[Federal Register Volume 86, Number 34 (Tuesday, February 23, 2021)]
[Rules and Regulations]
[Pages 10703-10729]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-28473]



 ========================================================================
 Rules and Regulations
                                                 Federal Register
 ________________________________________________________________________
 
 This section of the FEDERAL REGISTER contains regulatory documents 
 having general applicability and legal effect, most of which are keyed 
 to and codified in the Code of Federal Regulations, which is published 
 under 50 titles pursuant to 44 U.S.C. 1510.
 
 The Code of Federal Regulations is sold by the Superintendent of Documents. 
 
 ========================================================================
 

  Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / 
Rules and Regulations  

[[Page 10703]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 354

RIN 3064-AF31


Parent Companies of Industrial Banks and Industrial Loan 
Companies

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Federal Deposit Insurance Corporation is adopting a final 
rule that requires certain conditions and commitments for each deposit 
insurance application approval, non-objection to a change in control 
notice, and merger application approval that would result in an insured 
industrial bank or industrial loan company becoming, on or after the 
effective date of the final rule, a subsidiary of a company that is not 
subject to consolidated supervision by the Federal Reserve Board. The 
final rule also requires that before any industrial bank or industrial 
loan company may become a subsidiary of a company that is not subject 
to consolidated supervision by the Federal Reserve Board, such company 
and the industrial bank or industrial loan company must enter into one 
or more written agreements with the Federal Deposit Insurance 
Corporation.

DATES: The rule is effective on April 1, 2021.

FOR FURTHER INFORMATION CONTACT: Amanda Ledig, Attorney, (202) 898-
7261, [email protected]; Merritt Pardini, Counsel, (202) 898-6680, 
[email protected]; Joyce Raidle, Counsel, (202) 898-6763, 
[email protected]; Gregory Feder, Counsel, (202) 898-8724, 
[email protected]; Catherine Topping, Counsel, (202) 898-3975, 
[email protected]; Mark Flanigan, Senior Counsel, (202) 898-7426, 
[email protected]; Ashby Hilsman, Assistant General Counsel, (202) 
898-6636, [email protected], Legal Division; Scott Leifer, Senior 
Review Examiner, (508) 698-0361, Extension 8027, [email protected]; Don 
Hamm, Special Advisor, (202) 898-3528, [email protected]; Patricia 
Colohan, Associate Director, Risk Management Examinations Branch, (202) 
898-7283, [email protected], Division of Risk Management Supervision.

SUPPLEMENTARY INFORMATION:

Table of Contents

I. Policy Objectives
II. Background
    A. History
    B. Industrial Bank Exclusion Under the BHCA
    C. Industry Profile
    D. Supervision
    E. GAO and OIG Reports
    F. FDIC Moratorium and Other Agency Actions
    G. 2007 Notice of Proposed Rulemaking--Part 354
    H. Dodd-Frank Act and Industrial Banks
III. The Proposed Rule
IV. Discussion of General Comments and Final Rule
    A. General Comments
    1. Banking and Commerce
    2. Lack of Federal Consolidated Supervision
    3. Consumer Protection Risks
    4. Justification for the Proposed Rule
    B. Description of the Final Rule
    1. Section 354.1--Scope
    2. Section 354.2--Definitions
    3. Section 354.3--Written Agreement
    4. Section 354.4--Required Commitments and Provisions of Written 
Agreement
    5. Section 354.5--Restrictions on Industrial Bank Subsidiaries 
of Covered Companies
    6. Section 354.6--Reservation of Authority
    7. Responses to Additional Questions
V. Expected Effects
    A. Overview of Industrial Banks
    B. Analysis of the Commitments
    C. Safety and Soundness of Affected Banks
    D. Broad Effects on the Banking Industry
    E. Expected Effects on Consumers
    F. Expected Effects on the Economy
VI. Regulatory Analysis
    A. Regulatory Flexibility Act
    B. Paperwork Reduction Act
    C. Plain Language
    D. Riegle Community Development and Regulatory Improvement Act 
of 1994
    E. Congressional Review Act

I. Policy Objectives

    The Federal Deposit Insurance Corporation (FDIC) monitors, 
evaluates, and takes necessary action to ensure the safety and 
soundness of State nonmember banks,\1\ including industrial banks and 
industrial loan companies (together, ``industrial banks'').\2\ In 
granting deposit insurance, issuing a non-objection to a change in 
control, or approving a merger, the FDIC must consider the factors 
listed in sections 6,\3\ 7(j),\4\ and 18(c),\5\ respectively, of the 
Federal Deposit Insurance Act (FDI Act). Congress expressly made all 
industrial banks eligible for Federal deposit insurance in 1982.\6\ As 
deposit insurer and as the appropriate Federal banking agency for 
industrial banks, the FDIC supervises industrial banks. A key part of 
its supervision is evaluating and mitigating the risks arising from the 
activities of the control parties and owners of insured industrial 
banks to ensure they do not threaten the safe and sound operations of 
those industrial banks or pose undue risk to the Deposit Insurance Fund 
(DIF).
---------------------------------------------------------------------------

    \1\ See 12 U.S.C. 1811, 1818, 1821, 1831o-1, 1831p-1.
    \2\ Herein, the term ``industrial bank'' means any insured 
State-chartered 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 pursuant to 
12 U.S.C. 1841(c)(2)(H). State laws refer to both industrial loan 
companies and industrial banks. For purposes of this rule, the FDIC 
is treating the two types of institutions as the same. The rule does 
not apply to limited purpose trust companies and credit card banks 
that also are exempt from the definition of ``bank.''
    \3\ 12 U.S.C. 1816.
    \4\ 12 U.S.C. 1817(j).
    \5\ 12 U.S.C. 1828(c).
    \6\ Garn-St. Germain Depository Institutions Act of 1982, Public 
Law 97-320, 96 Stat. 1469 (Oct. 15, 1982).
---------------------------------------------------------------------------

    Existing State and Federal laws allow both financial and commercial 
companies to own and control industrial banks. Congress expressly 
adopted an exception to permit such companies to own and control 
industrial banks, without becoming a bank holding company (BHC) under 
the Bank Holding Company Act (BHCA), as part of the Competitive 
Equality Banking Act of 1987 (CEBA).\7\ Industrial banks today are 
owned by financial and nonfinancial commercial firms. The FDIC has in 
recent years received applications from groups seeking to establish new 
industrial banks that would be owned by commercial parents. Proposals 
regarding industrial banks have presented unique risk profiles compared 
to traditional community

[[Page 10704]]

bank proposals. These profiles have included potential owners that 
would not be subject to Federal consolidated supervision,\8\ 
affiliations with organizations whose activities are primarily 
commercial in nature, and non-community bank business models.\9\
---------------------------------------------------------------------------

    \7\ Public Law 100-86, 101 Stat. 552 (Aug. 10, 1987).
    \8\ In the context of the proposed rule, ``Federal consolidated 
supervision'' referred to the supervision of a parent company and 
its subsidiaries by the Federal Reserve Board (FRB). Consolidated 
supervision of a bank holding company by the FRB encompasses the 
parent company and its subsidiaries, and allows the FRB to 
understand ``the organization's structure, activities, resources, 
and risks, as well as to address financial, managerial, operational, 
or other deficiencies before they pose a danger to the BHC's 
subsidiary depository institutions.'' See SR Letter 08-9, 
``Consolidated Supervision of Bank Holding Companies and the 
Combined U.S. Operations of Foreign Banking Organizations'' (Oct. 
16, 2008).
    \9\ See FDIC Deposit Insurance Applications, Procedures Manual 
Supplement, Applications from Non-Bank and Non-Community Bank 
Applicants, FIL-8-2020 (Feb. 10, 2020).
---------------------------------------------------------------------------

    Given the continuing interest in the industrial bank charter and 
the evolving business models, the FDIC proposed a rule in March 2020 to 
codify existing practices utilized by the FDIC to supervise industrial 
banks and their parent companies, to mitigate undue risk to the DIF 
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 financial strength for the industrial bank, consistent 
with section 38A of the FDI Act.\10\ The proposed rule described 
certain commitments that would be required as a condition of the FDIC's 
approval of, or non-objection to, each deposit insurance application, 
change in control notice, or merger application resulting in an 
industrial bank becoming a subsidiary of a company not subject to 
consolidated supervision by the Federal Reserve Board (FRB; each such 
parent company a Covered Company). The proposed rule required such a 
company and the subsidiary industrial bank to enter into one or more 
written agreements with the FDIC that contain certain commitments to be 
undertaken by the company to ensure the safe and sound operation of 
such industrial bank. The required commitments include capital and 
liquidity support from the parent to the industrial bank that have been 
incorporated in some form in the FDIC's prior actions to create an 
appropriate supervisory structure for industrial banks and their parent 
companies.\11\
---------------------------------------------------------------------------

