[Federal Register Volume 72, Number 23 (Monday, February 5, 2007)]
[Notices]
[Pages 5290-5294]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E7-1853]


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FEDERAL DEPOSIT INSURANCE CORPORATION


Moratorium on Certain Industrial Bank Applications and Notices

AGENCY: Federal Deposit Insurance Corporation (FDIC)

ACTION: Notice; Limited Extension of Moratorium.

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SUMMARY: This notice announces a one-year extension of the termination 
date of the FDIC's existing moratorium on industrial loan companies and 
industrial banks \1\ (collectively, ``industrial banks'') for deposit 
insurance applications and change in control notices with respect to 
certain industrial banks. The extended moratorium only applies to 
applications for deposit insurance and change in control notices with 
respect to industrial banks that will become subsidiaries of companies 
engaged in non-financial activities \2\ (``commercial activities'').
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    \1\ For purposes of the extended moratorium, the terms 
``industrial loan company'' and ``industrial bank'' mean any insured 
State bank that is an industrial bank, industrial loan company, or 
other similar institution that is excluded from the definition of 
``bank'' in the Bank Holding Company Act of 1956 (BHCA) pursuant to 
section 2(c)(2)(H) of the BHCA, 12 U.S.C. 1841(c)(2)(H).
    \2\ For purposes of the extended moratorium, the term 
``financial activity'' includes: (i) Banking, managing or 
controlling banks or savings associations; and (ii) any activity 
permissible for financial holding companies under 12 U.S.C. 1843(k), 
any specific activity that is listed as permissible for bank holding 
companies under 12 U.S.C. 1843(c), as well as activities that the 
Federal Reserve Board (FRB) has permitted for bank holding companies 
under 12 CFR 225.28 and 225.86, and any activity permissible for all 
savings and loan holding companies under 12 U.S.C. 1467a(c). The 
term ``non-financial activity'' is any other activity. The FDIC 
intends to follow the written guidance of the FRB and the Office of 
Thrift Supervision (OTS) regarding permissible holding company 
activities in its interpretations of the term ``financial activity'' 
and to consult with the FRB and/or OTS before making any decisions.
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    Although the FDIC's existing industrial bank moratorium was 
originally set to expire on January 31, 2007 for all industrial banks, 
as a result of the extension, the moratorium will now expire on January 
31, 2008 for certain industrial banks. The extended moratorium does not 
apply to any application for deposit insurance or change in control 
notice with respect to any industrial bank that will not become a 
subsidiary of a company, or any industrial bank that will become a 
subsidiary of a company engaged only in financial activities. The FDIC 
is also publishing elsewhere in the Federal Register today a notice of 
proposed rulemaking that proposes certain requirements on any 
industrial bank that will become a subsidiary of a company that is 
engaged only in financial activities and is not subject to consolidated 
bank supervision by the Federal Reserve Board (FRB) or the Office of 
Thrift Supervision (OTS) (hereinafter referred to as ``Federal 
Consolidated Bank Supervision'').

DATES: The extended moratorium is effective through January 31, 2008.

FOR FURTHER INFORMATION CONTACT: Robert C. Fick, Counsel, (202) 898-
8962 or Thomas P. Bolt, Counsel, (202) 898-6750, Federal Deposit 
Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

    Industrial banks were first chartered in the early 1900's as small 
loan companies for industrial workers. Over time some of the chartering 
states expanded the powers of their industrial banks to the extent that 
some industrial banks now have generally the same powers as state 
commercial banks.

