The Federal Deposit Insurance Corp’s decision to
Since the beginning of the Trump administration, there has been an uptick in ILC applications, but so far the pending applications are mostly from automobile manufacturers. While the FDIC’s bid to revise ILC application rules signals the administration’s generally favorable approach to the nonbank charters, the largest retailers or tech giants could be a different story, says Ian Katz of Capital Alpha Partners.
“Each case is specific to its set of facts, but I think the default approach will be that more applicants should be allowed to be ILCs. I think the crypto and fintech applicants will be favorably viewed,” Katz said. “If giant retailers apply, it will probably provoke political opposition that will bring those applications more attention. The most ardent opponents of ILCs will oppose them all, but will also draw a line between the finance arms of automakers and retail giants. There are a lot more people who would view an ILC for a giant retailer as going too far.”
The agency is also
ILCs are unique state banking charters that are regulated and insured at the federal level by the FDIC. Like traditional banks, ILCs offer various loan types and deposit accounts. But unlike traditional bank holding companies, the parents of ILCs are exempt from key bank regulations. ILCs are not considered “banks” under the Bank Holding Company Act of 1956, and thus are not subject to prohibitions between banking and commerce, even though ILCs can take consumer deposits and make loans.
While ILCs are prohibited from offering demand-deposits accounts to consumers, they are allowed to offer quasi-demand deposit accounts known as negotiable order of withdrawal accounts. Industrial banks reserve the right to require a seven-day advance notice or more to make the funds in such accounts available to consumers.
The FDIC’s review of the application process comes as the agency is reviewing a number of prominent applications. Stellantis and
The new administration is expected to be far more friendly to ILCs than under Biden, and the applications should be processed relatively quickly. Michele Alt, a co-founder of financial services advisory and investment firm Klaros Group, which advised Nissan on its ILC move, says the move is positive, allowing applications to resume.
“I think this is best understood as part of the bigger trend of greater receptivity to ILCs,” Alt said. “It was no secret that former FDIC chair Marty Gruenberg, was generally reluctant to charter ILCs and Travis Hill — the acting chair — was at the FDIC when Nelnet and Square’s ILCs were approved, and is seen as being more receptive.”
Financial regulatory scholar Art Wilmarth, who is a professor emeritus of law at George Washington University Law School, says the recent moves by the FDIC signal a complete 180-degree turn from the prevailing approach under the prior administration.
“I view the FDIC’s withdrawal of its industrial bank proposed rule from last year — which would have significantly tightened restrictions on acquisitions of industrial banks by commercial enterprises — and the FDIC’s return to its existing February 2021 rule as providing strong indications that the FDIC is now prepared to adopt an ‘open door’ attitude toward applications by Big Tech firms, manufacturers and retailers, and other commercial firms to acquire industrial banks,” Wilmarth said.
The process for considering applications is lengthy and involves a number of regulatory hurdles. Firms must submit a charter application to their primary supervisor, a deposit insurance application to the FDIC, and, in some cases, a holding company application to the Federal Reserve. The banking agencies’ stated policy is to review a “complete” application within 120 days of submission, but the definition of “complete” can be squishy. Alt says pending applications could be considered more quickly now.
“The problem, of course, [is that] ‘complete’ is a little bit in the eye of the beholder, and during the Biden administration, it was very difficult to meet that sort of unwritten standard for what is ‘complete,'” Alt said. “Applicants could be stuck in the application preparation phase for a long time before the clock would actually start to tick. I think we’re going to see more discipline around the clock and greater transparency about what is required to get that clock ticking.”
The trade group continues to oppose approving new ILC charters, citing conflicts of interest and the need to ringfence commerce and banking functions in separate entities.
“The separation of banking and commerce exists for a reason, so that the company selling you a product isn’t the same company with access to your bank account balance,” said BPI’s Executive Vice President and Co-Head of Regulatory Affairs Paige Pidano Paridon. “We urge the FDIC to preserve this important distinction and prioritize a transparent process that treats all market participants equally, rather than rewarding those who arbitrage the system at the expense of existing safeguards.”
Alt counters that industry criticism must be taken with a grain of salt, that the ILC charter is sanctioned by law and that applications will continue to be carefully reviewed.
“Always consider the source of the criticism, and if the source is coming from competitors, take that into account,” Alt said. “The ILC is a legal charter that has existed since the 1980s since the Competitive Equality Banking Act. If an applicant meets these factors or safety and soundness, in this statutory framework, it should be granted an application.”
The Independent Community Bankers of America — which represents smaller firms and has also been a frequent critic of ILC charters — also
“ICBA continues to oppose new ILC charters amid a surge in applications, as these entities are exempt from the Bank Holding Company Act’s definition of a bank, resulting in a lack of Federal Reserve supervision at the holding company level,” said ICBA’s regulatory counsel Mickey Marshall. “Commercial ownership of ILCs creates an inherent conflict of interest when they lend to customers or affiliates of their parent companies. The 2008 failure of General Motors Acceptance Corporation led to a $17.2 billion taxpayer-funded bailout, underscoring the risks of commercial ILC ownership.”
But the real fear from banks is that a well-heeled tech or retail firm with a large, integral customer base will acquire an ILC charter and compete with big banks directly. Two decades ago, retail giant Walmart
Alt says while she supports the thoughtful consideration of each charter application and is not against a retail giant gaining a charter, she can understand why this kind of an institution would pose a threat to banks.
“What is frightening to existing banks is the incredible platform that a Walmart or a Google would have. They are cheap, they are efficient, they have incredible customer loyalty,” Alt said. “That is an amazing platform from which to offer financial services.”
Decades later, she says while she is not aware of another giant company poised to seek a charter, she would not categorically oppose such a move.
“Twenty years on … think of Google or any of the major tech companies, that would be Walmart on steroids — they are so convenient, so intertwined with American daily lives … and only getting more intertwined,” Alt said. “When you think about their big tech data capabilities and ability to instantly deliver their services — that is a whole new paradigm, potentially, for banking. I am not aware that Google is making a play for an application, but boy, Google’s name comes up a lot in these arguments as sort of a boogeyman for its competitors.”
Wilmarth says the FDIC’s request for information on ILCs indicated that such charters would not be off the table, opening the door to manufacturing firms and other commercial enterprises.
“Those companies clearly exploit the FDIC”s deposit insurance fund and other elements of the federal safety net for banks by (1) obtaining low-cost funding at subsidized interest rates that are not available to any other private-sector firms in the financial markets and (2) using that funding to support their commercial operations, thereby providing very significant competitive advantages over [non ILCs],” Wilmarth said. “[However, the] RFI do[es] ask pertinent questions concerning the risks posed to the DIF and to society by proposed acquisitions of industrial banks by Big Tech firms and other commercial enterprises, and I hope the FDIC will thoroughly consider those issues before approving any new applications by commercial firms.”