    \10\ Parent Companies of Industrial Banks and Industrial Loan 
Companies, 85 FR 17771, 17772-73 (Mar. 31, 2020). See also 12 U.S.C. 
1831o-1(b).
    \11\ In March of 2020, the FDIC approved two deposit insurance 
applications for industrial banks owned by firms whose businesses 
are predominantly financial in nature, Square Financial Services, 
Inc., Salt Lake City, Utah (Square Financial), and Nelnet Bank, Salt 
Lake City, Utah (Nelnet). As part of both approvals, the FDIC 
required the industrial banks and their parent companies to enter 
into written agreements with the FDIC that are consistent with the 
requirements of the proposed and this final rule.
---------------------------------------------------------------------------

    The FDIC is now issuing a final rule, which is largely consistent 
with the proposed rule. The final rule makes four substantive changes 
to the proposed rule. First, the final rule requires compliance from 
covered entities on or after the effective date of the rule rather than 
simply after, as proposed. Second, the final rule requires additional 
reporting by Covered Companies regarding systems for protecting the 
security, confidentiality, and integrity of consumer and nonpublic 
personal information. Third, the threshold regarding the limitation of 
a Covered Company's representation on the board of a subsidiary 
industrial bank has been raised in the final rule from 25 percent, as 
proposed, to less than 50 percent. Lastly, the final rule modifies the 
restrictions on industrial bank subsidiaries concerning the appointment 
of directors and senior executive officers to apply to the industrial 
bank only during the first three years after becoming a subsidiary of a 
Covered Company. These changes are discussed in sections IV.B.1., 
IV.B.4., and IV.B.5. of this Supplementary Information section below. 
In addition to providing this comprehensive framework for supervision, 
the final rule also provides interested parties with certainty and 
transparency regarding the FDIC's practices when making determinations 
on filings involving industrial banks.

II. Background

A. History

    Industrial banks began as small State-chartered loan companies in 
the early 1900s to provide small loans to industrial workers. 
Initially, many industrial banks did not accept any deposits and funded 
themselves instead by issuing investment certificates. However, the 
Garn-St. Germain Depository Institutions Act of 1982,\12\ among other 
effects, made all industrial banks eligible for Federal deposit 
insurance. This expanded eligibility for Federal deposit insurance 
brought industrial banks under the supervision of both a State 
authority and the FDIC.\13\ The chartering States gradually expanded 
the powers of their industrial banks so that today industrial banks 
generally have the same commercial and consumer lending powers as 
commercial banks.
---------------------------------------------------------------------------

    \12\ 96 Stat. 1469.
    \13\ Prior to 1982, the FDIC had allowed some industrial banks 
to become federally insured, but FDIC insurance was typically 
limited to those industrial banks chartered by States where the 
relevant State's law allowed them to receive ``deposits'' or to use 
``bank'' in their name. For additional historical context regarding 
industrial bank supervision, see The FDIC's Supervision of 
Industrial Loan Companies: A Historical Perspective, Supervisory 
Insights (2004).
---------------------------------------------------------------------------

    Under the FDI Act, industrial banks are ``State banks'' \14\ and 
all of the existing FDIC-insured industrial banks are ``State nonmember 
banks.'' \15\ As a result, the FDIC is the appropriate Federal banking 
agency for industrial banks.\16\ Each industrial bank is also regulated 
by its respective State chartering authority. The FDIC generally 
exercises the same supervisory and regulatory authority over industrial 
banks as it does over other State nonmember banks.
---------------------------------------------------------------------------

    \14\ 12 U.S.C. 1813(a)(2).
    \15\ 12 U.S.C. 1813(e)(2).
    \16\ 12 U.S.C. 1813(q)(2).
---------------------------------------------------------------------------

B. Industrial Bank Exclusion Under the BHCA

    In 1987, Congress enacted the CEBA, which exempted industrial banks 
from the definition of ``bank'' in the BHCA. As a result, parent 
companies that control industrial banks are not BHCs under the BHCA and 
are not subject to the BHCA's activities restrictions or FRB 
supervision and regulation. The industrial bank exception in the BHCA 
therefore allows for commercial firms to own or control a bank. By 
contrast, BHCs and savings and loan holding companies (SLHCs) are 
subject to Federal consolidated supervision by the FRB and are 
generally prohibited from engaging in commercial activities.\17\
---------------------------------------------------------------------------

    \17\ Section 4 of the BHCA generally prohibits a BHC from 
acquiring ownership or control of any company which is not a bank or 
engaging in any activity other than those of banking or of managing 
or controlling banks and other subsidiaries authorized under the 
BHCA. See 12 U.S.C. 1843(a)(1) and (2). The Home Owners' Loan Act 
(HOLA) governs the activities of SLHCs, as amended by the Dodd-Frank 
Act, which generally subjects these companies to the permissible 
financial holding company activities under section 4(k) of the BHCA 
(12 U.S.C. 1843(k), activities that are financial in nature or 
incidental to a financial activity). See 12 U.S.C. 1467a(c)(2)(H).
---------------------------------------------------------------------------

    More specifically, the CEBA redefined the term ``bank'' in the BHCA 
to include: (1) Any FDIC-insured institution, and (2) any other 
institution that accepts demand or checkable deposit accounts and is 
engaged in the

[[Page 10705]]

business of making commercial loans.\18\ This change effectively closed 
the so-called ``nonbank bank'' exception implicit in the prior BHCA 
definition of ``bank.'' The CEBA created explicit exceptions from this 
definition for certain categories of federally insured institutions, 
including industrial banks, credit card banks, and limited purpose 
trust companies. The exclusions from the definition of the term 
``bank'' created in 1987 by the CEBA remain in effect today. To be 
eligible for the CEBA exception from the BHCA definition of ``bank,'' 
an industrial bank must have received a charter from one of the limited 
number of States eligible to issue industrial bank charters, and the 
law of the chartering State must have required Federal deposit 
insurance as of March 5, 1987. In addition, an industrial bank must 
meet one of the following criteria: (i) Not accept demand deposits,\19\ 
(ii) have total assets of less than $100 million, or (iii) have been 
acquired prior to August 10, 1987.\20\
---------------------------------------------------------------------------

    \18\ 12 U.S.C. 1841(c)(1).
    \19\ Regulation D, 12 CFR part 204, implements the reserve 
requirements of section 19 of the Federal Reserve Act and defines a 
demand deposit as a deposit that is payable on demand, or issued 
with an original maturity or required notice period of less than 
seven days, or a deposit representing funds for which the depository 
institution does not reserve the right to require at least seven 
days' written notice of an intended withdrawal. Demand deposits may 
be in the form of (i) checking accounts; (ii) certified, cashier's, 
teller's, and officer's checks; and (iii) traveler's checks and 
money orders that are primary obligations of the issuing 
institution. Other forms of accounts may also meet the definition of 
``demand deposit.'' See 12 CFR 204.2(b)(1).
    \20\ 12 U.S.C. 1841(c)(2)(H).
---------------------------------------------------------------------------

    Industrial banks are currently chartered in California, Hawaii, 
Minnesota, Nevada, and Utah. Under the CEBA, these States were 
permitted to grandfather existing industrial banks and continue to 
charter new industrial banks.\21\ Generally, industrial banks offer 
limited deposit products, a full range of commercial and consumer 
loans, and other banking services. Although some industrial banks that 
have total assets of less than $100 million accept demand deposits, 
most industrial banks do not offer demand deposits. Negotiable order of 
withdrawal (NOW) accounts \22\ may be offered by industrial banks.\23\ 
Industrial banks have branching rights, subject to certain State law 
constraints.
---------------------------------------------------------------------------

    \21\ Colorado was also grandfathered but it has no active 
industrial banks and has since repealed its industrial bank statute.
    \22\ A NOW account is an interest-earning bank account whereby 
the owner may write drafts against the money held on deposit. NOW 
accounts were developed when certain financial institutions were 
prohibited from paying interest on demand deposits. The prohibition 
on paying interest on demand deposits was lifted when the FRB 
repealed its Regulation Q, effective July 21, 2011. See 76 FR 42015 
(July 18, 2011). Many provisions of the repealed Regulation Q were 
transferred to the FRB's Regulation D.
    \23\ 12 U.S.C. 1832(a). Only certain types of customers may 
maintain deposits in a NOW account. 12 U.S.C. 1832(a)(2).
---------------------------------------------------------------------------

