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FDIC Federal Register Citations
[Federal Register: February 5, 2007 (Volume 72, Number 23)] 

[Notices]

[Page 5290-5294]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr05fe07-55]

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FEDERAL DEPOSIT INSURANCE CORPORATION

Moratorium on Certain Industrial Bank Applications and Notices

AGENCY: Federal Deposit Insurance Corporation (FDIC)

ACTION: Notice; Limited Extension of Moratorium.

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SUMMARY: This notice announces a one-year extension of the termination

date of the FDIC's existing moratorium on industrial loan companies and

industrial banks \1\ (collectively, ``industrial banks'') for deposit

insurance applications and change in control notices with respect to

certain industrial banks. The extended moratorium only applies to

applications for deposit insurance and change in control notices with

respect to industrial banks that will become subsidiaries of companies

engaged in non-financial activities \2\ (``commercial activities'').

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\1\ For purposes of the extended moratorium, the terms

``industrial loan company'' and ``industrial bank'' mean any insured

State bank that is an industrial bank, industrial loan company, or

other similar institution that is excluded from the definition of

``bank'' in the Bank Holding Company Act of 1956 (BHCA) pursuant to

section 2(c)(2)(H) of the BHCA, 12 U.S.C. 1841(c)(2)(H).

\2\ For purposes of the extended moratorium, the term

``financial activity'' includes: (i) Banking, managing or

controlling banks or savings associations; and (ii) any activity

permissible for financial holding companies under 12 U.S.C. 1843(k),

any specific activity that is listed as permissible for bank holding

companies under 12 U.S.C. 1843(c), as well as activities that the

Federal Reserve Board (FRB) has permitted for bank holding companies

under 12 CFR 225.28 and 225.86, and any activity permissible for all

savings and loan holding companies under 12 U.S.C. 1467a(c). The

term ``non-financial activity'' is any other activity. The FDIC

intends to follow the written guidance of the FRB and the Office of

Thrift Supervision (OTS) regarding permissible holding company

activities in its interpretations of the term ``financial activity''

and to consult with the FRB and/or OTS before making any decisions.

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Although the FDIC's existing industrial bank moratorium was

originally set to expire on January 31, 2007 for all industrial banks,

as a result of the extension, the moratorium will now expire on January

31, 2008 for certain industrial banks. The extended moratorium does not

apply to any application for deposit insurance or change in control

notice with respect to any industrial bank that will not become a

subsidiary of a company, or any industrial bank that will become a

subsidiary of a company engaged only in financial activities. The FDIC

is also publishing elsewhere in the Federal Register today a notice of

proposed rulemaking that proposes certain requirements on any

industrial bank that will become a subsidiary of a company that is

engaged only in financial activities and is not subject to consolidated

bank supervision by the Federal Reserve Board (FRB) or the Office of

Thrift Supervision (OTS) (hereinafter referred to as ``Federal

Consolidated Bank Supervision'').

DATES: The extended moratorium is effective through January 31, 2008.

FOR FURTHER INFORMATION CONTACT: Robert C. Fick, Counsel, (202) 898-

8962 or Thomas P. Bolt, Counsel, (202) 898-6750, Federal Deposit

Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background


Industrial banks were first chartered in the early 1900's as small

loan companies for industrial workers. Over time some of the chartering

states expanded the powers of their industrial banks to the extent that

some industrial banks now have generally the same powers as state

commercial banks.

[[Page 5291]]

Since the passage of the Competitive Equality Banking Act of 1987

(CEBA),\3\ the industrial bank industry has changed significantly.

Between 1987 and 2006 total assets held by industrial banks grew from

$4.2 billion to $177 billion.

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\3\ Public Law 100-86, 101 Stat. 552 (codified as amended in

various sections of title 12 of the U.S. Code)

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Since January 1, 2000, 24 industrial banks became insured.\4\ As of

January 30, 2007, there were fifty-eight insured industrial banks with

aggregate total assets of approximately $177 billion.\5\ Six industrial

banks reported total assets of $10 billion or more; eleven other

industrial banks reported total assets of $1 billion or more. The

remaining forty-one institutions, on average, reported total assets of

approximately $231.8 million. Forty-five of those fifty-eight operated

in Utah and California.\6\ Of the fifty-eight existing industrial

banks, forty-three were either controlled by one or more individuals or

controlled by a parent company whose business is financial in nature.