[[Page 5291]]

    Since the passage of the Competitive Equality Banking Act of 1987 
(CEBA),\3\ the industrial bank industry has changed significantly. 
Between 1987 and 2006 total assets held by industrial banks grew from 
$4.2 billion to $177 billion.
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    \3\ Public Law 100-86, 101 Stat. 552 (codified as amended in 
various sections of title 12 of the U.S. Code)
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    Since January 1, 2000, 24 industrial banks became insured.\4\ As of 
January 30, 2007, there were fifty-eight insured industrial banks with 
aggregate total assets of approximately $177 billion.\5\ Six industrial 
banks reported total assets of $10 billion or more; eleven other 
industrial banks reported total assets of $1 billion or more. The 
remaining forty-one institutions, on average, reported total assets of 
approximately $231.8 million. Forty-five of those fifty-eight operated 
in Utah and California.\6\ Of the fifty-eight existing industrial 
banks, forty-three were either controlled by one or more individuals or 
controlled by a parent company whose business is financial in nature. 
As of January 30, 2007, thirty-one of the fifty-eight existing 
industrial banks were owned by companies that were engaged solely in 
financial activities and that were not subject to Federal Consolidated 
Bank Supervision; such companies are hereinafter referred to as ``Non-
FCBS Financial Companies.'' Eight of the fifty-eight industrial banks 
(representing approximately sixty-nine percent of industrial bank 
industry assets) were owned by companies that are engaged solely in 
financial activities and are subject to consolidated supervision by the 
FRB or the OTS. Four of the fifty-eight industrial banks were owned by 
individuals. Fifteen industrial banks were subsidiaries of holding 
companies that are non-financial in nature, i.e., commercial.
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    \4\ During 2000, 4 new industrial banks were insured; 2 during 
each of 2001 and 2002; 5 during 2003; 6 during 2004; 4 during 2005; 
and 1 in 2006.
    \5\ Based on reported assets as of September 30, 2006, the most 
recent reported data.
    \6\ Industrial banks also operate in Colorado, Hawaii, Indiana, 
Minnesota and Nevada.
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    In 2005, the Government Accountability Office (GAO) expressed its 
concern that industrial banks owned by commercial companies or other 
entities without a Federal consolidated supervisor created an uneven 
playing field when compared to banks and thrifts owned by holding 
companies subject to Federal consolidated supervision.\7\ The concerns 
regarding the lack of consolidated supervision and the possible 
limitations of the FDIC's authority echoed those previously expressed 
by the FDIC's Office of Inspector General (OIG) in a 2004 report.\8\
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    \7\ U.S. Gov't Accountability Office, GAO-05-621, Industrial 
Loan Corporations: Recent Asset Growth and Commercial Interest 
Highlight Differences in Regulatory Authority 79-80 (2005) 
(hereinafter ``GAO Report'').
    \8\ See Federal Deposit Insurance Corporation Office of 
Inspector General, Report No. 2004-048, The Division of Supervision 
and Consumer Protection's Approach for Supervising Limited-Charter 
Depository Institutions (2004) (hereinafter ``OIG Report'').
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    Some industrial banks continue to be small, community-focused 
institutions. However, the FDIC has noted a recent increase in the 
number of applications for deposit insurance and notices of change in 
control with respect to industrial banks that would be affiliated with 
commercial companies or other entities that would not be subject to 
Federal Consolidated Bank Supervision. Such institutions are often 
large organizations that tend to have complex business plans. Their 
subsidiary industrial banks tend to provide specialty lending programs 
or financial services or other support to the holding company. Whatever 
their purpose or structure, the industrial bank charter has generated a 
significant amount of public interest in recent years as various 
entities have explored the feasibility and business opportunities 