C. Industry Profile

    The industrial bank industry has evolved since the enactment of the 
CEBA. The industry experienced significant asset growth between 1987 
and 2006 when total assets held by industrial banks grew from $4.2 
billion to $213 billion.\24\ From 2000 to 2006, 24 industrial banks 
became insured.\25\ As of January 30, 2007, there were 58 insured 
industrial banks with $177 billion in aggregate total assets.\26\ The 
ownership structure and business models of industrial banks evolved as 
industrial banks were acquired or formed by a variety of commercial 
firms, including, among others, BMW, Target, Pitney Bowes, and Harley 
Davidson. For instance, certain companies established industrial banks, 
in part, to support the sale of the manufactured products (e.g. 
automobiles) or other services, whereas certain retailers established 
industrial banks to issue general purpose credit cards. In addition, 
certain financial companies also formed or acquired industrial banks to 
provide access to Federal deposit insurance for brokerage customers' 
cash management account balances. The cash balances their customers 
maintain with the securities affiliate are swept into insured, 
interest-bearing accounts at the industrial bank subsidiary, thereby 
providing the brokerage customers with FDIC-insured deposits during the 
period of time that cash is held for future investment.
---------------------------------------------------------------------------

    \24\ Most of the growth during this period is attributable to 
financial services firms that controlled industrial banks offering 
sweep deposit programs to provide Federal deposit insurance for 
customers' free cash balances and to American Express moving its 
credit card operations from its Delaware-chartered credit card bank 
to its Utah-chartered industrial bank.
    \25\ During this time period, the FDIC received 57 applications 
for Federal deposit insurance for industrial banks, 53 of which were 
acted on. Also during this time period, 21 industrial banks ceased 
to operate due to mergers, conversions, voluntary liquidations, and 
one failure (Southern Pacific Bank, Torrance, CA, failed in 2003).
    \26\ Of the 58 industrial banks existing at this time, 45 were 
chartered in Utah and California. The remaining industrial banks 
were chartered in Colorado, Hawaii, Minnesota, and Nevada.
---------------------------------------------------------------------------

    Since 2007, the industrial bank industry has experienced 
contraction both in terms of the number of institutions and aggregate 
total assets. As of September 30, 2020, there were 23 industrial banks 
\27\ with $173 billion in aggregate total assets. Four industrial banks 
reported total assets of $10 billion or more; ten industrial banks 
reported total assets of $1 billion or more but less than $10 billion. 
The industrial bank sector today includes a diverse group of insured 
financial institutions operating a variety of business models. A 
significant number of the existing industrial banks support the 
commercial or specialty finance operations of their parent company and 
are funded through non-core sources.
---------------------------------------------------------------------------

    \27\ Of the 23 industrial banks existing as of June 30, 2020, 14 
were chartered in Utah, four in Nevada, three in California, one in 
Hawaii, and one in Minnesota. An additional industrial bank, Nelnet 
Bank, began operations in November of 2020. Square Financial was 
approved in March and has not opened for business.
---------------------------------------------------------------------------

    The reduction in the number of industrial banks from 2007 to 2020 
was due to a variety of factors, including mergers, conversions, 
voluntary liquidations, and the failure of two small institutions.\28\ 
For business, marketplace, or strategic reasons, several industrial 
banks converted to commercial banks and thus became ``banks'' under the 
BHCA. Four industrial banks were approved in 2007 and 2008; however, 
none of those institutions exist today.\29\ Moratoria imposed by the 
FDIC and Congress (as discussed below) were also a factor.
---------------------------------------------------------------------------

    \28\ Security Savings Bank, Henderson, Nevada, failed in 
February 2009, and Advanta Bank Corporation, Draper, Utah, failed in 
March 2010.
    \29\ In each case, the institution pursued a voluntary 
transaction that led to termination of the respective institution's 
industrial bank charter. One institution converted to a commercial 
bank charter and continues to operate, one merged and the resultant 
bank continues to operate, and two terminated deposit insurance 
following voluntary liquidations. Such transactions generally result 
from proprietary strategic determinations by the institutions and 
their parent companies or investors.
---------------------------------------------------------------------------

    Since the beginning of 2017, the FDIC has received 12 Federal 
deposit insurance applications related to proposed industrial banks. Of 
those, two have been approved,\30\ eight have been withdrawn, and two 
are pending.\31\ The FDIC anticipates potential continued interest in 
the establishment of industrial banks, particularly with regard to 
proposed institutions that plan to pursue a specialty or limited 
purpose business model.
---------------------------------------------------------------------------

    \30\ In March of 2020, the FDIC approved the deposit insurance 
applications of Nelnet Bank and Square Financial. Square Financial 
has not yet commenced operations.
    \31\ Decisions to withdraw an application are made at the 
discretion of the organizers and can be attributed to a variety of 
reasons. In some cases, an application is withdrawn and then refiled 
after changes are incorporated into the proposal. In such cases, the 
new application is reviewed by the FDIC without prejudice. In other 
cases, the applicant may, for strategic reasons, determine that 
pursuing an insured industrial bank charter is not in the 
organizers' best interests.

---------------------------------------------------------------------------

[[Page 10706]]

D. Supervision

    Because industrial banks are insured State nonmember banks, they 
are subject to the FDIC's Rules and Regulations, as well as other 
provisions of law, including restrictions under the Federal Reserve Act 
governing transactions with affiliates,\32\ anti-tying provisions of 
the BHCA,\33\ and insider lending regulations. Industrial banks are 
also subject to regular examination, including examinations focused on 
safety and soundness, Bank Secrecy Act and Anti-Money Laundering 
compliance, consumer protection including Community Reinvestment Act 
(CRA) compliance, information technology (IT), and trust services, as 
appropriate. Pursuant to section 10(b)(4) of the FDI Act, the FDIC has 
the authority to examine the affairs of any industrial bank affiliate, 
including the parent company, as may be necessary to determine the 
relationship between the institution and the affiliate, and the effect 
of such relationship on the depository institution.\34\
---------------------------------------------------------------------------

    \32\ See 12 U.S.C. 1828(j)(1)(A).
    \33\ For purposes of section 106 of the BHCA, an industrial bank 
is treated as a ``bank'' and is subject to the anti-tying 
restrictions therein. See 12 U.S.C. 1843(f)(1).
    \34\ 12 U.S.C. 1820(b)(4).
---------------------------------------------------------------------------

    In addition, under section 38A of the FDI Act, as amended by the 
Dodd Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank 
Act),\35\ the FDIC is required to impose a requirement on companies 
that directly or indirectly own or control an industrial bank to serve 
as a source of financial strength for that institution.\36\ In 
addition, subsection (d) of section 38A of the FDI Act provides 
explicit statutory authority for the appropriate Federal banking agency 
to require reports from a controlling company to assess the ability of 
the company to comply with the source of strength requirement, and to 
enforce compliance by such company.\37\
---------------------------------------------------------------------------

    \35\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \36\ 12 U.S.C. 1831o-1(b).
    \37\ See 12 U.S.C. 1831o-1(d).
---------------------------------------------------------------------------

    Consistent with section 38A and other authorities under the FDI 
Act, the FDIC has historically required capital and liquidity 
maintenance agreements (CALMAs) \38\ and other written agreements 
between the FDIC and controlling parties of industrial banks as well as 
the imposition of prudential conditions when approving or non-objecting 
to certain filings involving an industrial bank. Such written 
agreements provide required commitments for the parent company to 
provide financial resources and a means for the FDIC to pursue formal 
enforcement action under sections 8 and 50 of the FDI Act \39\ should a 
party fail to comply with the agreements.
---------------------------------------------------------------------------

    \38\ When the FDIC has required a CALMA, the capital levels 
required generally have exceeded the average thresholds required of 
community banks, due to the risks involved in the business plans of 
many industrial banks.
    \39\ See 12 U.S.C. 1818 and 1831aa.
---------------------------------------------------------------------------

E. GAO and OIG Reports

    Beginning in 2004, the FDIC Office of Inspector General (OIG) 
conducted two evaluations and the Government Accountability Office 
(GAO) conducted a statutorily mandated study regarding the FDIC's 
supervision of industrial banks, including its use of prudential 
conditions.\40\ An OIG evaluation published in 2004 focused on whether 
industrial banks posed greater risk to the DIF than other financial 
institutions, and reviewed the FDIC's supervisory approach in 
identifying and mitigating material risks posed to those institutions 
by their parent companies. A July 2006 OIG evaluation reviewed the 
FDIC's process for reviewing and approving industrial bank applications 
for deposit insurance and monitoring conditions imposed with respect to 
industrial bank business plans. A September 2005 GAO study cited 
several risks posed to banks operating in a holding company structure, 
including adverse intercompany transactions, operations risk, and 
reputation risk. The GAO study also discussed concerns about the FDIC's 
ability to protect an industrial bank from those risks as effectively 
as the Federal consolidated supervisory approach under the BHCA.\41\
---------------------------------------------------------------------------

    \40\ See OIG Evaluation 04-048, The Division of Supervision and 
Consumer Protection's Approach for Supervising Limited-Charter 
Depository Institutions (2004), available at https://www.fdicig.gov/reports04/04-048.pdf; OIG Evaluation 06-014, The FDIC's Industrial 
Loan Company Deposit Insurance Application Process (2006), available 
at https://www.fdicig.gov/reports06/06-014.pdf; U.S. Gov't 
Accountability Office, GAO-05-621, Industrial Loan Corporations: 
Recent Asset Growth and Commercial Interest Highlight Differences in 
Regulatory Authority (Sept. 2005), available at https://www.gao.gov/products/GAO-05-621(GAO-05-621).
    \41\ GAO-05-621.
---------------------------------------------------------------------------

    These reports acknowledged the FDIC's supervisory actions to ensure 
the independence and safety and soundness of commercially owned 
industrial banks. The reports further acknowledged the FDIC's 
authorities to protect an industrial bank from the risks posed by its 
parent company and affiliates. These authorities include the FDIC's 
authority to conduct examinations, impose conditions on and enter into 
written agreements with an industrial bank parent company, terminate an 
industrial bank's deposit insurance, enter into written agreements 
during the acquisition of an insured depository institution, and to 
pursue enforcement actions.