As of January 30, 2007, thirty-one of the fifty-eight existing

industrial banks were owned by companies that were engaged solely in

financial activities and that were not subject to Federal Consolidated

Bank Supervision; such companies are hereinafter referred to as ``Non-

FCBS Financial Companies.'' Eight of the fifty-eight industrial banks

(representing approximately sixty-nine percent of industrial bank

industry assets) were owned by companies that are engaged solely in

financial activities and are subject to consolidated supervision by the

FRB or the OTS. Four of the fifty-eight industrial banks were owned by

individuals. Fifteen industrial banks were subsidiaries of holding

companies that are non-financial in nature, i.e., commercial.

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\4\ During 2000, 4 new industrial banks were insured; 2 during

each of 2001 and 2002; 5 during 2003; 6 during 2004; 4 during 2005;

and 1 in 2006.

\5\ Based on reported assets as of September 30, 2006, the most

recent reported data.

\6\ Industrial banks also operate in Colorado, Hawaii, Indiana,

Minnesota and Nevada.

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In 2005, the Government Accountability Office (GAO) expressed its

concern that industrial banks owned by commercial companies or other

entities without a Federal consolidated supervisor created an uneven

playing field when compared to banks and thrifts owned by holding

companies subject to Federal consolidated supervision.\7\ The concerns

regarding the lack of consolidated supervision and the possible

limitations of the FDIC's authority echoed those previously expressed

by the FDIC's Office of Inspector General (OIG) in a 2004 report.\8\

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\7\ U.S. Gov't Accountability Office, GAO-05-621, Industrial

Loan Corporations: Recent Asset Growth and Commercial Interest

Highlight Differences in Regulatory Authority 79-80 (2005)

(hereinafter ``GAO Report'').

\8\ See Federal Deposit Insurance Corporation Office of

Inspector General, Report No. 2004-048, The Division of Supervision

and Consumer Protection's Approach for Supervising Limited-Charter

Depository Institutions (2004) (hereinafter ``OIG Report'').

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Some industrial banks continue to be small, community-focused

institutions. However, the FDIC has noted a recent increase in the

number of applications for deposit insurance and notices of change in

control with respect to industrial banks that would be affiliated with

commercial companies or other entities that would not be subject to

Federal Consolidated Bank Supervision. Such institutions are often

large organizations that tend to have complex business plans. Their

subsidiary industrial banks tend to provide specialty lending programs

or financial services or other support to the holding company. Whatever

their purpose or structure, the industrial bank charter has generated a

significant amount of public interest in recent years as various

entities have explored the feasibility and business opportunities

associated with including an industrial bank as part of their

operations.

In 2006, the FDIC received more than 13,800 comment letters

regarding the proposed Wal-Mart Bank's 2005 deposit insurance

application.\9\ Most of these comments expressed opposition to granting

deposit insurance with respect to this particular applicant; however,

some commenters raised more universal concerns about industrial banks.

Over 640 of the more general comments were specifically focused on the

risk posed to the deposit insurance fund by industrial banks owned by

commercial companies or by holding companies without a Federal

consolidated bank supervisor. Similar sentiments were expressed by

witnesses during three days of public hearings held by the FDIC

regarding the Wal-Mart application. In addition, the Home Depot also

filed a change in control notice in connection with its proposed

acquisition of EnerBank, a Utah industrial bank. In response to the

request for public comment on the change in control notice, the FDIC

received approximately 830 comment letters; almost all of them

expressed opposition to the proposed acquisition.

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\9\ See the FDIC's Web site at http://www.fdic.gov/regulations/laws/walmart/

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Congress also has had a continuing interest in the industrial bank

charter. Most recently, on July 12, 2006, the House Committee on

Financial Services (Committee) held a hearing regarding industrial

banks. At the hearing, the General Counsels of the FDIC and FRB

testified before the Committee regarding the history, characteristics,

current industry profile, and supervision of industrial banks.\10\ The

FDIC's testimony noted that today's industrial banks are owned by a

diverse group of financial and commercial entities. Among industrial

banks owned by such entities are those that serve a particular lending,

funding, or processing function within a larger organizational

structure, and those that directly support one or more affiliate's

commercial activities. The business plans for these industrial banks

differ substantially from the consumer lending focus of the original

industrial banks.