associated with including an industrial bank as part of their 
operations.
    In 2006, the FDIC received more than 13,800 comment letters 
regarding the proposed Wal-Mart Bank's 2005 deposit insurance 
application.\9\ Most of these comments expressed opposition to granting 
deposit insurance with respect to this particular applicant; however, 
some commenters raised more universal concerns about industrial banks. 
Over 640 of the more general comments were specifically focused on the 
risk posed to the deposit insurance fund by industrial banks owned by 
commercial companies or by holding companies without a Federal 
consolidated bank supervisor. Similar sentiments were expressed by 
witnesses during three days of public hearings held by the FDIC 
regarding the Wal-Mart application. In addition, the Home Depot also 
filed a change in control notice in connection with its proposed 
acquisition of EnerBank, a Utah industrial bank. In response to the 
request for public comment on the change in control notice, the FDIC 
received approximately 830 comment letters; almost all of them 
expressed opposition to the proposed acquisition.
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    \9\ See the FDIC's Web site at http://www.fdic.gov/regulations/laws/walmart/.
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    Congress also has had a continuing interest in the industrial bank 
charter. Most recently, on July 12, 2006, the House Committee on 
Financial Services (Committee) held a hearing regarding industrial 
banks. At the hearing, the General Counsels of the FDIC and FRB 
testified before the Committee regarding the history, characteristics, 
current industry profile, and supervision of industrial banks.\10\ The 
FDIC's testimony noted that today's industrial banks are owned by a 
diverse group of financial and commercial entities. Among industrial 
banks owned by such entities are those that serve a particular lending, 
funding, or processing function within a larger organizational 
structure, and those that directly support one or more affiliate's 
commercial activities. The business plans for these industrial banks 
differ substantially from the consumer lending focus of the original 
industrial banks.
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    \10\ Industrial Loan Companies: A Review of Charter, Ownership, 
and Supervision Issues: Hearing Before the H. Comm. on Financial 
Services, 109th Cong. (2006). The Committee also heard testimony 
from G. Edward Leary, Commissioner for the Utah Department of 
Financial Institutions; Rick Hilman, Director of Financial Markets 
and Community Investment, U.S. Government Accountability Office; 
George Sutton, Former Commissioner for the Utah Department of 
Financial Institutions; Terry Jorde, Chairman, President, and CEO of 
CountryBank USA, Chairman of ICBA; John L. Douglas, Partner, Alston 
& Bird; Arthur C. Johnson, Chairman and CEO of United Bank of 
Michigan; Prof. Lawrence J. White, Professor of Economics, Stern 
School of Business of New York University; Michael J. Wilson, 
Director, Legislative and Political Action Department, United Food 
and Commercial International Union. Also, several organizations 
submitted record statements.
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    Currently, eight industrial bank deposit insurance applications are 
pending before the FDIC. Also, in 2006 the FDIC received three 
additional deposit insurance applications that were either returned or 
withdrawn. In addition, the FDIC received seven change in control 
notices for the acquisition of industrial banks; five of which have 
been returned or withdrawn. None of the potential parent companies 
would be subject to Federal Consolidated Bank Supervision, and at least 
nine of the eighteen potential parent companies are engaged in 
activities that are considered commercial in nature.
    To evaluate the concerns and issues raised with respect to 
industrial banks, on July 28, 2006, the FDIC imposed a six-month 
moratorium on FDIC action with respect to certain industrial bank 
applications and notices.\11\ The FDIC declared the moratorium to 
enable it to further evaluate (i) Industry developments, (ii) the 
various issues, facts, and arguments raised with respect to the 
industrial bank industry, (iii)

