Banking and Finance Law Daily FDIC proposal would require conditions for industrial banks before deposit insurance approval
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Wednesday, March 18, 2020

FDIC proposal would require conditions for industrial banks before deposit insurance approval

By Colleen M. Svelnis, J.D.

The FDIC has issued a proposal that would require certain conditions and commitments to be met before approval of deposit insurance applications by industrial banks or industrial loan companies.

The Federal Deposit Insurance Corporation has issued a Notice of Proposed Rulemaking that would require certain conditions and commitments for approval or non-objection to certain filings involving an industrial bank or industrial loan company (ILCs) whose parent company is not subject to consolidated supervision by the Federal Reserve Board. The proposal would add a new rule, Part 354 of the FDIC Rules and Regulations, codifying the FDIC’s current supervisory processes and policies with respect to covered industrial banks and "This proposal would ensure that parent companies serve as a source of strength for their industrial bank subsidiaries," stated FDIC Chairman Jelena McWilliams. "By codifying these requirements, the proposal would enhance transparency and provide important protections for the Deposit Insurance Fund."

The proposal is intended to ensure the safe and sound operation of these institutions as well as provide the necessary transparency regarding the FDIC’s supervisory practices. The proposed rule would apply to deposit insurance, change in bank control, and merger filings that involve industrial banks. Under the proposal, a covered parent company must enter into written agreements with the FDIC and the industrial bank to do the following:

  • address the company’s relationship with the industrial bank;
  • require capital and liquidity support from the parent to the industrial bank; and
  • establish appropriate recordkeeping and reporting requirements.

The agency also issued a Fact Sheet on the proposed rule, as well as an agency staff memorandum recommending that the FDIC Board of Directors approve the proposal. FDIC is seeking comments on the proposed rule, which are due 60 days from publication in the Federal Register.

In a separate statement, McWilliams explained that the FDIC evaluates all applications for deposit insurance, including those for industrial banks, based on the same statutory factors, and the same FDIC regulations that apply to any insured depository institution apply equally to industrial banks. According to McWilliams, the proposed rule "would codify a number of required commitments that the FDIC has typically included as a precondition for approval of industrial banks in the past. The rule would require that any industrial bank seeking deposit insurance1 agree to such commitments as a precondition for approval." McWilliams stated that the rule would accomplish the following:

  1. The rule would provide transparency to potential future applicants and the broader public as to what the FDIC requires of parent companies of industrial banks.
  2. The rule would ensure that all parents of industrial banks approved for deposit insurance going forward would be subject to such required commitments.

Martin J. Gruenberg, a member of the FDIC Board of Directors, issued a statement expressing his support of the Notice of Proposed Rulemaking. Gruenberg stated that the proposal appears to be consistent with its stated purpose, "to codify existing practices utilized by the FDIC to supervise industrial banks and their parent companies, to mitigate undue risk to the DIF (Deposit Insurance Fund) that may otherwise be presented in the absence of Federal consolidated supervision of an industrial bank and its parent company, and to ensure that the parent company that owns or controls an industrial bank serves as a source of strength for the industrial bank, consistent with Section 38A of the FDI [Federal Deposit Insurance] Act."

Industry response. In a letter sent to McWilliams, Independent Community Bankers of America expressed concern over the proposal, asking the FDIC to refrain from approving any deposit insurance applications submitted by ILCs until the proposed rulemaking is finalized, as well as hold a hearing on each of the pending ILC applications. ICBA expressed particular concern about three applicants—Square Financial Services, Inc., Nelnet Bank and Rakuten Bank America—"because the owners of those ILCs have substantial commercial interests." The ICBA asked the FDIC to deny any applicant whose owner does not agree to be subject to the same restrictions imposed by the Bank Holding Company Act (BHCA) that community bank holding companies are subject to "for safety and soundness reasons and to maintain the separation of banking and commerce."

ICBA also joined with other community groups to ask the agency to hold off approving any applications submitted by industrial banks or ILCs for deposit insurance until the proposed rulemaking is finalized and hold public hearings on each application. "Given the number and variety of significant outstanding policy issues, we believe it would be imprudent for the FDIC to approve applications from ILCs or industrial banks until the final rulemaking is promulgated," the organizations stated in their letter.

Companies: Bank Policy Institute; Center for Responsible Lending; Independent Community Bankers of America; National Association for the Advancement of Colored People; The Leadership Conference on Civil and Human Rights

MainStory: TopStory DepositInsurance

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