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FDIC Federal Register Citations -
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[6714-01-P]

FEDERAL DEPOSIT INSURANCE CORPORATION

Industrial Loan Companies and Industrial Banks

AGENCY: Federal Deposit Insurance Corporation (FDIC)

ACTION: Notice and Request for Comment

SUMMARY: The FDIC is seeking comment on specific issues related to industrial loan companies and industrial banks (collectively, ILCs), including issues regarding the current legal and business framework of ILCs and the possible benefits, detrimental effects, risks, and supervisory issues associated with the ILC industry. The FDIC believes that public input will assist the FDIC in identifying any potential risks to the Deposit Insurance Fund, any emerging safety and soundness issues, or other policy issues raised by ILCs and, further, will assist the FDIC in determining whether statutory, regulatory, or policy changes should be made in the FDICís supervision of ILCs in order to protect the Deposit Insurance Fund or other important Congressional objectives.

DATES: Written comments must be received on or before [INSERT DATE THAT IS 45 DAYS AFTER DATE OF PUBLICATION].

ADDRESSES: You may submit comments by any of the following methods:

  • Agency Web Site: http://www.fdic.gov/regulations/laws/federal/propose.html. Follow instructions for submitting comments on the Agency web site.
  • E-mail: Comments@FDIC.gov.
  • Mail: Robert E. Feldman, Executive Secretary, Attention: Comments, Federal Deposit Insurance Corporation, 550 17th Street, N.W., Washington, D.C. 20429.
  • Hand Delivery/Courier: Guard station at rear of the 550 17th Street Building (located on F Street) on business days between 7:00 a.m. and 5:00 p.m.

Internet Posting: All comments received will be posted without change to http://www.fdic.gov/regulations/laws/federal/propose.html including any personal information provided.

FOR FURTHER INFORMATION CONTACT: Thomas Bolt, Counsel, telephone (202) 898-6750, Federal Deposit Insurance Corporation, Washington, D.C. 20429.

SUPPLEMENTARY INFORMATION:

I. BACKGROUND

Recently, the growth of the ILC industry, the trend toward commercial company ownership of ILCs and the nature of some ILC business models have raised questions about the risks posed by ILCs to the Deposit Insurance Fund, including whether their commercial relationships pose any safety and soundness risks. On July 28, 2006 the FDIC imposed a six-month moratorium on FDIC action to (i) accept, approve, or deny any application for deposit insurance submitted to the FDIC by, or on behalf of, an ILC, or (ii) accept, disapprove, or issue a letter of intent not to disapprove, any change in bank control notice submitted to the FDIC with respect to an ILC. The purpose of the moratorium is to preserve the status quo while the FDIC evaluates (i) industry developments, (ii) the various issues, facts, and arguments raised with respect to the ILC industry, (iii) whether ILCs pose any increased risk to the Deposit Insurance Fund, or whether there are emerging safety and soundness issues or policy issues involving ILCs, and (iv) whether statutory, regulatory, or policy changes should be made in the FDICís oversight of ILCs in order to protect the Deposit Insurance Fund or important Congressional objectives. A notice of the imposition of the moratorium was published in the Federal Register on August 1, 2006 (71 FR 43482, August 1, 2006). The notice expressed the FDICís intent to seek public input on the issues and concerns raised with regard to the ILC industry.

ILCs were first chartered in the early 1900's as small loan companies for industrial workers. ILCs are state-chartered banks supervised by their chartering states and the FDIC, which is their primary federal regulator. ILCs were first insured on January 1, 1934. As of March 31, 2006, 61 insured ILCs operating from California, Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah reported total assets approximating $155 billion.

Under current law, certain ILCs may affiliate with, or be owned by, a company whose activities are generally considered to be commercial in nature. This ability of certain ILCs to be owned by or affiliated with commercial entities results from the Competitive Equality Banking Act of 1987 (CEBA). The CEBA generally exempts from the definition of ďbankĒ in the Bank Holding Company Act (BHCA) any ILC that meets certain requirements. As a result, the parent companies of ILCs that qualify for the exemption under the BHCA, unlike companies that are subject to the BHCA, are not prohibited from engaging in commercial activities, and are not required to be supervised by the Federal Reserve Board (FRB) and may not be subject to any other form of consolidated supervision. Nevertheless, the majority of companies that own ILCs are financial entities. Eleven are under some form of consolidated supervision by either the FRB or the Office of Thrift Supervision (OTS). OTS-supervised holding companies currently control approximately 65% of the total ILC assets nationwide. Many other companies that own ILCs are subject to primary supervision by state or federal regulators.