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\10\ Industrial Loan Companies: A Review of Charter, Ownership,

and Supervision Issues: Hearing Before the H. Comm. on Financial

Services, 109th Cong. (2006). The Committee also heard testimony

from G. Edward Leary, Commissioner for the Utah Department of

Financial Institutions; Rick Hilman, Director of Financial Markets

and Community Investment, U.S. Government Accountability Office;

George Sutton, Former Commissioner for the Utah Department of

Financial Institutions; Terry Jorde, Chairman, President, and CEO of

CountryBank USA, Chairman of ICBA; John L. Douglas, Partner, Alston

& Bird; Arthur C. Johnson, Chairman and CEO of United Bank of

Michigan; Prof. Lawrence J. White, Professor of Economics, Stern

School of Business of New York University; Michael J. Wilson,

Director, Legislative and Political Action Department, United Food

and Commercial International Union. Also, several organizations

submitted record statements.

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Currently, eight industrial bank deposit insurance applications are

pending before the FDIC. Also, in 2006 the FDIC received three

additional deposit insurance applications that were either returned or

withdrawn. In addition, the FDIC received seven change in control

notices for the acquisition of industrial banks; five of which have

been returned or withdrawn. None of the potential parent companies

would be subject to Federal Consolidated Bank Supervision, and at least

nine of the eighteen potential parent companies are engaged in

activities that are considered commercial in nature.

To evaluate the concerns and issues raised with respect to

industrial banks, on July 28, 2006, the FDIC imposed a six-month

moratorium on FDIC action with respect to certain industrial bank

applications and notices.\11\ The FDIC declared the moratorium to

enable it to further evaluate (i) Industry developments, (ii) the

various issues, facts, and arguments raised with respect to the

industrial bank industry, (iii)


[[Page 5292]]

whether there are emerging safety and soundness issues or policy issues

involving industrial banks or other risks to the insurance fund, and

(iv) whether statutory, regulatory, or policy changes should be made in

the FDIC's oversight of industrial banks in order to protect the

deposit insurance fund or important Congressional objectives.\12\

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\11\ See Moratorium on Certain Industrial Loan Company

Applications and Notices, 71 FR 43482 (August 1, 2006).

\12\ Id.

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Thereafter, on August 23, 2006, the FDIC published in the Federal

Register a request for public comment on twelve questions.\13\ Among

other things, the FDIC sought public comment on what modifications, if

any, should be made to its regulations in light of the changing

industrial bank industry; how and whether the attributes of

consolidated supervision affect the safety and soundness of either

industrial banks or the Deposit Insurance Fund; and how, and whether,

the FDIC should differentiate and assess possible risks associated with

financial or commercial ownership of industrial banks.

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\13\ See Industrial Loan Companies and Industrial Banks, 71 FR

49456 (August 23, 2006).

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The FDIC received over 12,600 comment letters in response to the

Request for Public Comment during the comment period.\14\ Approximately

12,485 comments were generated by what appears to be organized

campaigns either supporting or opposing the proposed industrial bank to

be owned by Wal-Mart or the proposed acquisition of Enerbank, also an

industrial bank, by The Home Depot. Of this total, approximately 82

percent generally were opposed to the ownership of industrial banks by

Wal-Mart or other commercial companies. The remaining comment letters

were sent by individuals, law firms, community banks, financial

services trade associations, existing and proposed industrial banks or

their parent companies, the Conference of State Bank Supervisors, and

two members of Congress. Of the total comments received, seventy-one

commenters addressed specific substantive issues concerning the

industrial bank industry and its regulation.

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\14\ See http://www.fdic.gov/regulations/laws/federal/2006/06comilc.html

.

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The commenters who favored the current state of the industrial bank

industry generally believed that the risks commonly associated with

commercial company affiliations are overstated and that industrial

banks affiliated with commercial companies generally maintain safe and

prudent business relationships and financial and managerial support

systems. They felt that the current restrictions on transactions with

affiliates and tying provide ample protection for the industrial bank.

The commenters who expressed a negative or neutral view of the

industrial bank industry generally believed that affiliations with

commercial companies and other entities not subject to consolidated

supervision presented safety and soundness problems and unacceptable

risks to the Deposit Insurance Fund by increasing the potential for

conflicts of interest, excessive dependence on such affiliates, and

tying. These commenters supported extending the moratorium until

Congress acts on legislation to prohibit industrial banks from

affiliating with non-financial entities. Some urged the FDIC to issue

regulations restricting industrial banks from affiliating with non-

financial entities. Still others suggested that the conditions imposed

by the FDIC in the past were insufficient, standing alone, to offer

adequate protections to the Deposit Insurance Fund. Several commenters

cited the competitive advantages--in access to capital, customers, and

marketing opportunities--that exist when industrial banks are owned by

commercial entities or otherwise lack a Federal Consolidated Bank

Supervisor.

