WASHINGTON — The Federal Reserve Board's chief regulator suggested he was open to companies receiving industrial loan company charters, a sign that the central bank's view on ILCs may be evolving.
"I don’t think of [ILCs] as a particularly special, excessively problematic case,” said Federal Reserve Vice Chairman for Supervision Randal Quarles at an International Monetary Fund forum Wednesday.
Quarles' comments, which echoed remarks he made Tuesday at a House Financial Services Committee hearing, appeared to contrast with past statements by former Fed officials. The agency has long cast suspicion on ILC charters, viewing their exemption from Fed holding company requirements as a supervisory loophole. The Fed even at one point called on Congress to crack down on them.
Quarles, who comes from the state — Utah — where ILCs are most prevalent, on Wednesday said he did not have any particular concerns about ILC charters or companies that apply for one, saying that such applications should be considered and granted based on the strength of the application.
“I think we should apply the same measures of assessment that we apply to the granting of a charter of any other financial institution — the safety and soundness of the business model, the confidence in the management, all the assessments that go into that,” Quarles said.
Testifying before the House Financial Services Committee a day earlier, Quarles presented a similarly positive view toward the ILC sector. He was asked about how a current interpretation of the Volcker rule requires the ban on proprietary trading to be applied not only to a deposit-taking ILC but to its parent company as well.
Rep. Mia Love, R-Utah, said those rules have pushed companies that previously had ILC charters — including GE Capital — to give them up. Quarles said he was aware of those problems and was sympathetic to Love’s concerns.
“As a citizen of Utah, I am very familiar with [ILCs],” Quarles said. “It hasn’t been … a project of the Federal Reserve up to now to consider our regulatory system and how that apples to the ILCs, but I’m very aware of the importance of the issues you’re stating.”
“So you would agree that ILCs have been a stable source of capital in our communities, even after the financial crisis,” Love said.
“That certainly was my experience, yes,” Quarles said.
The issue had been in the public eye in the mid 2000s when Walmart applied for an ILC charter, only to find its application opposed by the banking industry and forces opposed to the company more generally.
The Fed was always believed to oppose ILC parents' ability to charter a depository institution without having to become bank holding companies. Since Fed-supervised bank parents must be primarily financial in nature, the ILC is one of the last legal routes for commercially focused companies to enter the banking system.
Ultimately, Walmart withdrew its application and the issue largely went away, but recent applications by fintech companies such as Square have reignited the debate. Community banks have come out opposed to the applications, while Jelena McWilliams — the president’s nominee to chair the Federal Deposit Insurance Corp. — appeared to favor the charters.
Quarles’ embrace of ILCs may not necessarily mean that he embraces the move for larger technology companies to become financial intermediaries.
Most fintech firms interface with the existing financial system fairly well, he said, either through limitations on the products they offer or partnerships with chartered institutions. But when it comes to big firms entering the space, he was more cautious, saying it could pose a bigger challenge than what the Fed thinks of as fintech today.
“It’s certainly conceivable that that evolves in such a way that is much different than creating some interface that tacks on to the existing financial infrastructure,” Quarles said. “To the extent that that is done on a fractional reserve basis — and to the extent it is not done on a fractional reserve basis, it is hard to see how it would then be competitive with the existing financial sector — it would raise many of the same issues that call for regulation of the financial sector.”