[[Page 5292]]

whether there are emerging safety and soundness issues or policy issues 
involving industrial banks or other risks to the insurance fund, and 
(iv) whether statutory, regulatory, or policy changes should be made in 
the FDIC's oversight of industrial banks in order to protect the 
deposit insurance fund or important Congressional objectives.\12\
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    \11\ See Moratorium on Certain Industrial Loan Company 
Applications and Notices, 71 FR 43482 (August 1, 2006).
    \12\ Id.
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    Thereafter, on August 23, 2006, the FDIC published in the Federal 
Register a request for public comment on twelve questions.\13\ Among 
other things, the FDIC sought public comment on what modifications, if 
any, should be made to its regulations in light of the changing 
industrial bank industry; how and whether the attributes of 
consolidated supervision affect the safety and soundness of either 
industrial banks or the Deposit Insurance Fund; and how, and whether, 
the FDIC should differentiate and assess possible risks associated with 
financial or commercial ownership of industrial banks.
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    \13\ See Industrial Loan Companies and Industrial Banks, 71 FR 
49456 (August 23, 2006).
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    The FDIC received over 12,600 comment letters in response to the 
Request for Public Comment during the comment period.\14\ Approximately 
12,485 comments were generated by what appears to be organized 
campaigns either supporting or opposing the proposed industrial bank to 
be owned by Wal-Mart or the proposed acquisition of Enerbank, also an 
industrial bank, by The Home Depot. Of this total, approximately 82 
percent generally were opposed to the ownership of industrial banks by 
Wal-Mart or other commercial companies. The remaining comment letters 
were sent by individuals, law firms, community banks, financial 
services trade associations, existing and proposed industrial banks or 
their parent companies, the Conference of State Bank Supervisors, and 
two members of Congress. Of the total comments received, seventy-one 
commenters addressed specific substantive issues concerning the 
industrial bank industry and its regulation.
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    \14\ See http://www.fdic.gov/regulations/laws/federal/2006/06comilc.html.
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    The commenters who favored the current state of the industrial bank 
industry generally believed that the risks commonly associated with 
commercial company affiliations are overstated and that industrial 
banks affiliated with commercial companies generally maintain safe and 
prudent business relationships and financial and managerial support 
systems. They felt that the current restrictions on transactions with 
affiliates and tying provide ample protection for the industrial bank. 
The commenters who expressed a negative or neutral view of the 
industrial bank industry generally believed that affiliations with 
commercial companies and other entities not subject to consolidated 
supervision presented safety and soundness problems and unacceptable 
risks to the Deposit Insurance Fund by increasing the potential for 
conflicts of interest, excessive dependence on such affiliates, and 
tying. These commenters supported extending the moratorium until 
Congress acts on legislation to prohibit industrial banks from 
affiliating with non-financial entities. Some urged the FDIC to issue 
regulations restricting industrial banks from affiliating with non-
financial entities. Still others suggested that the conditions imposed 
by the FDIC in the past were insufficient, standing alone, to offer 
adequate protections to the Deposit Insurance Fund. Several commenters 
cited the competitive advantages--in access to capital, customers, and 
marketing opportunities--that exist when industrial banks are owned by 
commercial entities or otherwise lack a Federal Consolidated Bank 
Supervisor.
    The FDIC's experience and the comments suggest no risk or other 
possible harm that is unique to the industrial bank charter. Rather, 
the concerns that have been raised focus on the ownership of the 
industrial bank and on the proposed industrial bank's business model or 
plan. Consequently, the FDIC's analysis of how to proceed focuses 
primarily on the proposed owners of industrial banks.