Since ILCs are insured state nonmember banks, they are subject to FDIC Rules and Regulations, restrictions under the Federal Reserve Act governing transactions with affiliates and anti-tying provisions of the Bank Holding Company Act, various consumer protection laws and regulations, and the Community Reinvestment Act. ILCs are also subject to regular examinations, including examinations focusing on safety and soundness, consumer protection, community reinvestment, information technology and trust activities.

FDIC supervisory policies regarding an institution, including an ILC owned by a parent company, consider the organizational relationships of the institution. The FDIC has the authority to examine an ILCís relationships with its parent company and any other affiliate. Also, the FDICís enforcement authority extends beyond the ILC itself and includes institution-affiliated parties. This includes the authority to require such action as the agency determines to be appropriate, which may include divestiture of the ILC. However, since the FDIC is not a consolidated supervisor, it does not have the authority to examine affiliates that do not have a relationship with the ILC or to impose capital requirements on the parent company of an ILC.

The FDIC generally follows the same review process for ILC applications and notices as it does for such filings from other applicants. In the case of applications for deposit insurance, the FDIC has the authority to impose reasonable conditions through its order approving the application. In the case of a change in bank control filed with the FDIC, the FDIC can impose requirements and restrictions through a formal agreement among the FDIC, the institution and the parent company. Decisions regarding specific conditions or provisions are based upon the totality of the filing and investigation, and may consider the complexity and perceived risk of the proposal, adequacy of capital and management, relationships with affiliated entities, and sufficiency of risk management programs, among other considerations. Conditions or provisions may be time-specific or may impose continuing requirements or restrictions that must be satisfied on an ongoing basis. Conditions may be modified or discarded at the request of the institution or at the FDICís own initiative if circumstances change in the future.

Concerns Expressed Regarding ILCs

A variety of concerns have been raised regarding ILCs. These primarily focus on whether ILCs in a holding company structure that is not subject to some form of consolidated supervision pose greater safety and soundness issues or risks to the Deposit Insurance Fund than do insured depository institutions in a holding company structure which is subject to consolidated Federal supervision. These concerns include the absence of consolidated supervisory requirements for the parent companies of ILCs; the absence of an obligation by the ILC parent company to keep the ILC well capitalized; and differences in authority to examine affiliate relationships. General concerns have also been raised about the potential mixing of banking and commerce that might be presented by an ILC.

II. QUESTIONS POSED BY THE FDIC

In imposing the six-month moratorium on actions relative to applications for deposit insurance and notices of change in bank control, the FDIC indicated its intent to evaluate (i) industry developments; (ii) the various facts, issues, and arguments raised with respect to the ILC industry; (iii) whether there are emerging safety and soundness issues or other risks to the Deposit Insurance Fund or other policy issues involving ILCs; and (iv) whether statutory, regulatory, or policy changes should be made in the FDICís oversight of ILCs in order to protect the Deposit Insurance Fund or other important Congressional objectives. The FDIC believes that public participation will provide valuable insight into the issues presented by recent trends and changes in the ILC industry, and will assist the FDIC in deciding how to respond to those issues. In order to obtain public input, the FDIC invites comments in response to the following questions. To aid our analysis, we encourage commenters to identify, by number, the question to which each section of their comment corresponds.

1. Have developments in the ILC industry in recent years altered the relative risk profile of ILCs compared to other insured depository institutions? What specific effects have there been on the ILC industry, safety and soundness, risks to the Deposit Insurance Fund, and other insured depository institutions? What modifications, if any, to its supervisory programs or regulations should the FDIC consider in light of the evolution of the ILC industry?

