Industrial Banks Are Good for Consumers
It’s never a good thing for consumers – or for the broader American economy – when legislation is used to accomplish what fair competition cannot. Yet, encouraging policymakers to place a thumb on the scale or to pick winners and losers in a marketplace remains common in Washington.
We’ve seen it in trade policy throughout America’s history. In the 18th Century rules favored the U.S. sugar and cotton industries; in the 19th Century rules favored the steel and timber industries. In the tech arena, internet companies like Google, Netflix and Amazon sought policies that would hinder companies like Comcast, AT&T and Verizon from competing against them for customers.
This time Congress is intervening and limit consumer choice and competition with H.R. 5912 – The Close the ILC Loophole Act. Industrial banks (or Industrial Loan Companies or ILCs) are Federal Deposit Insurance Corporation (FDIC)-regulated depository institutions chartered at the state level in California, Colorado, Hawaii, Indiana, Minnesota, Nevada, and Utah, and H.R. 5912 would bar the issuance of ILC charters moving forward, thus limiting new options for consumers. AFSA submitted a comment letter to House Financial Services Committee Chair Maxine Water (D-CA) and Ranking Member Patrick McHenry (R-NC) outlining the danger limiting ILCs would have on financial innovation.
ILCs, which originally formed decades ago to offer financial services to blue collar workers who did not have traditional bank accounts, are competition for consumers’ business. This is particularly so for ILCs operated by such entities as major auto manufacturers that provide vehicle loans, or by nonfinancial institutions that may offer other consumer loan or credit products.
Some try to create the impression that ILCs are unregulated or less strenuously regulated than other banks. But that’s simply not the case. The Congressional Research Service has noted, “ILCs are subject to the same laws and regulations as all state banks.” Additionally, industrial banks are subject to the same restrictions and requirements, regulatory oversight, and safety and soundness exams as any other kind of FDIC-insured depository institution.
The fact is, ILCs create more options for consumers and create more competition among financial institutions for consumers’ business. That’s a good thing for the marketplace, and especially for consumers. For decades, it has been argued that if certain types of companies received an industrial bank charter, the banking system could collapse. However, ILCs have outperformed all other FDIC-insured institutions for over 20 years, so it’s not a surprise that some might be looking to game the system and hinder that kind of competition.
During the past five decades, industrial banks have compiled among the best records of capitalization and profitability of any group of banks in the nation, and they represent a sector of the financial services industry that should not be eliminated, but rather encouraged to grow. Congress has far more important financial issues to address in the coming months than to put in place anti-competitive policies that benefit one segment of the financial services industry.
May 17th, 2022
