to the financial protection of the U.S. taxpayers because of its size. Thus, when activism does not exist or has little impact in the banking industry, particularly in a crisis period, the control market could function as a substitute. However, the control market produces bigger institutions with larger supervisory challenges, a result that is also favored by regulators and supervisors as it transfers the assets of weaker institutions to stronger banks, thus lowering potential cost of the FDIC fund in the short term (see Prescott (2024) for an example).[28] However, larger institutions impose a higher cost on the economy in the event of their failure. Thus, fostering effective activism could reduce the extreme events that increasingly seem routine.

Conclusion

Regulation and supervision have weakened the influence of activist investors and blockholders on bank governance and conduct as well as on financial stability. Further, no evidence yet exists that an increase in the permitted level of block ownership from 5 percent to 10 percent has had any measurable impact on bank conduct. While more activism has been evident in the past five years, instances were not likely to be related to changes in 2020 control ownership, as a similar trend existed outside financial firms. Moreover, increased activism in the banking sector was mostly targeted at smaller institutions and with no clear evidence of having made banks more valuable or healthier. Arguably, activism and block ownership are critical to the functioning of the U.S. capital market and businesses. But bank supervision and regulation have made these tactics ineffective. More disclosure and more timely disclosure by regulators could lift the imposed opacity and could make activism more vibrant (see Mehran and Spatt, 2024).

This post comes to us from Hamid Mehran, a financial economist, and Chester Spatt, the Pamela R. and Kenneth B. Dunn Professor of Finance at Carnegie Mellon’s Tepper School of Business.

ENDNOTES

[1] https://clsbluesky.law.columbia.edu/2024/05/14/how-bank-regulation-and-supervision-can-weaken-financial-stability/

[2] https://www.nytimes.com/1990/09/01/business/tisch-family-invests-in-3-banks.html

[3] https://www.nytimes.com/1991/02/09/business/tisch-group-cuts-stakes-in-2-banks.html

[4] https://www.theatlantic.com/magazine/archive/2013/01/whats-inside-americas-banks/309196/

[5] While Warren Buffet’s investments in Goldman Sachs in 2008 and the Bank of America in 2011 resulted in gains for his company, his investments were in preferred stock and warrants and not in common stock. Further, unlike most investors, he had a significant influence over the U.S. Treasury, an influence that goes back to his investment in Salomon Brothers in 1987, he was able to reverse the ban on the company’s participation in bond auctions. During the financial crisis, apparently he contributed to the Secretary of the Treasury’s decision to infuse capital into banks directly.

[6] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3845170

[7] https://www.journals.uchicago.edu/doi/abs/10.1086/261385

[8] https://www.newyorkfed.org/research/epr/03v09n1/0304adam.html

[9] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2482359

[10] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2838541

[11] https://clsbluesky.law.columbia.edu/2024/05/14/how-bank-regulation-and-supervision-can-weaken-financial-stability/

[12] https://www.clevelandfed.org/publications/working-paper/1998/wp-9803-large-shareholders-and-market-discipline-in-a-regulated-industry-a-clinical-study

[13] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=981274

[14] https://www.federalreserve.gov/newsevents/pressreleases/bcreg20200130a.htm

[15] https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3828789

[16] https://www.wsj.com/articles/bank-of-new-york-mellon-gives-activist-trian-fund-a-board-seat-1417524537?gaa_at=eafs&gaa_n=ASWzDAiRloon68XI4cx7kNuFK59wS9z9NpTkWGHwrd781QdFh3XAlHc8vKDt&gaa_ts=6863dab2&gaa_sig=9yKj6-85-1EA0gVEIuquXugCRzj71DVwTrDHFNbCqCg6jzG0xRkvY_Od_Xyz05sqSsnMwVNijt41MlTjEzZRRg%3D%3D

[17] https://amp.theguardian.com/business/2021/may/07/activist-edward-bramson-ends-barclays-battle-by-selling-stake