F. FDIC Moratorium and Other Agency Actions

    In 2005, Wal-Mart Bank's application for Federal deposit insurance 
drew extensive public attention to the industrial bank charter. The 
FDIC received more than 13,800 comment letters regarding Wal-Mart's 
proposal. Most of the commenters were opposed to the application. 
Commenters also raised broader concerns about industrial banks, 
including the risk posed to the DIF by industrial banks owned by parent 
companies that are not subject to Federal consolidated supervision. 
Similar concerns were expressed by witnesses during three days of 
public hearings held by the FDIC in the spring of 2006 concerning the 
Wal-Mart application. Also in 2006, The Home Depot filed a change in 
control notice in connection with its proposed acquisition of EnerBank, 
a Utah-chartered industrial bank. The FDIC received approximately 830 
comment letters regarding the notice, almost all of which expressed 
opposition to the proposed acquisition. Ultimately, the Wal-Mart 
application and The Home Depot's notice were withdrawn.
    To evaluate the concerns and issues raised with respect to the Wal-
Mart and The Home Depot filings and industrial banks generally, on July 
28, 2006, the FDIC imposed a six-month moratorium on FDIC action with 
respect to deposit insurance applications and change in control notices 
involving industrial banks.\42\ The FDIC suspended agency action in 
order to further evaluate (i) industry developments; (ii) the various 
issues, facts, and arguments raised with respect to the industrial bank 
industry; (iii) whether there were emerging safety and soundness issues 
or policy issues involving industrial banks or other risks to the DIF; 
and (iv) whether statutory, regulatory, or policy changes should be 
made in the FDIC's oversight of industrial banks in order to protect 
the DIF or important Congressional objectives.\43\
---------------------------------------------------------------------------

    \42\ See Moratorium on Certain Industrial Loan Company 
Applications and Notices, 71 FR 43482 (Aug. 1, 2006).
    \43\ Id. at 43483.
---------------------------------------------------------------------------

    In connection with this moratorium, on August 23, 2006, the FDIC 
published a notice and request for comment on a wide range of issues 
concerning industrial banks.\44\ The FDIC received

[[Page 10707]]

over 12,600 comment letters in response to the notice.\45\ The 
substantive comments related to the risk profile of the industrial bank 
industry, concerns over the mixing of banking and commerce, the FDIC's 
practices when making determinations in industrial bank applications 
and notices, whether commercial ownership of industrial banks should be 
allowed, and perceived needs for supervisory change.
---------------------------------------------------------------------------

    \44\ See Industrial Loan Companies and Industrial Banks, 71 FR 
49456 (Aug. 23, 2006). The Notice included questions concerning the 
current risk profile of the industrial bank industry, safety and 
soundness issues uniquely associated with ownership of such 
institutions, the FDIC's practice with respect to evaluating and 
making determinations on industrial bank applications and notices, 
whether a distinction should be made when the industrial bank is 
owned by an entity that is commercial in nature, and the adequacy of 
the FDIC's supervisory approach with respect to industrial banks.
    \45\ Approximately 12,485 comments on the notice were generated 
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. 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.
---------------------------------------------------------------------------

    The moratorium was effective through January 31, 2007, at which 
time the FDIC extended the moratorium one additional year for deposit 
insurance applications and change in control notices for industrial 
banks that would be owned by commercial companies.\46\ The moratorium 
was not applicable to industrial banks to be owned by financial 
companies.
---------------------------------------------------------------------------

    \46\ See Moratorium on Certain Industrial Bank Applications and 
Notices, 72 FR 5290 (Feb. 5, 2007).
---------------------------------------------------------------------------

G. 2007 Notice of Proposed Rulemaking (NPR)--Part 354

    In addition to extending the moratorium for one year with respect 
to commercial parent companies, the FDIC published for comment a 
proposed rule designed to strengthen the FDIC's consideration of 
applications and notices for industrial banks to be controlled by 
financial companies not subject to Federal consolidated bank 
supervision, identified as part 354 (2007 NPR).\47\ The 2007 NPR would 
have imposed requirements on applications for deposit insurance, merger 
applications, and notices for change in control that would result in an 
industrial bank becoming a subsidiary of a company engaged solely in 
financial activities that is not subject to Federal consolidated bank 
supervision by either the FRB or the then-existing Office of Thrift 
Supervision (OTS). The rule would have established safeguards to assess 
the parent company's continuing ability to serve as a source of 
strength for the insured industrial bank, and to identify and respond 
to problems or risks that may develop in the company or its 
subsidiaries.
---------------------------------------------------------------------------

    \47\ See Industrial Bank Subsidiaries of Financial Companies 72 
FR 5217 (Feb. 5, 2007); see also https://www.fdic.gov/news/news/press/2007/pr07007.html.
---------------------------------------------------------------------------

    Similar to this final rule, the 2007 NPR would have required a 
parent company to enter into a written agreement with the FDIC 
containing required commitments related to the examination of, and 
reporting and recordkeeping by, the industrial bank, the parent 
company, and its affiliates. The majority of commenters did not oppose 
these requirements, noting the FDIC already has authority to collect 
such information under section 10(b)(4) of the FDI Act.\48\ Many 
commenters, however, objected to limiting parent company representation 
on the industrial bank subsidiary's board of directors to 25 percent, 
and argued instead for requiring that a majority of directors be 
independent. The majority of commenters stated that the FDIC should not 
impose capital requirement commitments as contemplated in the 2007 NPR 
on commercial parents of industrial banks because a one-size-fits all 
regulatory approach to capital requirements would not be appropriate 
due to the idiosyncratic business models and operations of such parent 
companies.
---------------------------------------------------------------------------

    \48\ See 12 U.S.C. 1820(b)(4).
---------------------------------------------------------------------------

    Though the 2007 NPR did not affect industrial banks that would be 
controlled by companies engaged in commercial activities, several 
commenters addressed the distinction between industrial banks owned by 
financial and nonfinancial companies. Two commenters contended that the 
FDIC lacked authority to draw a distinction between financial and 
nonfinancial industrial bank owners absent a change in law. Several 
commenters argued that drawing such a distinction would essentially 
repeal the exception of industrial banks from the definition of 
``bank'' in the BHCA. There was little consensus among commenters as to 
whether commercially owned industrial banks pose unique safety and 
soundness issues.
    The FDIC did not finalize the 2007 NPR. Although multiple factors 
contributed to the FDIC's decision to not advance a final rule, the 
most significant factor was the onset of two interconnected and 
overlapping crises: the financial crisis of 2008-09, and the banking 
crisis from 2008 to 2013.\49\ With the advent of the crises, 
applications to form de novo insured institutions, or to acquire 
existing institutions, declined significantly, including with respect 
to industrial banks.
---------------------------------------------------------------------------

    \49\ See Crisis and Response, An FDIC History, 2008-2013, 
available at https://www.fdic.gov/bank/historical/crisis/. The 
financial crisis in 2008 and 2009 threatened large financial 
institutions of all kinds, both inside and outside the traditional 
banking system, and thus endangered the financial system itself. 
Second, a banking crisis, accompanied by a swiftly increasing number 
of both troubled and failed insured depository institutions, began 
in 2008 and continued until 2013.
---------------------------------------------------------------------------

H. Dodd-Frank Act and Industrial Banks

    As discussed above and in reaction to the 2008-09 financial crisis, 
the Dodd-Frank Act amended the FDI Act by adding section 38A.\50\ Under 
section 38A, for any insured depository institution that is not a 
subsidiary of a BHC or SLHC, the appropriate Federal banking agency for 
the insured depository institution must require any company that 
directly or indirectly controls such institution to serve as a source 
of financial strength for the institution.\51\
---------------------------------------------------------------------------

    \50\ See 12 U.S.C. 1831o-1.
    \51\ 12 U.S.C. 1831o-1(b). This amendment also requires the 
appropriate Federal banking agency for a BHC or SLHC to require the 
BHC or SLHC to serve as a source of financial strength for any 
subsidiary of the BHC or SLHC that is a depository institution. 12 
U.S.C. 1831o-1(a).
---------------------------------------------------------------------------