2. Do the risks posed by ILCs to safety and soundness or to the Deposit Insurance Fund differ based upon whether the owner is a financial entity or a commercial entity? If so, how and why? Should the FDIC apply its supervisory or regulatory authority differently based upon whether the owner is a financial entity or a commercial entity? If so, how should the FDIC determine when an entity is ďfinancialĒ and in what way should it apply its authority differently?

3. Do the risks posed by ILCs to safety and soundness or to the Deposit Insurance Fund differ based on whether the owner is subject to some form of consolidated Federal supervision? If so, how and why? Should the FDIC assess differently the potential risks associated with ILCs owned by companies that (i) are subject to some form of consolidated Federal supervision, (ii) are financial in nature but not currently subject to some form of consolidated Federal supervision, or (iii) cannot qualify for some form of consolidated Federal supervision? How and why should the consideration of these factors be affected?

4. What features or aspects of a parent of an ILC (not already discussed in Questions 2 and 3) should affect the FDICís evaluation of applications for deposit insurance or other notices or applications? What would be the basis for the FDIC to consider those features or aspects?

5. The FDIC must consider certain statutory factors when evaluating an application for deposit insurance (see 12 U.S.C. 1816), and certain largely similar statutory factors when evaluating a change in control notice (see 12 U.S.C. 1817(j)(7)). Are these the only factors FDIC may consider in making such evaluations? Should the consideration of these factors be affected based on the nature of the ILCís proposed owner? Where an ILC is to be owned by a company that is not subject to some form of consolidated Federal supervision, how would the consideration of these factors be affected?

6. Should the FDIC routinely place certain restrictions or requirements on all or certain categories of ILCs that would not necessarily be imposed on other institutions (for example, on the institutionís growth, ability to establish branches and other offices, ability to implement changes in the business plan, or capital maintenance obligations)? If so, which restrictions or requirements should be imposed and why? Should the FDIC routinely place different restrictions or requirements on ILCs based on whether they are owned by commercial companies or companies not subject to some form of consolidated Federal supervision? If such conditions are believed appropriate, should the FDIC seek to establish the underlying requirements and restrictions through a regulation rather than relying upon conditions imposed in the order approving deposit insurance?

7. Can there be conditions or regulations imposed on deposit insurance applications or changes of control of ILCs that are adequate to protect an ILC from any risks to safety and soundness or to the Deposit Insurance Fund that exist if an ILC is owned by a financial company or a commercial company? In the interest of safety and soundness, should the FDIC consider limiting ownership of ILCs to financial companies?

8. Is there a greater likelihood that conflicts of interest or tying between an ILC, its parent, and affiliates will occur if the ILC parent is a commercial company or a company not subject to some form of consolidated Federal supervision? If so, please describe those conflicts of interest or tying and indicate whether or to what extent such conflicts of interest or tying are controllable under current laws and regulations. What regulatory or supervisory steps can reduce or eliminate such risks? Does the FDIC have authority to address such risks in acting on applications and notices? What additional regulatory or supervisory authority would help reduce or eliminate such risks?

9. Do ILCs owned by commercial entities have a competitive advantage over other insured depository institutions? If so, what factors account for that advantage? To what extent can or should the FDIC consider this competitive environment in acting on applications and notices? Can those elements be addressed through supervisory processes or regulatory authority? If so, how?

10. Are there potential public benefits when a bank is affiliated with a commercial concern? Could those benefits include, for example, providing greater access to banking services for consumers? To what extent can or should the FDIC consider those benefits if they exist?

11. In addition to the information requested by the above questions, are there other issues or facts that the FDIC should consider that might assist the FDIC in determining whether statutory, regulatory, or policy changes should be made in the FDICís oversight of ILCs?

12. Given that Congress has expressly excepted owners of ILCs from consolidated bank holding company regulation under the Bank Holding Company Act, what are the limits on the FDICís authority to impose such regulation absent further Congressional action?

By Order of the Board of Directors

* * *

Dated at Washington D.C., this 17th day of August, 2006.

FEDERAL DEPOSIT INSURANCE CORPORATION

Robert E. Feldman
Executive Secretary

 


Last Updated 08/17/2006 Regs@fdic.gov