Money manager BlackRock recently began a push for exchange-traded corporate bond funds among regional and community banks, amid calls from regulators to limit risk and ease up on mortgage bond investments.
Following the collapse of the financial system in 2008, which resulted in part from risky and faulty mortgage investments, regulators urged firms to reduce their investments in mortgage securities–an opportunity BlackRock has sought to capitalize on, Reuters reports.
“This is going to be a multiple-year trend and dialogue,” BlackRock Managing Director Jared Murphy, who is overseeing the effort to extend the ETFs, said, according to Reuters.
BlackRock estimates that the nation’s approximate 7,000 regional and community banks have securities portfolios totaling $1.5 trillion, most of which are in mortgage-backed securities. The concentration could make the community institutions more vulnerable to interest rate risk.
The funds, iSharesBonds ETFs, feature 100 to 200 investment-grade corporate bonds and an expense ratio of 0.1 percent. Each fund’s securities have a defined maturity intended to reduce the interest rate risk, and investors will know on a certain date that their ETF funds are worth full face value, Reuters reports.
In the second quarter, a west coast regional bank invested $100 million in one of the funds, and since the products launched in April, the company has talked to more than 150 regional and community banks about coming on board.
Some analysts, however, have said BlackRock could have a hard time convincing smaller institutions, which are more inclined to purchase Treasury securities that have no credit risk, versus corporate bonds that can default.
“Community bankers feel like they’re going to be the last in the food chain to know if there are any problems with a corporate issuer,” Edward Krei, the managing director at the Baker Group, an Oklahoma City-based consulting firm that advises community banks, said, according to Reuters.
While BlackRock has attempted to help small banks obtain corporate debt, thereby increasing its competitive advantage, Jim Reber, the president of ICBA securities—a subsidiary of the Independent Community Bankers of America—said the effort may not persuade big business.
“If [a bank] doesn’t want to have exposure, there’s no amount of ease of entrance into that market that is going to change their mind,” Reber said, Reuters reports.