    Through the Dodd-Frank Act, Congress also imposed a three-year 
moratorium on the FDIC's approval of deposit insurance applications for 
industrial banks that were owned or controlled by a commercial 
firm.\52\ The Dodd-Frank Act moratorium also applied to the FDIC's non-
objection to any change in control of an industrial bank that would 
place the institution under the control of a commercial firm.\53\ The 
moratorium expired in July 2013, without any further action by 
Congress.
---------------------------------------------------------------------------

    \52\ Public Law 111-203, title VI, section 603(a), 124 Stat. 
1597 (2010). Section 603(a) also imposed a moratorium on FDIC action 
on deposit insurance applications by credit card banks and trust 
banks owned or controlled by a commercial firm. The Dodd-Frank Act 
defined a ``commercial firm'' for this purpose as a company that 
derives less than 15 percent of its annual gross revenues from 
activities that are financial in nature, as defined in section 4(k) 
of the BHCA (12 U.S.C. 1843(k)), or from ownership or control of 
depository institutions.
    \53\ Id.
---------------------------------------------------------------------------

    In addition, the Dodd-Frank Act directed the GAO to conduct a study 
of the implications of removing all exceptions from the definition of 
``bank'' under the BHCA. The GAO report was published in January of 
2012.\54\ This report examined the number and general characteristics 
of

[[Page 10708]]

exempt institutions, the Federal regulatory system for such 
institutions, and potential implications of subjecting the holding 
companies of such institutions to BHCA requirements. The GAO report 
noted that the industrial bank industry experienced significant asset 
growth in the 2000s and, during this time, the profile of industrial 
banks changed: Rather than representing a class of small, limited-
purpose institutions, industrial banks became a diverse group of 
insured institutions with a variety of business lines.\55\ Ultimately, 
the GAO found that Federal regulation of the exempt institutions' 
parent companies varied, noting that FDIC officials interviewed in 
connection with the study indicated that supervision of exempt 
institutions was adequate, but also noted the added benefit of Federal 
consolidated supervision. Finally, data examined by the GAO suggested 
that removing the BHCA exceptions would likely have a limited impact on 
the overall credit market, chiefly because the overall market share of 
exempt institutions was, at the time of the study, small.\56\
---------------------------------------------------------------------------

    \54\ See U.S. Government Accountability Office, GAO-12-160, 
Characteristics and Regulation of Exempt Institutions and the 
Implications of Removing the Exemptions (Jan. 2012), available at 
https://www.gao.gov/products/GAO-12-160.
    \55\ Id. at 13.
    \56\ The GAO did not recommend repeal of the exemption.
---------------------------------------------------------------------------

III. The Proposed Rule

    On March 31, 2020, the FDIC published a notice of proposed 
rulemaking (NPR or proposal) to establish a supervisory framework for 
industrial banks and their parent companies that are not subject to 
Federal consolidated supervision.\57\ The proposed rule required 
certain conditions, commitments, and restrictions for each deposit 
insurance application approval, non-objection to a change in control 
notice, and merger application approval that would result in an 
industrial bank becoming a subsidiary of a company not subject to 
consolidated supervision by the FRB. The proposal required such a 
Covered Company to enter into one or more written agreements with the 
FDIC and the industrial bank subsidiary. The commitments included:
---------------------------------------------------------------------------

    \57\ 85 FR 17771 (Mar. 31, 2020).
---------------------------------------------------------------------------

     Furnishing an initial listing, with annual updates, of the 
Covered Company's subsidiaries.
     Consenting to FDIC examination of the Covered Company and 
its subsidiaries.
     Submitting an annual report on the Covered Company and its 
subsidiaries, and such other reports as requested.
     Maintaining such records as the FDIC deemed necessary.
     Causing an independent annual audit of each industrial 
bank.
     Limiting the Covered Company's representation on the 
industrial bank's board of directors or managers (board), as the case 
may be, to 25 percent.
     Maintaining the industrial bank's capital and liquidity at 
such levels as deemed appropriate and take other action necessary to 
provide the industrial bank with a resource for additional capital or 
liquidity.
     Entering into a tax allocation agreement.\58\
---------------------------------------------------------------------------

    \58\ See proposed Sec.  354.4(a)(1) through (8).
---------------------------------------------------------------------------

    The proposal also set forth the FDIC's authority to require, as an 
additional commitment, a contingency plan that, among other items, 
provides a strategy for the orderly disposition of the industrial bank 
without the need for the appointment of a receiver or conservator.
    Recently, a number of companies have considered options for 
providing financial products and services by establishing an industrial 
bank subsidiary. Many companies have publicly noted the benefits of 
deposit insurance and establishing a deposit-taking institution. 
Although many interested parties operate business models focused on 
traditional community bank products and services, others operate unique 
business models, some of which are focused on innovative technologies 
and strategies, including newer business models employed by fintech 
firms that utilize novel or unproven products or processes.
    Some of the companies recently exploring an industrial bank charter 
engage in commercial activities or have diversified business operations 
and activities that would not otherwise be permissible for BHCs under 
the BHCA and applicable regulations. Given the continuing interest in 
the establishment of industrial banks, particularly with regard to 
proposed institutions that plan to implement specialty or limited 
purpose business models, including those focused on innovative 
technologies, the FDIC believes a rule is appropriate to provide 
necessary transparency for market participants. Through this final 
rule, the FDIC is formalizing its framework to supervise industrial 
banks and mitigate risk to the DIF that may otherwise be presented in 
the absence of Federal consolidated supervision of an industrial bank 
and its parent company.
    The FDIC has the authority to issue rules to carry out the 
provisions of the FDI Act,\59\ including rules to ensure the safety and 
soundness of industrial banks and to protect the DIF. Moreover, as the 
only agency with the power to grant or terminate deposit insurance, the 
FDIC has a unique responsibility for the safety and soundness of all 
insured institutions.\60\ In granting deposit insurance, the FDIC must 
consider the factors in section 6 of the FDI Act; \61\ these factors 
generally focus on the safety and soundness of the proposed institution 
and any risk it may pose to the DIF. The FDIC is also authorized to 
permit or deny various transactions by State nonmember banks, including 
merger and change in bank control transactions, based to a large extent 
on safety and soundness considerations and on its assessment of the 
risk to the DIF.\62\
---------------------------------------------------------------------------

    \59\ ``[T]he Corporation . . . shall have power . . . [t]o 
prescribe by its Board of Directors such rules and regulations as it 
may deem necessary to carry out the provisions of this chapter or of 
any other law which it has the responsibility of administering or 
enforcing (except to the extent that authority to issue such rules 
and regulations has been expressly and exclusively granted to any 
other regulatory agency).'' 12 U.S.C. 1819(a)(Tenth).
    \60\ See 12 U.S.C. 1815, 1818(a).
    \61\ Such factors are the financial history and condition of the 
depository institution, the adequacy of the depository institution's 
capital structure, the future earnings prospects of the depository 
institution, the general character and fitness of the management of 
the depository institution, the risk presented by such depository 
institution to the DIF, the convenience and needs of the community 
to be served by such depository institution, and whether the 
depository institution's corporate powers are consistent with the 
purposes of the FDI Act. See 12 U.S.C. 1816.
    \62\ See 12 U.S.C. 1817(j), 1828(c), and 1828(d).
---------------------------------------------------------------------------

    The FDIC has the responsibility to consider filings based on 
statutory criteria and make decisions. Following the publication of the 
proposed rule, the FDIC approved two deposit insurance applications, by 
Square Financial and Nelnet, to create de novo industrial banks, the 
first such approvals since 2008. The FDIC determined that the 
applications satisfied the seven statutory factors under section 6 of 
the FDI Act, and the FDIC's approval of deposit insurance for these 
industrial banks fulfilled the Agency's statutory responsibility. As 
part of both approvals, the FDIC required the industrial banks and 
their parent companies to enter into CALMAs and Parent Company 
Agreements to protect the industrial bank and address potential risks 
to the DIF.
    The FDIC invited comment on all aspects of the March 2020 proposal, 
including questions posed by the Agency. The comment period for the 
proposed rule ended on July 1, 2020.\63\

[[Page 10709]]

The FDIC received 29 comments from industry group/trade associations, 
insured depository institutions, consumer and public interest groups, 
State banking regulator(s), law firms, a member of Congress, academics, 
and other interested parties.\64\ In addition, the FDIC received three 
letters related to the subject matter considered in the proposed rule 
prior to the formal comment period. The FDIC is now finalizing the 
proposed rule, with changes based on public comments, as described in 
detail below.
---------------------------------------------------------------------------