The FDIC's experience and the comments suggest no risk or other

possible harm that is unique to the industrial bank charter. Rather,

the concerns that have been raised focus on the ownership of the

industrial bank and on the proposed industrial bank's business model or

plan. Consequently, the FDIC's analysis of how to proceed focuses

primarily on the proposed owners of industrial banks.

II. The Extended Moratorium

Scope

The original six-month moratorium imposed on July 28, 2006,

deferred FDIC action on deposit insurance applications and change in

control notices with respect to all proposed and existing industrial

banks. However, recently the FDIC has noted a marked increase in

deposit insurance applications for, and change-in-control notices with

respect to, industrial banks that would be affiliated with commercial

concerns and other companies that would not have a Federal Consolidated

Bank Supervisor. This trend has led to heightened concerns by some

members of Congress and commenters regarding the lack of Federal

Consolidated Bank Supervision, the mixing of banking and commerce, and

the potential for an ``uneven playing field.'' Both the FDIC's

observations and the bulk of the comments received indicate that these

concerns about industrial banks focus on commercial-company ownership

and/or the lack of Federal Consolidated Bank Supervision.

Financial companies that are subject to Federal Consolidated Bank

Supervision (``FCBS Financial Companies''), such as bank holding

companies, financial holding companies, and savings and loan holding

companies generally do not present these same issues. Many of the

statutory and regulatory tools available to Federal Consolidated Bank

Supervisors can substantially restrict the extent to which such

companies may engage in commercial activities or affiliate with

commercial companies. Moreover, the examination, reporting, and

monitoring systems of Federal Consolidated Bank Supervisors can be

effective tools in preventing an affiliate's activities from causing a

safety and soundness risk to the bank. Finally, holding companies that

are expected to serve as a source of strength to their subsidiary

insured depository institutions provide an important resource for an

insured bank in need of additional capital. As a result, the FDIC

believes that this class of industrial bank ownership does not need

further study and that the supervisory tools currently available to the

FDIC are adequate.

Generally, industrial banks owned by individuals also do not

present the same issues that industrial banks owned by commercial

companies present. In the case of an industrial bank owned by

individuals, there is neither a parent company nor any subsidiary of a

parent company that could present an opportunity for a safety and

soundness risk or a conflict of interest with the industrial bank.\15\

Consequently, at this time, the FDIC believes that ownership of

industrial banks by individuals presents no extraordinary issues that

deserve further study or consideration.

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\15\ Since there is no parent company of the industrial bank,

the BHCA does not apply.

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Importantly, industrial banks to be owned by Non-FCBS Financial

Companies present some of the same issues that industrial banks owned

by commercial companies do. However, the FDIC believes that those

issues can be controlled or minimized in such cases. In addition, some

such companies are subject to well-established regulatory authorities,

e.g., by state insurance commissions or the U.S. Securities and

Exchange Commission. Such Non-FCBS Financial Companies engage only in

financial activities and, so, do not engage in commercial activities

either directly or indirectly.

[[Page 5293]]

However, since these companies will not be subject to Federal

Consolidated Bank Supervision, the FDIC believes that safeguards should

be implemented that provide adequate protections for the safety and

soundness of insured industrial banks and for the protection of the

Deposit Insurance Fund. Through the publication of a notice of proposed

rulemaking for part 354, the FDIC is proposing conditions and

requirements to provide safeguards such as examination of, and

reporting by, such companies and their subsidiaries, and binding

commitments to serve as a resource for additional capital for the

industrial bank subsidiaries. We anticipate that the proposed

regulations will provide the safeguards that the FDIC believes could be

helpful in identifying and avoiding or controlling, on a consolidated

basis, the safety and soundness risks and the risks to the Deposit

Insurance Fund that may result from that kind of company-ownership

model.

Industrial banks that are to be owned or controlled, directly or

indirectly, by commercial companies, however, continue to present

concerns. Under current law, commercial companies would not be allowed

to acquire a thrift or a bank, other than an industrial bank, and would

not have a Federal Consolidated Bank Supervisor. In many instances,

commercial activities are the predominant, if not sole, business of

such companies. In such circumstances, not only would consolidated

supervision not be present, but the current supervisory process and

infrastructure may not produce the safeguards that the FDIC believes

could be helpful in identifying and avoiding or controlling, on a

consolidated basis, the safety and soundness risks and the risks to the

Deposit Insurance Fund that may result from that kind of company-

ownership model. The recent trend of increased interest in industrial

banks by entities engaged in commercial activities makes an evaluation

of the application of current supervisory structures to such owners

timely and appropriate. As a result, the FDIC believes that this class

of companies needs further study and consideration on two key issues:

(1) What, if any, increased risks are created by ownership by

commercial companies and (2) how well do current supervisory models

apply to such owners.

