WASHINGTON–It’s gotten easier for Facebook, Walmart, Amazon and other companies to get into financial services and the lending business.
The Federal Deposit Insurance Corp. has approved a final rule governing “industrial loan companies” that will allow major businesses to seek banking charters while escaping capital and liquidity demands faced by dedicated financial firms, noted the Los Angeles Times.
The measure will “provide transparency to market participants regarding the FDIC’s minimum expectations for parent companies of industrial banks,” FDIC Chairman Jelena McWilliams said in a statement.
The LA Times reported the new rule formalizes years of agency practice with the industrial loan company charters, which were created to let commercial firms make small loans to workers but have become a back door into big-time banking.
“The proposal released earlier this year sparked alarm in the banking industry over the prospect of competition against giant companies that could leverage their huge customer bases and guaranteed consumer traffic to gain meaningful toeholds in banking,” the Times added. “And they could offer customers financial services backed by the government — including FDIC deposit protections — with fewer regulatory demands.”
An Unusual Alliance
The LA Times noted the banking industry, in an unusual alliance with Democratic lawmakers and consumer groups, had called for a halt in approving new charters until Congress closes a loophole that allows what they see as an unfair advantage.
But as CUToday.info reported earlier, the FDIC cleared two industrial loan companies this year when it granted conditional deposit-insurance approval for mobile payment firm Square Inc. and student lender Nelnet Inc.
“But an effort by Japanese online retailer Rakuten Inc. to set up its own bank is seen as a major test case for a nonfinancial firm to break down the traditional barrier between banking and commerce,” the Times stated.
“If the FDIC approves Rakuten’s application, it will set a precedent for every other Big Tech company (Amazon, Facebook, Google, etc.) to enter banking through an [industrial loan company] charter without consolidated supervision,” the Bank Policy Institute wrote in a blog post last month that was cited in the Times’ report.
‘Increased Urgency’
The FDIC said in a rule notice that the agency is obliged to implement federal law as it exists today, citing an increased urgency to clarify the application process as more companies express interest in seeking charters.
“Whether commercial firms should continue to be able to own industrial banks is a policy decision for Congress to make,” the agency said in its notice.
The FDIC added it will be able to consider the potential effect of each applicant on the goal to keep banking services competitive, safe and sound. It also said applicants will have to agree to examinations and annual reports and ensure that they’ll financially support the lender when needed, the Times reported.
The final rule does not represent any sea change in how the FDIC approaches deposit insurance applications, according to FDIC Chair Jelena McWilliams. McWilliams said the Final Rule serves to "codify and clarify," and provides "transparency to market participants regarding the FDIC's minimum expectations for parent companies of industrial banks.”
The Requirements
Among other things, the final rule requires the applicant non-bank parent company to:
- Submit an annually updated list of its subsidiaries
- Consent to an FDIC examination (of both the covered company and subsidiaries)
- Submit an annual report to the FDIC of the covered company's financial condition, systems for controlling financial and operational risks, transactions with its subsidiaries, and compliance with laws and regulations
- Obtain an annual independent audit of each of the covered company's subsidiary industrial banks
- Limit the covered company's direct and indirect representation on the board of each subsidiary industrial bank to less than 50%
- Maintain certain capital and liquidity requirements of subsidiary industrial banks
- Execute a tax allocation agreement with subsidiary industrial banks