    \63\ Given the disruptions caused by the COVID-19 global 
pandemic, the FDIC announced on May 27, 2020, that it would extend 
the comment period from June 1, 2020, to July 1, 2020, to allow 
interested parties additional time to analyze the proposal and 
prepare comments.
    \64\ On March 15, 2020, bank trade groups, and consumer and 
civil rights groups sent a letter to the FDIC urging the agency not 
to approve deposit insurance applications submitted by industrial 
banks until the NPR is finalized. See https://bpi.com/consumer-civil-rights-groups-industry-urge-fdic-halt-approval-of-industrial-bank-applications-close-ilc-loopholes-first/. On July 29, 2020, some 
of the same groups sent a letter to Congress requesting a three-year 
moratorium on industrial bank licensing applications. See https://bpi.com/banking-and-consumer-groups-call-on-congress-to-close-ilc-loophole/.
---------------------------------------------------------------------------

IV. Discussion of General Comments and Final Rule

A. General Comments

    Many commenters were supportive of the FDIC's overall effort to 
provide certainty, clarity, and transparency to the supervisory 
framework for the parent companies and affiliates of industrial banks. 
A number of commenters were generally supportive of the industrial bank 
charter citing the benefits of charter choice, increased competition, 
and the provision of financial services. These commenters asserted the 
charter poses no increased risk to the DIF. In their view, the parent 
companies serve as an important source of strength and governance for 
the subsidiary industrial bank. They asserted that in times of stress, 
a diversified parent may be in a better position to provide capital 
support to a bank subsidiary than a BHC whose assets consist almost 
entirely of the bank subsidiary. These commenters also argued that an 
industrial bank benefits from its business relationship with the 
parent, for example, through marketing support and fewer start-up 
costs. State regulators stated that the joint supervisory approach to 
supervising industrial banks with the FDIC has been effective, and 
industrial banks with commercial parents do not present an outsized 
safety and soundness risk.
    Comments submitted by bank trade associations, consumer groups, and 
academics were generally critical of the proposed rule and expressed a 
range of concerns, which are discussed below.
1. Banking and Commerce
    Commenters' criticism of the industrial bank charter, and by 
extension the proposed rule, is focused, in part, on the mixing of 
banking and commerce through the commercial ownership of an industrial 
bank. The main argument is that commercial ownership of an industrial 
bank disregards the policy of separation of banking and commerce 
embodied in the BHCA \65\ and raises risk to the DIF as a result of a 
lack of Federal consolidated supervision over the commercial parent 
company.
---------------------------------------------------------------------------

    \65\ See Federal Reserve Bank of San Francisco, Economic Letter 
1998-21, The Separation of Banking and Commerce (July 3, 1998), 
available at https://www.frbsf.org/economic-research/publications/economic-letter/1998/july/separation-banking-commerce/.
---------------------------------------------------------------------------

    Although Federal banking regulation has historically advanced a 
policy of separating banking and commerce, there is an express 
Congressional exception of industrial banks from the BHCA's 
restrictions on commercial affiliations.\66\ The CEBA exception does 
not limit eligible parent companies to those engaged in financial 
activities. The FDIC's responsibility is to implement the law as it 
exists today. Whether commercial firms should continue to be able to 
own industrial banks is a policy decision for Congress to make.
---------------------------------------------------------------------------

    \66\ The legislative history of the CEBA offers no explanation 
of why this exception was adopted. While the industrial bank 
exception was included in the Senate version of the Act, the House 
version omitted it. The Conference report does not shed much light:
    INDUSTRIAL LOAN COMPANY EXEMPTION SECTION 2(C) (2) (H) OF THE 
BANK HOLDING COMPANY ACT
    The Senate amendment exempts from the definition of ``bank'' 
certain industrial banks; industrial loan companies, or other 
similar institutions. The House recedes to the Senate.
    Conference Report to accompany H.R. 27--Competitive Equality 
Banking Act of 1987 (July 31, 1987), at 121.
---------------------------------------------------------------------------

    Some commenters requested that the FDIC impose a new moratorium on 
deposit insurance applications involving industrial banks to allow for 
legislative action. Certain commenters argued that a moratorium, or a 
delay in the rulemaking more generally, was important in light of the 
current economic stress and uncertainty caused by the COVID-19 
pandemic. The purpose of this final rule is to ensure adequate 
oversight of industrial banks owned by financial and commercial 
companies. Additional moratoria or delays in processing and considering 
applications are outside the scope of this rulemaking and would be 
inconsistent with the express Congressional exception of industrial 
banks from the BHCA's restrictions on commercial affiliations and the 
FDIC's statutory obligations to receive and process applications 
related to industrial banks.
    These commenters also argued that allowing commercial firms and 
industrial banks to combine could potentially lead to conflicts of 
interest in the lending process and undue concentrations of economic 
power--concerns they contend underlie the general prohibition against 
the mixing of commerce and banking in the BHCA. As noted above, the 
decision to allow commercial firms to own industrial banks was a 
decision made by Congress. Industrial banks are restricted from making 
favorable loans to their affiliates by sections 23A and 23B of the 
Federal Reserve Act, which quantitatively and qualitatively limit 
transactions between an industrial bank and its affiliates.\67\ 
Furthermore, section 23B of the Federal Reserve Act requires that any 
transaction between a bank and its affiliates must be ``on terms and 
under circumstances, including credit standards, that are substantially 
the same, or at least as favorable to [the] bank or its subsidiary as 
those prevailing at the time for comparable transactions'' with 
unaffiliated companies.\68\ All covered transactions between an 
industrial bank and its affiliates must be on terms and conditions that 
are consistent with safe and sound banking practices.\69\
---------------------------------------------------------------------------

    \67\ 12 U.S.C. 371c(a)(1), 371c-1(a)(1); see also 12 U.S.C. 
1828(j).
    \68\ 12 U.S.C. 371c-1(b).
    \69\ 12 U.S.C. 371c(a)(4).
---------------------------------------------------------------------------

    Commenters' competition concerns were based on the possibility that 
large commercial or technology firms will acquire industrial banks and 
lead to commercial and financial conglomerates with concentrated and 
excessive economic power. These commenters were concerned that the FDIC 
will not adequately consider the anti-trust implications of commercial 
and financial conglomerates. The FDIC recognizes that there is a 
possibility that large and complex companies may seek to acquire an 
industrial bank as emerging technologies and other trends are leading 
to changes in the provision of banking services. The FDIC has 
discretion to evaluate the competitive effects of such proposals when 
considering a deposit insurance application, specifically the statutory 
factors of the risk to the DIF and the convenience and needs of the 
community to be served, in order to ensure the market for the provision 
of

[[Page 10710]]

banking services remains competitive and safe and sound.\70\ Moreover, 
the FDIC must consider the anticompetitive effects of a transaction 
when it is evaluating a notice under the Change in Bank Control Act 
(CBCA) or an application under the Bank Merger Act.\71\ Recognizing 
that the business models proposed by industrial banks are evolving 
(e.g., the increasing interplay of services between the bank and its 
nonfinancial affiliates), the FDIC is issuing this rule in order to 
help ensure the safety and soundness of industrial banks that become 
subsidiaries of Covered Companies.
---------------------------------------------------------------------------

    \70\ As part of its considerations, the FDIC may also seek the 
views of other Federal agencies.
    \71\ See 12 U.S.C. 1817(j)(7)(A), (B); 1828(c)(5).
---------------------------------------------------------------------------

2. Lack of Federal Consolidated Supervision
    Many commenters that were critical of the proposed rule also argued 
that the potential future expansion of banks operating under the CEBA 
exception threatens the Federal safety net because the FDIC lacks the 
statutory tools to adequately examine and supervise industrial banks 
and their parents and affiliates. These commenters noted for instance 
the many ecommerce affiliate relationships of a large, overseas parent 
company. The FDIC sought comment on whether the commitments requiring 
examination and reporting included in the proposed rule were the best 
approach to gain transparency and identify any potential risk to the 
industrial banks. A number of commenters argued that the eight 
commitments in the FDIC's proposed rule ``fail to achieve parity with 
the regime of consolidated supervision required for BHCs.'' Elements 
they viewed as lacking included consolidated capital and liquidity 
standards for the Covered Company, including both the industrial bank 
and all affiliated entities under common ownership, examination for 
compliance with the Volcker Rule requirements, sections 23A and 23B, 
and provisions in the Gramm-Leach-Bliley Act (GLBA) \72\ on data 
safeguards and privacy of customer information. Such commenters also 
argued that the FDIC does not have the authority to conduct full-scope 
examinations across any and all affiliates, including the parent 
company, in their own right. Several commenters suggested that the FDIC 
ask Congress to transfer the supervision of parent companies of 
industrial banks to the FRB to conduct consolidated supervision.
---------------------------------------------------------------------------

    \72\ Financial Services Modernization Act of 1999, Public Law 
106-102, 113 Stat. 1338 (1999).
---------------------------------------------------------------------------

