Understanding Industrial Banks
An industrial bank, also known as an industrial loan company (ILC), is a state-chartered financial institution often owned by a commercial entity and not regulated by a federal banking agency. These banks cater to consumers and small businesses, offering services like deposits and loans.
- An industrial bank, or ILC, operates under state charters, with Utah being a primary issuer of such charters in the U.S.
- Controversy surrounds industrial banks as they allow nonfinancial entities to provide banking services without oversight from the Federal Reserve.
Criticisms of Industrial Banks
Originally developed in the early 1900s, industrial banks aimed to serve lower- to moderate-income industrial workers who faced challenges in securing credit from conventional lenders.
These banks adhere to state regulatory guidelines and receive oversight from the Federal Deposit Insurance Corporation (FDIC). Industrial banks, due to their unique corporate structure, can be owned by corporations, evading certain traditional banking regulations, such as the Bank Holding Company Act, and avoiding Federal Reserve supervision. Fintech and investment firms have increasingly sought industrial bank charters due to these lax regulatory constraints.
While industrial banks possess banking powers akin to conventional banks, they bring scrutiny from those advocating for clearer separation between banking and commerce. Critics argue that these banks extend banking advantages to corporations without the necessary oversight accorded traditional banks.
In 2005, Walmart Inc. applied to establish an industrial bank to reduce transaction fees, triggering opposition from commercial banks and regulators. This led the FDIC to freeze industrial bank charters in 2006, coupled with state-level legislation restricting their expansion.
Withdrawn in 2007, Walmart’s application faced concerns that its banking involvement posed risks to the system and the FDIC Insurance Fund.
In 2019, the Independent Community Bankers of America (ICBA) advocated for halting federal deposit insurance for industrial banks, citing concerns over fintech entities like Square Inc. receiving unregulated state charters, circumventing oversight and disclosure requirements.
Senator John Kennedy introduced the “Eliminating Corporate Shadow Banking Act of 2019” to curtail nonfinancial entities from forming industrial banks. The ICBA supports this move to close loopholes, fortify the financial system, and bolster the division between banking and commerce.