Bank Policy Institute Calls for Enhanced FDIC Regulation of Industrial Loan Companies

The Bank Policy Institute ("BPI") urged the FDIC to address risks from industrial loan companies ("ILCs") by pausing new applications and strengthening oversight of their parent firms.

In a comment letter responding to the FDIC’s Request for Information ("RFI") on industrial banks and ILCs, BPI argued that the ILC charter undermines the separation of banking and commerce and exposes the Deposit Insurance Fund, and the broader financial system, to heightened risks. BPI noted that ILCs operate as FDIC-insured banks but are exempt from the Bank Holding Company Act, meaning their parent companies are not subject to Federal Reserve consolidated supervision. BPI warned that this loophole allows commercial firms to own banks without comparable safeguards and argued that Congress should close the asserted loophole and the FDIC should stop granting ILC charters.

Among others, BPI recommended the FDIC take the following interim steps to mitigate ILC risks:

1. Pause Processing of ILC Applications. BPI urged the FDIC to suspend review of deposit insurance applications involving an ILC until it completes its RFI process and considers regulatory changes. BPI emphasized that it would be inappropriate for the FDIC to approve new charters while simultaneously re-evaluating its approach to supervising these institutions.
2. Strengthen Oversight of ILC Parents. BPI recommended that the FDIC enhance its rules to bring supervision of ILC parent companies more in line with Federal Reserve oversight of bank holding companies. BPI called for mandatory annual examinations, increasing limitations on affiliate transactions, expanded reporting requirements, and higher expectations for risk management, cybersecurity, and Volcker Rule compliance.
3. Limit Commercial Activities. BPI argued for new restrictions and conditions on the non-financial activities of ILC parents to reduce conflicts of interest and competitive imbalances. It also advocated for the FDIC to impose concentration limits, as well as pre-approval requirements, for new business lines and to coordinate with antitrust regulators to address potential market distortions.
4. Impose Capital and Liquidity Requirements. BPI called for consolidated capital and liquidity standards for ILCs and their parents, with higher requirements than those applied to other insured banks.
5. Extend Privacy and Data Protections. BPI urged applying enterprise-wide financial privacy and information security requirements to ILC parents, citing risks of consumer data misuse by commercial and technology firms.