    As discussed in the proposed rule, the FDIC has both the authority 
and the capacity to effectively regulate industrial banks and their 
parent companies, and this rule strengthens the FDIC's supervision. The 
FDIC uses its supervisory authorities to mitigate the risks posed to 
insured depository institutions whose parent companies are not subject 
to consolidated supervision. In considering applications for deposit 
insurance and mergers, as well as change in control notices, the FDIC 
uses prudential conditions, as needed, to ensure sufficient autonomy 
and insulation of the insured depository institution from its parent 
and affiliates. The FDIC also requires CALMAs, which generally exceed 
the minimum capital requirements for traditional community banks, and 
other written agreements between the FDIC and controlling parties of 
industrial banks. These agreements are enforceable under sections 8 and 
50 of the FDI Act. In addition, under section 38A of the FDI Act, the 
FDIC is required to impose a requirement on companies that directly or 
indirectly own or control an industrial bank to serve as a source of 
financial strength for that institution.\73\ Subsection (d) of section 
38A of the FDI Act also provides explicit statutory authority for the 
appropriate Federal banking agency to require reports from a 
controlling company to assess the ability of the company to comply with 
the source of strength requirement, and to enforce compliance by such 
company.\74\ These prudential conditions and requirements will be 
embodied in written agreements consistent with the framework 
established by this final rule.
---------------------------------------------------------------------------

    \73\ 12 U.S.C. 1831o-1(b).
    \74\ See 12 U.S.C. 1831o-1(d).
---------------------------------------------------------------------------

    In addition, an important focus of the FDIC's examination and 
supervision program is evaluating and mitigating risk to insured 
depository institutions from affiliates. This includes examining the 
insured depository institution for compliance with laws and 
regulations, including affiliate transaction limits and capital 
maintenance.\75\ The examination reviews envisioned under this final 
rule provide the basis and opportunity to more fully evaluate the 
institution's affiliate relationships. As noted above, most conflict 
situations affecting banks and their affiliates can be mitigated 
through the supervisory process and application of the restrictions in 
sections 23A and 23B of the Federal Reserve Act and need not pose 
excessive risk to the bank or the banking system.
---------------------------------------------------------------------------

    \75\ See Report to the Congress and the Financial Stability 
Oversight Council Pursuant to Section 620 of the Dodd-Frank Act 
(Sept. 2016). The 2016 joint report evaluated the risks of bank 
activities and affiliations, as required by section 620 of the Dodd-
Frank Act.
---------------------------------------------------------------------------

    The rule also strengthens the FDIC supervisory framework in the 
area of contingency planning. This rule allows the FDIC to impose a 
contingency plan requirement, as needed, which will lead the FDIC, as 
well as the Covered Company and its subsidiary industrial bank, to a 
better understanding of the interdependencies, operational risks, and 
other circumstances or events that could create safety and soundness 
concerns for the insured industrial bank and attendant risk to the DIF. 
When imposed, this additional commitment will provide for recovery 
actions that address any financial or operational stress that may 
threaten the industrial bank.
    Finally, the FDIC's oversight and enforcement power extends to the 
parent or affiliates of any industrial bank whose activities affect 
that bank, further protecting the industrial bank from risky activities 
of affiliates.\76\
---------------------------------------------------------------------------

    \76\ See 12 U.S.C. 1820(b) and 1820(b)(4)(A).
---------------------------------------------------------------------------

    The FDIC has not found that industrial banks pose unique safety and 
soundness concerns based on the activities of the parent organization. 
Industrial banks are subject to all of the same restrictions and 
requirements, regulatory oversight, and safety and soundness exams as 
any other kind of insured depository institution. As such, the risks 
posed are substantially similar to those of all other charter types. A 
number of commenters noted that two industrial banks failed during the 
recent financial crisis. While these failed institutions were owned by 
parent companies not subject to Federal consolidated supervision, the 
failures were not the result of factors related to the industrial bank 
charter, as further discussed below.
    Certain commenters also observed that several large corporate 
owners of industrial banks experienced stress during the 2008-09 
financial crisis. In some cases, the parent organizations ultimately 
filed bankruptcy, while others pursued strategies to resolve the 
stress, including through access to government programs intended to 
alleviate the effects of the crisis within the financial services 
sector. These programs included the FDIC's Temporary Liquidity 
Guarantee Program (TLGP) and the Troubled Asset Relief Program (TARP) 
administered by the Department of the Treasury. Desired access to these 
programs contributed to several companies pursuing conversions of an 
industrial bank to a commercial bank, which required approval of the

[[Page 10711]]

parent company to become a BHC subject to regulation and supervision by 
the FRB.
    However, it is important to note that each institution or company 
described in the comments was engaged in activities permissible for all 
Federal and State banks, BHCs, or financial holding companies, as 
evidenced by the ability to gain approval for the conversions to 
commercial banks and BHCs. Further, the types and degree of stress were 
also experienced by many other insured depository institutions and 
banking companies, some of which also sought participation in TLGP and/
or TARP, failed, or pursued transactions to restructure the 
organization, merge, or raise capital to alleviate stress or avert 
failure. As such, the circumstances involving the companies highlighted 
in the comments were not dissimilar to those facing other banking 
companies, including companies subject to Federal consolidated 
supervision.
3. Consumer Protection Risks
    Commenters opposed to the proposed rule also argued that the growth 
in industrial banks poses broader consumer protection risks. They 
asserted that the parent companies of industrial banks are not subject 
to Federal financial privacy and information security requirements and 
the absence of these requirements creates risk for customers of the 
industrial banks, whether or not they also obtain products and services 
from the parent companies or nonfinancial affiliates. BHCs and SLHCs 
are limited in their use of consumer financial data for commercial 
purposes. These commenters asserted that industrial bank parent 
companies should be subject to the same restrictions.
    While there is no general Federal regime covering how nonpublic 
personal information held in the U.S. may be disclosed or how it must 
be secured, financial institutions, including industrial banks, are 
subject to Title V of the GLBA.\77\ The GLBA and its implementing 
regulations, cited by some commenters, impose a range of privacy 
obligations on financial institutions, including industrial banks, that 
exceed those imposed on most other business types. Specifically, the 
GLBA and implementing rules (1) impose limitations on information 
sharing between financial institutions and nonaffiliated third parties 
and require disclosure of information sharing policies and practices to 
consumers and customers, and (2) require financial institutions to 
develop, implement, and maintain comprehensive information security 
programs.\78\ However, businesses that are not subject to the GLBA are 
not free from all privacy and data protection requirements. There are 
other Federal laws that address privacy and data protection that may 
apply to a Covered Company and its affiliates as well as financial 
institutions. As one example, the Fair Credit Reporting Act (FCRA) 
establishes standards for collection and permissible purposes for 
dissemination of data by consumer reporting agencies and obligations on 
furnishers of information. As another example, section 5 of the Federal 
Trade Commission Act (FTC Act) provides broad authority to the FTC to 
pursue unfair and deceptive trade acts and practices against most 
businesses arising from privacy and data protection practices.\79\ 
Further, the Dodd-Frank Act granted the Consumer Financial Protection 
Bureau (CFPB) broad authority to enforce unfair, deceptive, and abusive 
acts and practices related to consumer financial products and services 
that may cover the activities of a Covered Company and its 
affiliates.\80\ Adding to the complexity at the Federal level, States 
have enacted laws governing the collection, use, protection, and 
disclosure of personal information. Many States have consumer 
protection and privacy laws as well as laws similar to the FTC Act that 
prohibit unfair or deceptive business practices.\81\
---------------------------------------------------------------------------

    \77\ Subtitle A of Title V of the GLBA, captioned ``Disclosure 
of Nonpublic Personal Information,'' limits the instances in which a 
financial institution may disclose nonpublic personal information 
about a consumer to nonaffiliated third parties, and requires a 
financial institution to disclose certain information sharing 
practices. ``Nonpublic personal information'' is defined to mean any 
personally identifiable financial information that is provided by 
the consumer to the financial institution; results from any 
transaction with the consumer or service performed for the consumer; 
or is otherwise obtained by the financial institution, but which is 
not ``publicly available information.'' See 15 U.S.C. 6801-09.
    \78\ See, e.g., 12 CFR part 332, Privacy of Consumer Financial 
Information.
    \79\ The FTC is empowered to seek injunctive relief and 
voluntary consent decrees that can result in FTC oversight of a 
company for a period of up to 20 years and may carry financial 
penalties for future violations. The Federal banking agencies 
enforce section 5 as to financial institutions under their 
supervision.
    \80\ The CFPB has been active in the privacy area and recently 
issued an advanced notice of proposed rulemaking (ANPR) seeking 
input on the financial records access right granted by section 1033 
of the Dodd-Frank Act pertaining to consumer information in the 
control or possession of consumer financial services providers. 85 
FR 71003 (Nov. 6, 2020).
    \81\ For example, the California Consumer Privacy Act of 2018 
serves as an omnibus law governing privacy rights. It was recently 
amended and expanded by the California Privacy Rights Act. 2020 Cal. 
Legis. Serv. Prop. 24 (2020). The Massachusetts Data Security 
Regulation includes State-level general data protection security 
requirements. 201 Mass. Code Regs. 17.00 et seq. The Act to Protect 
the Privacy of Online Consumer Information enacted by the Maine 
legislature is another example of a State law governing the privacy 
of consumer information. 35-A M.R.S. section 9301. These examples 
underscore the fact that although a uniform Federal law has not been 
enacted, privacy is increasingly in the forefront of the public and 
legislators alike.
---------------------------------------------------------------------------