II. The Extended Moratorium

Scope

    The original six-month moratorium imposed on July 28, 2006, 
deferred FDIC action on deposit insurance applications and change in 
control notices with respect to all proposed and existing industrial 
banks. However, recently the FDIC has noted a marked increase in 
deposit insurance applications for, and change-in-control notices with 
respect to, industrial banks that would be affiliated with commercial 
concerns and other companies that would not have a Federal Consolidated 
Bank Supervisor. This trend has led to heightened concerns by some 
members of Congress and commenters regarding the lack of Federal 
Consolidated Bank Supervision, the mixing of banking and commerce, and 
the potential for an ``uneven playing field.'' Both the FDIC's 
observations and the bulk of the comments received indicate that these 
concerns about industrial banks focus on commercial-company ownership 
and/or the lack of Federal Consolidated Bank Supervision.
    Financial companies that are subject to Federal Consolidated Bank 
Supervision (``FCBS Financial Companies''), such as bank holding 
companies, financial holding companies, and savings and loan holding 
companies generally do not present these same issues. Many of the 
statutory and regulatory tools available to Federal Consolidated Bank 
Supervisors can substantially restrict the extent to which such 
companies may engage in commercial activities or affiliate with 
commercial companies. Moreover, the examination, reporting, and 
monitoring systems of Federal Consolidated Bank Supervisors can be 
effective tools in preventing an affiliate's activities from causing a 
safety and soundness risk to the bank. Finally, holding companies that 
are expected to serve as a source of strength to their subsidiary 
insured depository institutions provide an important resource for an 
insured bank in need of additional capital. As a result, the FDIC 
believes that this class of industrial bank ownership does not need 
further study and that the supervisory tools currently available to the 
FDIC are adequate.
    Generally, industrial banks owned by individuals also do not 
present the same issues that industrial banks owned by commercial 
companies present. In the case of an industrial bank owned by 
individuals, there is neither a parent company nor any subsidiary of a 
parent company that could present an opportunity for a safety and 
soundness risk or a conflict of interest with the industrial bank.\15\ 
Consequently, at this time, the FDIC believes that ownership of 
industrial banks by individuals presents no extraordinary issues that 
deserve further study or consideration.
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    \15\ Since there is no parent company of the industrial bank, 
the BHCA does not apply.
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    Importantly, industrial banks to be owned by Non-FCBS Financial 
Companies present some of the same issues that industrial banks owned 
by commercial companies do. However, the FDIC believes that those 
issues can be controlled or minimized in such cases. In addition, some 
such companies are subject to well-established regulatory authorities, 
e.g., by state insurance commissions or the U.S. Securities and 
Exchange Commission. Such Non-FCBS Financial Companies engage only in 
financial activities and, so, do not engage in commercial activities 
either directly or indirectly.

[[Page 5293]]

However, since these companies will not be subject to Federal 
Consolidated Bank Supervision, the FDIC believes that safeguards should 
be implemented that provide adequate protections for the safety and 
soundness of insured industrial banks and for the protection of the 
Deposit Insurance Fund. Through the publication of a notice of proposed 
rulemaking for part 354, the FDIC is proposing conditions and 
requirements to provide safeguards such as examination of, and 
reporting by, such companies and their subsidiaries, and binding 
commitments to serve as a resource for additional capital for the 
industrial bank subsidiaries. We anticipate that the proposed 
regulations will provide the safeguards that the FDIC believes could be 
helpful in identifying and avoiding or controlling, on a consolidated 
basis, the safety and soundness risks and the risks to the Deposit 
Insurance Fund that may result from that kind of company-ownership 
model.
    Industrial banks that are to be owned or controlled, directly or 
indirectly, by commercial companies, however, continue to present 
concerns. Under current law, commercial companies would not be allowed 
to acquire a thrift or a bank, other than an industrial bank, and would 
not have a Federal Consolidated Bank Supervisor. In many instances, 
commercial activities are the predominant, if not sole, business of 
such companies. In such circumstances, not only would consolidated 
supervision not be present, but the current supervisory process and 
infrastructure may not produce the safeguards that the FDIC believes 
could be helpful in identifying and avoiding or controlling, on a 
consolidated basis, the safety and soundness risks and the risks to the 
Deposit Insurance Fund that may result from that kind of company-
ownership model. The recent trend of increased interest in industrial 
banks by entities engaged in commercial activities makes an evaluation 
of the application of current supervisory structures to such owners 
timely and appropriate. As a result, the FDIC believes that this class 
of companies needs further study and consideration on two key issues: 
(1) What, if any, increased risks are created by ownership by 
commercial companies and (2) how well do current supervisory models 
apply to such owners.
    Many members of Congress have urged the FDIC to extend the 
moratorium with respect to industrial banks that would be controlled by 
commercial firms. On December 7, 2006 one hundred and seven members of 
the House of Representatives sent a letter to the FDIC urging the FDIC 
to extend the moratorium for at least an additional six months. The 
Representatives requested the extension ``to allow the 110th Congress 
an opportunity to act on this important public policy issue.'' While 
the FDIC is not expressing any conclusion about the propriety of 
ownership of industrial banks by commercial companies, it is 
appropriate to provide Congress with a reasonable period for 
consideration of these developments and, if necessary, revisions to 
existing statutory authority.
    Furthermore, even though the FDIC has authority to act on any 
particular application, notice, or request involving an industrial 
bank, the FDIC has continuing concerns regarding the commercial 
ownership of industrial banks and the lack of a Federal Consolidated 
Bank Supervisor. The FDIC recognizes that commercial companies that 
currently own industrial banks will not be affected by the extended 
moratorium and that there may be concerns that this results in 
disparate treatment for those commercial companies now seeking to 
control ILCs. However, the FDIC has considered the potential impact of 
the extended moratorium on individual applicants and proponents, 
including commercial companies, and because the issues raised by such 
ownership have the potential for broad and substantial impact on the 
entire banking system and, potentially, the nation's economy, the FDIC 
believes that Congressional resolution of these issues may be 
appropriate.
    The FDIC also recognizes that the moratorium may appear 
inconsistent with specific timetables for agency action, including 
processing of approvals. However, adherence to a strict statutory 
timeline without an opportunity to re-evaluate its standards for 
determining the public interest risks frustrating the substantive 
policies the agency is charged with promoting. Consequently, the FDIC 
has concluded that a limited moratorium should be extended through 
January 31, 2008. The extension will both allow the FDIC needed time to 
evaluate the various issues, facts, and arguments associated with the 
ownership of an industrial bank by a commercial company, and allow 
Congress time to consider legislation concerning industrial banks.

