GOP senator tries to block commercial firms from becoming banks

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WASHINGTON — A Republican senator has launched another legislative challenge to large commercial firms' ownership of industrial loan companies.

With bankers opposed to the ILC application of the Japanese e-commerce giant Rakuten and concerns growing about the financial services ambitions of the U.S. tech giants, Sen. John Kennedy, R-La., has proposed a bill to ban nonfinancial firms from controlling ILCs — also known as industrial banks.

“Companies like Google and Facebook already are so big that they’re countries,” Kennedy said in a press release Wednesday. “If they’re allowed to handle your banking services, they’re going to turn into continents.”

Under the Eliminating Corporate Shadow Banking Act of 2019, “no industrial bank may be controlled, directly or indirectly, by a commercial firm,” according to the bill text. Such firms are defined as “any entity that derives any amount of revenue from activities that are not financial in nature, or incidental to a financial activity.”

Commercial activities of existing ILCs would be grandfathered as of Oct. 1, 2019.


Bankers and other critics have long been opposed to what they see as a legal loophole allowing commercial firms to own a federally insured bank through the ILC charter. The specialty institutions, mostly based in Utah, are distinct in that nonfinancial parents can own them without having to register as bank holding companies with the Federal Reserve.

“The Federal Reserve exists for a reason. The Rakutens and the Googles of the world shouldn’t be able to circumvent the Fed,” Kennedy said.

Kennedy’s bill is reminiscent of legislation supported by community banks in 2006 and 2007 that was drafted in response to Walmart’s attempt to charter a Utah ILC. Walmart ultimately withdrew its application amid heavy opposition from labor and banking industry groups, and the earlier bill — sponsored by then-Reps. Barney Frank, D-Mass., and Paul Gillmor, R-Ohio — lost steam. At the time, Sen. Sherrod Brown, D-Ohio, sponsored a similar bill in the Senate.

New ILC activity has largely stalled in the years since, but fintech firms’ interest in bank charter options has revived the debate. All eyes are on the Federal Deposit Insurance Corp., which is tasked with considering applications from Rakuten and the payments-focused fintech Square, among others.

Most recently, Rakuten has drawn the heaviest criticism for its bid. The company, sometimes referred to as the Amazon.com of Japan, plans to use its proposed ILC to expand financial services offerings on its U.S. online rebates platform.

Meanwhile, the big U.S. tech giants continue to try to extend their reach into the financial services sphere. Facebook has proposed plans for its Libra cryptocurrency, and just Wednesday it was reported that Google will partner with Citigroup and a California credit union to offer consumer checking accounts.

Industry groups immediately applauded Kennedy for introducing his bill.

“Any company that wishes to own a full-service bank should be subject to the same restrictions and supervision that apply to any other bank holding company,” Independent Community Bankers of America President and CEO Rebeca Romero Rainey said in a joint press release with Kennedy. “We look forward to advancing this important and needed policy fix, which promotes a safe and sound financial system and maintains the needed separation of banking and commerce.”

Other firms have pending applications with the FDIC for deposit insurance tied to ILCs, including Nelnet and Interactive Brokers Group. Nelnet, the nation's largest servicer of federal student loans, refiled its application on Tuesday.

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