Independent Banker - April 2019 - 43

There's no secret why these companies are so
interested in this obscure charter type. As ICBA
details in the white paper, a loophole in the Bank
Holding Company Act of 1956 (BHCA) allows
commercial and fintech companies to own or
acquire ILCs chartered by just a handful of states
without being subject to federal consolidated
supervision, and without having to divest their
commercial activities.
ments of BHCs to banking, managing or owning
banks, and a limited set of activities determined
to be " closely related to banking. " It also requires
all bank holding companies to divest themselves
of ownership in any firms that were involved in
nonbank activities.
This creates an uneven playing field relative
to community banks and other financial
institutions that must meet holding company
standards. It also leaves a dangerous gap in
safety and soundness oversight while violating
the longstanding U.S. separation of banking and
commerce activities.
Unsafe and unsound
ILCs are a threat to safety and soundness primarily
because their commercial owners are
exempt from consolidated supervision, one of
the two key provisions of the BHCA. Consolidated
supervision by the Federal Reserve allows
the agency to understand and monitor holding
companies to avoid risks to their subsidiary
depository institutions.
Further, parent companies are expected under
U.S. banking law to serve as a " source of financial
strength " to their subsidiaries, meaning they
can inject cash into struggling banks under their
control. Conversely, regulators must ensure
that parent companies experiencing difficulties
will not drain their banks' liquidity to prop
themselves up-creating risks for the banking
industry while exploiting its federal safety net.
Without consolidated supervision, regulators
cannot effectively enforce this doctrine for
commercial ILC holding companies. And even
if ILC parents were subject to such supervision,
banking regulators do not have the knowledge
or expertise to examine commercial holding
companies whose governance functions, risk
controls, financial operations and accounting
practices are starkly different from those of a
financial company.
Banking and commerce
The other key tenet of the BHCA is the separation
of commercial activities from banking. The
law restricts permissible activities and investWhile
amendments to the law ultimately led to
the 1987 ILC loophole exempting these entities
from the definition of " bank, " the basic framework
of the BHCA has endured for more than 60
years (see " The tangled history of ILCs " on the
next page).
ILCs are the functional equivalent of full-service
banks, so commercial ownership of them
Read the
white
paper
You can
find ICBA's
Industrial
Loan
Companies:
Closing the
Loophole
to Avert
Consumer
and
Systemic
Harm white
paper at
icba.org/
advocacy/
reports
In the current era of
big data, technology
conglomerates and
artificial intelligence,
the separation of
banking and commerce
is more important than
ever before.
effectively violates this longstanding American
economic policy. Federal law prohibits all
other full-service banks, whether federally or
state chartered, from being owned by commercial
companies.
In the current era of big data, technology
conglomerates and artificial intelligence, the
separation of banking and commerce is more
important than ever before.
The ILC applications by Square, SoFi and
Nelnet are indicative of what might await
consumers and the financial system if huge
commercial or technology firms like Amazon,
Google or Walmart are allowed to exploit the
FDIC-insured ILC loophole and operate without
adequate supervision.
Many community bankers and others likely
independentbanker.org Q 43
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Independent Banker - April 2019

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