A food-truck operator, a hometown car dealership, and a woman-owned neighborhood bakery seeking to grow their business and achieve their American dream choose an industrial bank as their financial partner. For small manufacturers, gig workers, hair salons and thousands more Main Street businesses who are overlooked by other banks,
Industrial banks are one of America's most reliable engines of jobs, consumer and small-business loans, payments, and community support. They are banks like any other, fully regulated, with the same rigorous standards for capital, liquidity and governance. Nevertheless,
Far from being a "loophole," Congress created the modern industrial bank to serve market needs that other banks overlook. Today's industrial banks and their parent companies are federally regulated, and their deposits are insured by the FDIC. Industrial banks are owned by real companies with real customers, real earnings and real capital. They must demonstrate financial strength and transparency and are subject to FDIC oversight that is as strong — and often stronger — than a bank holding company shell.
Industrial banks have the strongest safety record in American banking. Since Congress established industrial banks in 1987, only one has failed and caused a loss to the FDIC, and no commercially owned industrial bank has failed. Capital ratios average nearly 50% higher than the rest of the banking industry. Profitability, asset quality and loss performance all exceed national norms. If the country were designing a banking model from scratch, this would be a good start.
Critics of industrial banks rely on another outdated fiction — that allowing companies with diverse businesses to own a bank is somehow dangerous. Concentration is an issue, but only regarding the banks that have become "too big to fail," none of which are industrial banks. Instead, industrial banks help diversify the banking industry.
The Federal Deposit Insurance Corp's decision to scrap Biden-era rules restricting industrial banks raises hopes for firms seeking to establish ILCs, but that doesn't mean the entry of the largest retailers and tech firms — whose entry to the industry banks most fear — is imminent.
Congress deliberately preserved the industrial bank structure because diversification makes the system stronger. Unlike bank holding companies, industrial bank parent companies must be a source of strength for their banks — or they don't get to have a bank in the first place. Also, any lending to affiliated companies is strictly limited and fully secured. The real threat to the financial system and taxpayers lies in the continued consolidation of smaller institutions.
Industrial banks pay full risk-based premiums to the FDIC, and they are examined top to bottom. Industrial banks invest in their communities through the Community Reinvestment Act and many other activities. They undergo the same consumer-protection, privacy and fair-lending oversight as every other FDIC-insured institution. The record of zero losses to the deposit insurance fund from commercially owned institutions alone should put the tired "loophole" rhetoric to bed once and for all.
By expanding access to credit and fostering innovation in lending and payments, industrial banks make the system more competitive, inclusive and resilient. That's how competition works and that was the intent of Congress.
Of course, the FDIC should rigorously review applications for new industrial banks and approve only those that meet all the requirements. Ultimately, the nation will benefit from more — not fewer — industrial banks because they are good for consumers, good for taxpayers and good for competition in the banking sector.
Industrial banks have weathered every economic cycle with a safety record that is the envy of the industry while meeting the needs of real Americans and the small businesses that are part of America's economic engine. Policymakers would be wise to encourage the formation of more industrial banks in the U.S. as a proven, safe strategy to spur growth and opportunity for the nation.