Many members of Congress have urged the FDIC to extend the

moratorium with respect to industrial banks that would be controlled by

commercial firms. On December 7, 2006 one hundred and seven members of

the House of Representatives sent a letter to the FDIC urging the FDIC

to extend the moratorium for at least an additional six months. The

Representatives requested the extension ``to allow the 110th Congress

an opportunity to act on this important public policy issue.'' While

the FDIC is not expressing any conclusion about the propriety of

ownership of industrial banks by commercial companies, it is

appropriate to provide Congress with a reasonable period for

consideration of these developments and, if necessary, revisions to

existing statutory authority.

Furthermore, even though the FDIC has authority to act on any

particular application, notice, or request involving an industrial

bank, the FDIC has continuing concerns regarding the commercial

ownership of industrial banks and the lack of a Federal Consolidated

Bank Supervisor. The FDIC recognizes that commercial companies that

currently own industrial banks will not be affected by the extended

moratorium and that there may be concerns that this results in

disparate treatment for those commercial companies now seeking to

control ILCs. However, the FDIC has considered the potential impact of

the extended moratorium on individual applicants and proponents,

including commercial companies, and because the issues raised by such

ownership have the potential for broad and substantial impact on the

entire banking system and, potentially, the nation's economy, the FDIC

believes that Congressional resolution of these issues may be

appropriate.

The FDIC also recognizes that the moratorium may appear

inconsistent with specific timetables for agency action, including

processing of approvals. However, adherence to a strict statutory

timeline without an opportunity to re-evaluate its standards for

determining the public interest risks frustrating the substantive

policies the agency is charged with promoting. Consequently, the FDIC

has concluded that a limited moratorium should be extended through

January 31, 2008. The extension will both allow the FDIC needed time to

evaluate the various issues, facts, and arguments associated with the

ownership of an industrial bank by a commercial company, and allow

Congress time to consider legislation concerning industrial banks.

Summary

For the reasons discussed above, the scope of the extended

moratorium is narrower than the scope of the FDIC's original six-month

moratorium. Under the extended moratorium, the FDIC will take no action

to accept, approve, or deny any application for deposit insurance, or

to accept, disapprove, or issue a letter of intent not to disapprove

any change in control notice, with respect to any industrial bank that

would become a direct or indirect subsidiary of a company engaged in

commercial activities. While to date, commercially owned industrial

banks have not resulted in serious problems, in light of the concerns

that have been expressed and the recent trend of increased ownership of

industrial banks by commercial entities, the FDIC will continue to

monitor closely existing industrial banks that currently are controlled

by commercial companies.

Thus, the extended moratorium will not apply to, and the FDIC may

proceed with action on, any application for deposit insurance or any

change in control notice with respect to: (i) Any industrial bank that

would become a subsidiary of a company engaged only in financial

activities that is subject to Federal Consolidated Bank Supervision by

the FRB, or the OTS (i.e., a FCBS Financial Company); (ii) any

industrial bank that would not become a subsidiary of any company; or

(iii) any industrial bank that would become a subsidiary of a company

engaged only in financial activities that is not subject to Federal

Consolidated Bank Supervision by the FRB or the OTS (i.e., a Non-FCBS

Financial Company). While the notice of proposed rulemaking for part

354 is pending, the FDIC will consider deposit insurance applications

and change in control notices with respect to industrial banks within

group (iii) above on a case-by-case basis. After any final rules are

adopted, the FDIC will consider requests to modify any conditions and

requirements agreed to during the period between issuance of the

proposed rule and the effective date of the final rules to conform such

conditions and requirements to those in the final rules.

During the extended moratorium any application, notice or request

with respect to any industrial bank that is not subject to the

moratorium will be acted upon only by the FDIC's Board of Directors.

The extended moratorium is effective through January 31, 2008 for

applications for deposit insurance and change in control notices with

respect to industrial banks that will become subsidiaries of companies

engaged in commercial activities.

Dated at Washington DC, this 31st day of January 2007.

By Order of the Board of Directors.

[[Page 5294]]
 

Federal Deposit Insurance Corporation.

Valerie J. Best,

Assistant Executive Secretary.

[FR Doc. E7-1853 Filed 2-2-07; 8:45 am]

BILLING CODE 6714-01-P


    

Last Updated 02/05/2007 Regs@fdic.gov