[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