Summary

    For the reasons discussed above, the scope of the extended 
moratorium is narrower than the scope of the FDIC's original six-month 
moratorium. Under the extended moratorium, the FDIC will take no action 
to accept, approve, or deny any application for deposit insurance, or 
to accept, disapprove, or issue a letter of intent not to disapprove 
any change in control notice, with respect to any industrial bank that 
would become a direct or indirect subsidiary of a company engaged in 
commercial activities. While to date, commercially owned industrial 
banks have not resulted in serious problems, in light of the concerns 
that have been expressed and the recent trend of increased ownership of 
industrial banks by commercial entities, the FDIC will continue to 
monitor closely existing industrial banks that currently are controlled 
by commercial companies.
    Thus, the extended moratorium will not apply to, and the FDIC may 
proceed with action on, any application for deposit insurance or any 
change in control notice with respect to: (i) Any industrial bank that 
would become a subsidiary of a company engaged only in financial 
activities that is subject to Federal Consolidated Bank Supervision by 
the FRB, or the OTS (i.e., a FCBS Financial Company); (ii) any 
industrial bank that would not become a subsidiary of any company; or 
(iii) any industrial bank that would become a subsidiary of a company 
engaged only in financial activities that is not subject to Federal 
Consolidated Bank Supervision by the FRB or the OTS (i.e., a Non-FCBS 
Financial Company). While the notice of proposed rulemaking for part 
354 is pending, the FDIC will consider deposit insurance applications 
and change in control notices with respect to industrial banks within 
group (iii) above on a case-by-case basis. After any final rules are 
adopted, the FDIC will consider requests to modify any conditions and 
requirements agreed to during the period between issuance of the 
proposed rule and the effective date of the final rules to conform such 
conditions and requirements to those in the final rules.
    During the extended moratorium any application, notice or request 
with respect to any industrial bank that is not subject to the 
moratorium will be acted upon only by the FDIC's Board of Directors.
    The extended moratorium is effective through January 31, 2008 for 
applications for deposit insurance and change in control notices with 
respect to industrial banks that will become subsidiaries of companies 
engaged in commercial activities.

    Dated at Washington DC, this 31st day of January 2007.

    By Order of the Board of Directors.


[[Page 5294]]


Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. E7-1853 Filed 2-2-07; 8:45 am]
BILLING CODE 6714-01-P