The FDIC released a definitive rule on “Industrial Banks” or “Industrial Lending Firms” (collectively ILCs) this week which, in conjunction with recent ILC approvals of FDIC insurance applications, indicates a susceptibility to ILCs and their corporate mothers that has not in the past Case had been present (at least in detectable quantities).
An ILC is basically a type of bank organized under the laws of one of the few states (especially Utah). While an ILC can offer a full range of credit and deposit products and its deposit accounts are insured by the FDIC as well as those of traditional commercial banks, a company that owns the ILC is not subject to the same level of regulation as a bank’s parent company. This enables industrial or trading companies, including BMW or Pitney Bowes, to offer banking products and services directly to their customers, employees or other interest groups. (Many ILCs offer limited or specialized financial services and do not offer the full range of services to the general public.)
ILCs were established in the early 1900s to provide small loans to industrial workers. Probably because of this niche business model, the parent companies of ILCs are not regulated as “bank holding companies”. Federal laws, particularly the Bankholding Company Act, have historically separated banking from commerce and thus restricted the lines of business that a banking company can pursue. Bank holding companies can only engage in financial transactions (banking, insurance or securities transactions). , mostly) and are regulated and audited by the Federal Reserve. However, under the Bankholding Company Act, the definition of “bank” excludes ILCs. Thus, the parent companies of ILCs are not “bank holding companies” and can conduct any business activity. Walmart famously attempted to charter an ILC (and an FDIC deposit insurance for it) more than 15 years ago, but was shouted at by the banking industry and regulators. The 2007-2008 financial crisis and then moratoriums imposed by the FDIC and Congress dampened further interest in ILCs.
More recently, however, the ILC business model has received renewed attention: the FDIC has received 12 deposit insurance applications from ILCs and approved two since the beginning of 2017. The FDIC has stated that it expects continued interest in ILCs, particularly ILCs with a specialty or dedicated business model.
The new FDIC rule, which will come into effect April 1, 2021, sets out conditions and obligations for any deposit protection application approval by an ILC whose parent company is not regulated by the Federal Reserve. The purpose of the rule is to ensure that the ILC parents serve as a resource for their subordinate ILCs (a requirement of federal law) and to provide transparency to prospective applicants and the wider public about what the FDIC requires from the parent companies of the industrial banks covered. In particular, the FDIC rejected objections to the rule, which was based on the mixing of banking and commerce through commercial ownership of an ILC, noting that Congress created special treatment for ILCs and that it is therefore a policy of whether or not trading companies ILCs should continue to own decision for Congress.
In summary, the FDIC rule suggests a relatively new willingness at the federal level to consider ILC proposals from non-financial firms. While the process is unlikely to be quick or cheap, ILCs will provide a new avenue for non-financial firms seeking access to the financial system.