Commercial Firm Entrée to the Banking Sector: Industrial Loan Companies

The FDIC this week released a final rule on “industrial banks” or “industrial loan companies” (together, ILCs) that, coupled with recent approvals of FDIC insurance applications by ILCs, indicates a receptivity to ILCs and their corporate parents that historically has not been present (at least at detectable levels).

An ILC is basically a type of bank organized under the laws of one of a handful of states (most notably Utah). While an ILC can offer a full range of lending and deposit products, and its deposit accounts are insured by the FDIC just like those of conventional commercial banks, a company that owns the ILC is not subject to the same level of regulation that the parent company of a bank is. This allows industrial or commercial companies, including, for example, BMW or Pitney Bowes, to directly provide banking products and services to their customers, employees, or other stakeholders. (Many ILCs engage in limited or specialty financial services and do not offer a full range of services to the general public.)

ILCs were started in the early 1900s to provide small loans to industrial workers. Probably due to this niche business model, the corporate parents of ILCs are not regulated as “bank holding companies.” Federal statutes, most pertinently here, the Bank Holding Company Act, have historically separated banking from commerce and thus have limited the lines of business that a banking company can engage in. Bank holding companies can engage only in financial activities (banking, insurance or securities, for the most part) and are regulated and examined by the Federal Reserve. Under the Bank Holding Company Act, however, the definition of “bank” excludes ILCs. Thus, the parents of ILCs are not “bank holding companies” and can engage in any business activity. More than 15 years ago, Walmart famously sought to charter an ILC (and obtain FDIC deposit insurance for it), but was shouted down by the banking industry and regulators. The 2007-2008 financial crisis and then moratoria 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 by ILCs since early 2017, and it has approved two. The FDIC has stated that it expects continued interest in ILCs, particularly for ILCs with a specialty or limited purpose business model.

The new FDIC rule, which will be effective April 1, 2021, imposes conditions and requires commitments for each deposit insurance application approval from an ILC whose parent company is not subject to Federal Reserve supervision. The purpose of the rule is to ensure that ILC parents serve as the source of strength for their subsidiary ILCs (a requirement of federal statutes) and to provide transparency to future applicants and the broader public as to what the FDIC requires of parent companies of covered industrial banks. Notably, the FDIC rejected objections to the rule based on the mixing of banking and commerce through commercial ownership of an ILC, noting that Congress created the special treatment of ILCs and thus that whether commercial firms should continue to be able to own ILCs is a policy decision for Congress.

In sum, the FDIC rule further indicates a relatively new willingness at the federal level to entertain ILC proposals from non-financial companies. While the process is unlikely to be fast or cheap, ILCs will provide a new opportunity for non-financial firms seeking access to the financial system.