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1 1 (November 29, 2019)

handle is hein.crs/govbbtt0001 and id is 1 raw text is: - .......... 10 , yg\\ y gmm, Ngm 0 ILI November 29, 2019 Industrial Loan Companies and Fintech in Banking Several states offer a type of bank charter for industrial loan companies (ILCs). Certain features of ILCs and their regulation-particularly that their parent holding companies can be nonfinancial, commercial firms not supervised by the Federal Reserve-have made ILCs the subject of perennial policy debate. Recently, several technology companies have applied to establish new ILCs, refocusing interest on the issue. Industrial Loan Companies In the United States, depository institutions operate under a number of charter types offered at either the state or federal level. Each type determines which activities are permissible for the institution, which are restricted, and which federal bank agency or agencies will regulate the institution. In addition, a depository may be owned by a parent company, which in the vast majority of cases (ILCs excepted, as discussed below) is a bank-holding company or thrift- holding company (hereinafter collectively referred to as BHCs) regulated by the Federal Reserve. Originally, ILCs formed to serve niche lending markets (the name comes from their initial business of making loans to industrial workers), were not allowed to accept deposits, and were restricted in the types of loans they could make. Over time, market changes and changes to state and federal law and regulation have narrowed the differences between the products and services provided by ILCs and by commercial banks and savings associations. Table I. ILC Statistics, Third Quarter 2019 Number 24 Total Assets $141.4 billion Total Deposits $109.4 billion Chartering States UT (14); NV (4); CA (3); HI, IN, MN (I) Source: iBanknet, accessed on November 21, 2019, at http://www.iban knet.com/scripts/callreports/fiList.aspx?type=ilc. Currently, ILCs chartered in some states are allowed to accept certain types of deposits if the ILC is approved for deposit insurance by the Federal Deposit Insurance Corporation (FDIC). As a result, certain state charters allow ILCs to operate nationwide as full-service, FDIC-insured banks. Similar to state banks, the FDIC and a state agency regulate ILCs, and those agencies have the authority to prohibit or restrict certain transactions between the ILC and the parent holding company. Though the differences between banks and ILCs have narrowed, important legal and regulatory differences remain, two of which are the source of contentious debate. ILCs can be owned by a nonfinancial parent company, creating an avenue for commercial firms (e.g., retailers, manufacturers, or possibly technology companies) to own a bank. This raises questions over whether ILCs create an unacceptable mixing of banking and commerce. In addition, under federal law, an ILC parent company that meets certain criteria is not necessarily considered a BHC pursuant to the Bank Holding Company Act of 1956 (P.L. 84-511), and thus generally is not subject to regulatory supervision by the Federal Reserve. (An exception would occur in cases where an ILC or its parent is designated a systemically important financial institution, over which the Federal Reserve does have supervisory authority. See CRS Report R42150, Systemically Important or Too Big to Fail Financial Institutions, by Marc Labonte.) This may raise questions over whether appropriate regulatory supervision of ILCs is in place, and whether their regulatory treatment puts BHCs and their banks at an unfair competitive disadvantage. Debated Issues Separation of Banking and Finance. In general, the United States has historically adopted policies to separate banking (for the purposes of this In Focus, meaning deposit-taking) and commerce (i.e., buying and selling goods and services). Rationales for such policies involve preventing a number of interrelated problems. One is that a mixed organization's banking subsidiary could have incentives to make decisions based on the larger organization's interests, rather than on safe and sound banking principles. For example, it may choose to make overly risky loans to customers of its commercial parent. While the bank subsidiary may suffer losses on such overly risky loans, the organization on the whole may not, since the loan proceeds were paid to the commercial parent to make a purchase. Meanwhile, the funding to undertake this imprudent lending would be backed by federal deposit insurance, which is ultimately backed by the taxpayers. For this reason, proponents of separating banking and commerce argue it prevents an inappropriate extension of bank safety nets to commercial enterprises. In addition, they argue that a combined enterprise, with financing operations in-house and in part funded through taxpayer-backed deposits, could more easily achieve the size and financial resources necessary to exercise anticompetitive market power. ILC opponents assert that commercial firms' ownership of ILCs exposes the U.S. banking system and economy to these risks. In contrast, ILC proponents assert these concerns are overstated and do not justify preventing the potential reali7ation of certain benefits Potential benefits of mixed

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