Big banks join fight against new ILCs

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Bankers are closing ranks in opposition to a proposal that would make it easier for tech companies to compete in the lending business, teeing up a rare tangle between the banking establishment and Trump-appointed regulators.

For three years, the main lobbying group for small U.S. banks has fought efforts by the likes of SoFi and Square to obtain so-called industrial bank charters. But now the nation’s big banks are also opposing key aspects of a regulatory proposal that would smooth a path for new entrants, according to letters filed recently with the Federal Deposit Insurance Corp.


In March, the FDIC launched an effort to formalize the process of obtaining an industrial bank charter. At the same time, the agency approved deposit insurance applications by Square and the student loan servicer Nelnet, clearing a path for the first new U.S. industrial banks in more than a decade.

Since then, two more companies have announced plans to operate industrial banks — the Japanese e-commerce giant Rakuten, which refiled a previously withdrawn application, and the St. Louis-based financial advisory firm Edward Jones.

Trade groups that represent big banks recently expressed opposition to the Rakuten application, voicing doubt about the wisdom of mixing banking activities with nonfinancial businesses.

And last week, one of those Washington-based industry groups, the Bank Policy Institute, went further, calling on the FDIC to lobby Congress to bar nonfinancial companies from owning industrial banks. In the meantime, the group urged the FDIC to institute a moratorium on processing deposit insurance applications for new industrial banks, which are also known as industrial loan companies.

“Past efforts by large commercial firms, such as Wal-Mart and Home Depot, to acquire FDIC-insured ILCs have raised significant concern and alarm,” Dafina Stewart, the Bank Policy Institute’s associate general counsel, wrote in a June 30 letter, before lamenting that the FDIC’s proposal would not prevent the likes of Facebook or Amazon from acquiring industrial banks.

The Consumer Bankers Association, which represents big banks, and the American Bankers Association, whose membership includes large and small depositories, also expressed opposition to aspects of the FDIC’s proposal.

Under the FDIC’s proposal, parent companies of new industrial banks would have to agree to examinations, specialized capital and liquidity requirements and other measures.

The big banks’ call for a moratorium comes more than two years after the Independent Community Bankers of America made a similar request, which has gone unheeded.

The ICBA, which represents small banks, argued in its own letter last week that commercial firms should never be allowed to own a bank, even if they are subject to enhanced supervision and regulation.

Tech companies argue that the banking industry’s increasing hostility is an attempt to ward off new competition. Brian Peters, executive director of Financial Innovation Now, a trade group whose members include Amazon, Apple, Google, PayPal and Square, accused some in the banking industry of “fearmongering.”

Square, a San Francisco-based payments processor that also facilitates loans to its small-business customers, is the only member of Financial Innovation Now to have expressed interest in the industrial bank charter, Peters said in an interview Monday.

The question of whether to allow tech companies to operate banks is a rare issue in which the banking industry is allied with consumer advocacy organizations. Consumer groups that have expressed concerns about the FDIC’s proposal include the Center for Responsible Lending, the National Consumer Law Center and the Woodstock Institute.

In recent letters to the FDIC, consumer groups echoed banks’ argument that blending financial and commercial activities would pose systemic risks. But they also expressed concerns about how new industrial banks would be evaluated under the Community Reinvestment Act, and the possibility that the charters could be used to facilitate high-cost lending.

Groups led by the Center for Responsible Lending wrote in a July 1 letter that existing industrial banks are already involved in high-cost lending schemes. “By permitting unprecedented blending of commercial and financial activities, and by making it easier than ever to make high-cost loans above states’ interest rate limits, this proposal is a recipe for disaster,” the letter stated.

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Deposit insurance ILCs FDIC Fintech regulations Nonbank Licenses and charters Community banking Square