FDIC nears decision on ILC bids as it floats new standards for charter
WASHINGTON — The Federal Deposit Insurance Corp. proposed new standards for companies seeking to own industrial loan companies as the agency appears ready to move applications that have been held up over persistent questions about the charter.
Parent companies of new ILCs would have to agree to examinations, specialized capital and liquidity requirements, and other measures in exchange for regulatory approval under the proposal unveiled Tuesday.
The proposal approved by notational vote of the FDIC board of directors are aimed at clarifying ILC procedures following years of controversy over the specialized charter and a prolonged holdup in sanctioning new charters. Agency officials say the plan would formalize how the FDIC already handles applications.
But as the agency issued the proposed application procedures for public comment, FDIC Chair Jelena McWilliams said the board would consider two pending applications later in the day for parent companies that are financial in nature.
"The outcome of the vote on these applications should not be interpreted as an endorsement, or a criticism, of the industrial bank charter, but rather the fulfillment of a statutory responsibility to consider such applications," McWilliams said.
The proposal comes as tech-focused firms such as Square and Rakuten await an FDIC decision on their ILC applications, and community banks continue to oppose fintechs and other nontraditional firms attempting to use the charter to enter the banking system. Other firms awaiting approval include AmeriNational Community Services and Nelnet.
The proposal would codify record-keeping requirements and would compel parent companies to receive written approval form the FDIC on a host of actions, such as significant changes to the ILC's business plan or turnover in its executive suite.
But the core of the new process would be eight requirements that an ILC parent would have to agree to under a written pact with the FDIC. The written agreements would require the ILC to raise capital and liquidity to “such levels as the FDIC deems necessary for the safe and sound operation of the industrial bank.” The parent company and its subsidiaries would be subject to FDIC exams meant to monitor compliance with the written agreement.
“This proposal would ensure that parent companies serve as a source of strength for their industrial bank subsidiaries,” said McWilliams. “By codifying these requirements, the proposal would enhance transparency and provide important protections for the Deposit Insurance Fund.”
Among the eight requirements, ILC applicants would also have to provide the FDIC a list with all of the company’s subsidiaries, updated annually; submit an annual report to the FDIC on the parent company’s condition; maintain new records “as the FDIC deems necessary to assess the risks to the industrial bank; and submit to an annual independent audit “of each subsidiary industrial bank.”
Parent companies would also have to maintain separation from the industrial bank. In order to receive deposit insurance approval, the FDIC would require that no more than 25% of the industrial bank’s board could be board members of the parent company.
The proposal, which allows for a 60-day comment period, comes after several years of renewed interest from fintech firms in the ILC charter as a potential route into the regulated banking system. But ILC bids continue to face resistance over a decade after Walmart's attempt to obtain a charter united banks and labor groups in opposition, forcing the retail giant to withdraw its application.
The charter is one avenue for companies to operate like a bank without having to go through some of the hoops required of more traditional financial institutions. ILCs are not subject to bank holding company oversight by the Federal Reserve, and are one of the few charters still available to non-financial firms.
The FDIC’s new proposal would not affect the nation’s exiting industrial banks. It would also not apply to industrial banks that are owned by commercial bank parents already subject to Fed supervision.
The FDIC said the proposal largely codifies how the agency already handles ILC applications, and that one of the major incentives for publishing a rule (as opposed to guidance) was market transparency.
The proposal "would provide transparency to potential future applicants and the broader public as to what the FDIC requires of parent companies of industrial banks," McWilliams said.
The proposal would mark the first time the FDIC has asked parent companies to have to any maintain a pool dedicated to maintaining the liquidity and reserves of a bank. The pool could also be an open line of credit, according to the FDIC.
The FDIC proposal would also mandate that a parent company and its industrial bank distinguish “tax assets generated by [an] industrial bank” from those of the owner.
FDIC board member Martin Gruenberg agreed that "the purpose of the proposed rule is to codify existing practices utilized by the FDIC to supervise industrial banks and their parent companies, to mitigate undue risk to the DIF ... that may otherwise be presented in the absence of federal consolidated supervision of an industrial bank and its parent company."