Dear Director Worthing:
The Bank Policy Institute[1] (“BPI”) and the Independent Community Bankers of America (“ICBA”)[2] write regarding PayPal’s application for Federal Deposit Insurance Corporation (“FDIC”) insurance.
Industrial loan companies (“ILCs”) offer banking products and services functionally indistinguishable from those that banks provide. However, the parent companies of ILCs are exempt from the requirements of the Bank Holding Company Act (“BHCA”).[3] Therefore, they can avoid regulation and supervision by the Board of Governors of the Federal Reserve System and need not confine their activities to those “closely related to banking.”[4] Thus, the ILC exemption effectively serves as a loophole through which commercial firms can own insured banks but not be subject to the federally mandated regulatory and supervisory framework intended to promote a safe, sound and stable U.S. banking system. The loophole also violates the longstanding U.S. policy that banking and commerce should remain separate. Therefore, as we have long advocated, Congress should close this loophole—and, until such time, the FDIC should not issue deposit insurance to any ILC applicant, including PayPal Bank.
The risks of combining banking and non-financial businesses are a longstanding concern of U.S. public policy. For example, the BHCA limits the affiliation of banks and non-financial businesses by generally prohibiting bank holding companies from owning more than five percent of the voting stock of non-financial companies, with limited exceptions.[5] This prohibition addresses several potential problems that could lead to consumer harm and financial stability risk, including:
- A concentration of economic power;
- Less stringent credit standards for and higher risk exposures to affiliates;
- Less attractive credit terms to unaffiliated non-financial businesses; and
- Other similar conflicts of interest.
Under the BHCA, the activities of affiliates of a bank are subject to “consolidated supervision.” Furthermore, the ILC exemption was not intended to provide an avenue for commercial, retail, or tech firms to enter into banking. The ILC industry has changed dramatically since 1987 when this statutory exemption was created as part of the Competitive Equality in Banking Act (“CEBA”). At that time, the size, nature, and powers of ILCs were limited.[6]
Today, however, the loophole allows large national and international financial and commercial firms to acquire an ILC, which is an FDIC-insured depository institution, and gain access to the federal safety net available to insured depository institutions. Indeed, dramatic changes have occurred with ILCs that make them a particularly attractive avenue for firms to gain access to the federal safety net without being subject to the activity restrictions and prudential framework that Congress established for the corporate owners of other full-service commercial banks.
To read the full comment letter, please click here, or click on the download button below.
[1] The Bank Policy Institute is a nonpartisan public policy, research, and advocacy group that represents universal banks, regional banks, and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud, and other information security issues.
[2] The Independent Community Bankers of America® has one mission: to create and promote an environment where community banks flourish. We power the potential of the nation’s community banks through effective advocacy, education, and innovation. As local and trusted sources of credit, America’s community banks leverage their relationship-based business model and innovative offerings to channel deposits into the neighborhoods they serve, creating jobs, fostering economic prosperity, and fueling their customers’ financial goals and dreams. For more information, visit ICBA’s website at icba.org.
[3] 12 U.S.C. § 1841(c)(2)(H) (“The term “bank” does not include […] [a]n industrial loan company, industrial bank, or other similar institution[.]”).
[4] 12 U.S.C. § 1843(k)(4)(F). We have long recognized that parents of ILCs that are subject to consolidated supervision by the Federal Reserve do not pose additional risks to the system and need not be included in any limitation on ILC parent companies. These include both bank holding companies and foreign banking organizations with operations in the United States that are already regulated as bank holding companies under the International Banking Act.
[5] 12 U.S.C. § 1843(a)(2) and (c)(6).
[6] ILCs were first established in the early 1900s to make small loans to industrial workers and, until recently, were not generally permitted to accept deposits or obtain deposit insurance. At the time of CEBA’s enactment, most ILCs were small, locally owned institutions that had only limited deposit-taking and lending powers under state law. At the end of 1987, the largest ILC had assets of only approximately $410 million, and the average asset size of all ILCs was less than $45 million. The relevant states also were not actively chartering new ILCs. At the time CEBA was enacted, for example, Utah had only 11 state-chartered ILCs and had a moratorium on the chartering of new ILCs. Moreover, interstate banking restrictions and technological limitations made it difficult for institutions chartered in a grandfathered state to operate a retail banking business regionally or nationally; these factors do not inhibit regional or national expansion today.
