Warren calls on FDIC to again pause ILC approvals

• Key insight: Two Senate Democrats are calling for a moratorium on Industrial Loan Company charter approvals until Congress can pass a law defining ILCs as banks under the Bank Holding Company Act, which would subject their parent companies to supervisory oversight.
• Expert quote: "A moratorium would provide Congress with an opportunity to address a longstanding crack in the wall separating banking and commerce before it becomes a chasm," wrote Sens. Elizabeth Warren, D-Mass., and Andy Kim, D-N.J.
• Forward look: The Federal Deposit Insurance Corp., which approves ILC charters, is unlikely to heed the call, but the move suggests ILCs may be a target for Democrats if they regain power in future elections.

Senate Banking Committee ranking member Elizabeth Warren, D-Mass., and committee member Andy Kim, D-N.J., are calling on the Federal Deposit Insurance Corp. to halt Industrial Loan Company charter approvals until Congress can pass a law defining ILCs as banks under the Bank Holding Company Act.

In a letter to acting FDIC Chair Travis Hill Monday, the two senators said that the exemption of ILCs from consideration as banks for the purposes of the BHCA means that commercial firms gain the benefits of owning a bank — including taking in low-cost insured deposits and making profitable loans — without the supervisory oversight of parent companies and nonbank affiliates that other banks are subject to. 

Regulators' inability to look into the material financial condition of an ILC's parent company and nonbank affiliates creates a blind spot that can lead to unexpected turmoil, the lawmakers said.

"That means the activities of the parent company and all of the nonbank affiliates are generally out of the sight of regulators, even though those entities can pose serious risks to the bank and, in turn, the Deposit Insurance Fund," Warren and Kim said in the letter. "A moratorium would provide Congress with an opportunity to address a longstanding crack in the wall separating banking and commerce before it becomes a chasm."

Traditional banks have long been wary of the competitive edge that ILCs could get from the different regulatory structures. ILCs were initially developed as a way for companies to provide credit to populations that might not otherwise obtain it — factory workers or miners, for example. Congress in 1987 passed a provision exempting ILCs from the definition of "bank" under the BHCA, and the sector has grown substantially since that time, topping $200 billion of combined assets today.

ILCs

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There has been a spurt of new ILC applications since the Trump administration took office in January, primarily from automakers like Nissan and Ford. And earlier this year, the FDIC rescinded a Biden-era proposal that would have required ILC applicants to demonstrate their financial independence from their parent companies and evaluate the community impact of a charter approval, suggesting a more favorable regulatory landscape for ILCs under the current administration. 

But traditional banks' primary fear is that a large retailer — with a large commercial footprint and millions of potential customers — could apply for an ILC, potentially sapping core deposits from the banking system. Walmart famously attempted to obtain an ILC charter in 2005, only to withdraw their application in 2006 in the face of strong opposition from the banking industry and consumer advocates alike. 

In the wake of that episode, the FDIC issued a moratorium on new ILC applications in 2006, and Congress enacted a three-year moratorium on new ILCs with the passage of Dodd-Frank in 2010. Even after the moratorium expired in 2013, no new ILC charters were approved until Square and NalNet obtained their charters in 2020. 

More recently, the Japanese tech firm Ratuken has applied for an ILC charter and subsequently withdrawn its application several times. If the e-commerce firm were to obtain a charter, it could spur more U.S.-based tech firms to do the same. 

"Major retailers like Walmart may also try again, if the FDIC takes a more permissive approach," Warren and Kim said. "We are at a similar inflection point to 2006 and a moratorium is appropriate."