FDIC Approves New Industrial Bank Charters
The Federal Deposit Insurance Corp. (FDIC) on March 18, 2020, approved deposit insurance applications for two companies, Square and Nelnet, to launch two, new industrial banks. The approval of industrial banks, which the American Financial Services Association has sought for nearly two decades, paves the way for more non-depository financial institutions to provide key banking services to consumers.
Consumer advocates expressed concern with the FDIC move, making the same false claims that they have made for years, noting that industrial banks are “shadowy,” and that they are not subject to banking regulations of any kind.
In fact, industrial banks are regulated by the FDIC and state bank regulators, are subject to the same banking laws, and are regulated in the same manner as other depository institutions. They are supervised and examined both by the states that charter them and by the FDIC. They are subject to the same safety and soundness, consumer protection, deposit insurance, Community Reinvestment Act, and capital guarantee requirements as other FDIC-insured depository institutions.
For more than a century industrial banks have compiled the best record of capitalization and profitability of any group of banks in the nation. There is no evidence that the states have abused or inadequately regulated industrial banks they chartered and have demonstrated beyond any reasonable and objective doubt that industrial banks can operate as safe, sound, responsible and beneficial providers of credit.
Industrial banks were first formed in 1910, predating the passage of the Federal Reserve Act in 1913. Industrial banks are depository institutions chartered under the laws of Utah, California, Colorado, Nevada, Hawaii, Indiana, and Minnesota. Far from being “shadow banks,” industrial banks are state-chartered banking institutions that may be owned by a commercial entity. They engage in consumer and commercial lending on both a secured and unsecured basis. They accept time deposits and deposits that may be withdrawn through negotiable orders of withdrawal (“NOW” accounts).
Most owners of industrial banks are exempted from Federal Reserve Board supervision as bank holding companies. Similar Bank Holding Company Act exemptions apply to thousands of institutions not owned by other companies, and to financial institutions that do not offer a full range of banking services, such as credit-card banks, Edge Act banks, grandfathered non-bank banks and trust banks. These exemptions benefit bank customers by introducing additional competition into the marketplace, without increased risk to the deposit-insurance system.
Industrial banks, which have existed for over a century, evolved from Morris Plan Banks, which organized at a time when commercial banks generally did not make consumer loans or offer deposit accounts to individuals. The word “industrial” in their name stems from the original mission of providing credit to industrial workers, not to the industries themselves.
The Dodd-Frank Act placed a temporary moratorium on commercial firms chartering or acquiring industrial banks in order to allow Congress time to study the merits of allowing commercial firms to operate them. Congress did not renew the moratorium in 2013, meaning that federal law allows commercial firms to charter and acquire Industrial banks.
AFSA is pleased with the FDIC’s announcement and looks forward to working with federal and state regulators to continue to advocate for greater financial services choices for all consumers.
March 19th, 2020