    In the absence of a single, comprehensive Federal law regulating 
privacy and the collection use, processing, disclosure, security, and 
disposal of personal information, the FDIC will continue to supervise 
and examine industrial banks and enforce compliance with the GLBA and 
all other Federal consumer protection laws and regulations. In 
addition, and in response to the concerns expressed by commenters that 
a Covered Company and affiliates that are not engaged in financial 
services would not be covered by the GLBA, the FDIC is including in the 
final rule a requirement for a Covered Company to inform the FDIC about 
its systems for protecting the security, confidentiality, and integrity 
of consumer and nonpublic personal information, as part of the Covered 
Company's commitment to submit an annual report to the FDIC. This 
reporting will provide the FDIC with a better understanding across all 
of a Covered Company's financial and nonfinancial affiliates and 
activities and provide the means to monitor for potential consumer 
protection risks.
    The FDIC will evaluate privacy and data protection issues presented 
by a deposit insurance application, a change in control notice, or a 
merger application involving an industrial bank on a case-by-case 
basis. When appropriate, the FDIC may consider imposing heightened 
requirements specific to industrial banks and Covered Companies 
regarding the use of consumer financial data for commercial purposes. 
Decisions will be based on the size and complexity of the industrial 
bank, the nature and scope of its activities, the sensitivity of any 
customer information at issue, and the unique facts and circumstances 
of the filing before the FDIC.
    Certain commenters expressed concerns about industrial bank and 
nonbank partnerships that the commenters believe have led to increased 
predatory lending.\82\ A major

[[Page 10712]]

component of the FDIC's mission is to ensure that financial 
institutions treat consumers and depositors fairly, and operate in 
compliance with Federal consumer protection, anti-discrimination, and 
community reinvestment laws. The FDIC addresses the problem of 
predatory lending by taking supervisory action, by encouraging and 
assisting banks to serve all sectors of their community, and by 
providing consumers with information to help make informed financial 
decisions.
---------------------------------------------------------------------------

    \82\ The concern appears to arise from perceived abuses of 
longstanding statutory authority rather than the proposed rule. 
Congress enacted section 27 of the FDI Act, 12 U.S.C. 1831d, in 
1980, permitting State banks to charge interest at the rate 
permitted by the law of the State where the bank is located, even if 
that rate exceeds the rate permitted by the law of the borrower's 
State. Federal court precedents reviewing this authority have upheld 
this practice for decades. Section 27 also permits States to opt out 
of its coverage by adopting a law, or certifying that the voters of 
the State have voted in favor of a provision which states explicitly 
that the State does not want section 27 to apply with respect to 
loans made in such State.
---------------------------------------------------------------------------

4. Justification for the Proposed Rule
    Several commenters raised concerns that the FDIC offered 
insufficient justification for the proposed rule. In particular, 
commenters argued that the proposed rule did not set out a sufficient 
factual, legal, or policy basis for proposed rule, and that there was 
insufficient discussion of the risks, public policy concerns, and 
statutory public interest factors concerning industrial banks.
    The Administrative Procedure Act (APA) \83\ requires a notice of 
proposed rulemaking to provide sufficient factual detail and rationale 
for the rule to permit interested parties to comment meaningfully.\84\
---------------------------------------------------------------------------

    \83\ 5 U.S.C. 551 et seq.
    \84\ 5 U.S.C. 553(b); see, e.g., National Lifeline Association 
v. F.C.C., 921 F.3d 1105, 1115 (D.C. Cir. 2019).
---------------------------------------------------------------------------

    The proposed rule set out a clear description of the basis for the 
proposed rule. The NPR discussed the history of industrial banks in the 
U.S., both generally and in the context of controversies over the past 
two decades. The NPR acknowledged the arguments raised by critics, 
reviewing the potential risks inherent in approving and supervising 
industrial banks. These include concerns over the mixing of banking and 
commerce as well as the risk to the DIF posed by the lack of Federal 
consolidated supervision of parent companies. The NPR also set out the 
justification for the proposed rule, including the need to codify and 
clarify supervisory expectations for industrial banks and the 
importance of imposing commitments on parent companies to ensure the 
parent company can serve as a source of strength for its subsidiary 
industrial bank. The NPR provided sufficient discussion of the factual, 
legal, and policy considerations for the proposed rule, such that 
interested parties were able to--and did--submit a variety of comments 
on a number of issues raised in and by the proposed rule.
    A few commenters argued that the NPR did not adequately discuss the 
FDIC's decision to allow industrial bank applications in the wake of 
both the temporary moratorium the FDIC put into place from 2006 to 2008 
and the subsequent 2010 to 2013 moratorium Congress enacted through the 
Dodd-Frank Act. To reverse the industrial bank moratorium without 
additional details, these commenters suggest, is arbitrary and 
capricious and violates the APA.
    As the Supreme Court has noted, ``Agencies are free to change their 
existing policies as long as they provide a reasoned explanation for 
the change.'' \85\ The explanation need not prove that ``the reasons 
for the new policy are better than the reasons for the old one; it 
suffices that the new policy is permissible under the statute, that 
there are good reasons for it, and that the agency believes it to be 
better, which the conscious change of course adequately indicates.'' 
\86\ Specifically, ``the agency must examine the relevant data and 
articulate a satisfactory explanation for its action including a 
rational connection between the facts found and the choice made.'' \87\
---------------------------------------------------------------------------

    \85\ Encino Motorcars, LLC v. Navarro, 136 S.Ct. 2117, 2126 
(2016).
    \86\ F.C.C. v. Fox Television Stations, Inc., 556 U.S. 502, 515 
(2009).
    \87\ Motor Vehicle Mfrs. Ass'n v. State Farm Mut. Auto. Ins. 
Co., 463 U.S. 29, 43 (1983).
---------------------------------------------------------------------------

    The NPR provided a reasoned discussion of the decision to move 
forward with the proposed rule, as discussed above. Furthermore, the 
NPR also explained why it was proceeding now when it chose not to do so 
with the 2007 rulemaking. The NPR noted that the FDIC's decision not to 
go forward with the 2007 proposal was rooted in a number of factors. 
More specifically, while the FDIC considered the comments received on 
the 2007 rulemaking, industry conditions and other factors had the 
effect of reducing organizer interest in establishing new industrial 
banks. Most notably, interest in organizing new institutions of all 
charter types, including industrial banks, diminished given the 
deteriorating economic and market conditions identified as early as 
mid-2007. In part, this diminished interest reflected the market 
uncertainty, restricted liquidity, reduced availability of capital, and 
difficult interest rate environment experienced by all institutions 
across the banking industry. In addition, interest in industrial bank 
charters was affected by changes in certain State laws that limited the 
ability to form or acquire industrial banks, and was reflected in the 
number of industrial banks seeking conversions to commercial bank 
charters. The factors, collectively, argued against moving forward with 
a final rule, as did the opportunity to closely monitor the performance 
of industrial banks during a period of significant stress.\88\
---------------------------------------------------------------------------

    \88\ As noted above in section II.H of this Supplementary 
Information section, after 2013, the moratorium imposed by Congress 
in the Dodd-Frank Act expired by its terms and was not renewed.
---------------------------------------------------------------------------

    Overall, the performance and condition of industrial banks during 
the most recent banking crises was generally consistent with other 
FDIC-insured institutions based on assigned supervisory ratings, which 
consider each institution's unique business model, complexity, and risk 
profile. From the beginning of 2009 through 2011, on average, 
industrial banks were assigned composite and component ratings similar 
to other charter types with regard to safety and soundness, consumer 
protection, and the CRA. Further, the portfolio of industrial banks 
reflected similar proportions of institutions that were composite rated 
3, 4, or 5 \89\ during the crisis, as well as a similar rate of failure 
as the portfolio of traditional community banks.
---------------------------------------------------------------------------

    \89\ Each financial institution is assigned composite and 
component ratings for safety and soundness under the Uniform 
Financial Institutions Rating System (UFIRS). Under the UFIRS, 
composite ratings are based on an evaluation and rating of six 
essential components of an institution's financial condition and 
operations: Adequacy of capital, the quality of assets, the 
capability of management, the quality and level of earnings, the 
adequacy of liquidity, and the sensitivity to market risk. 
Evaluations of the components take into consideration the 
institution's size and sophistication, the nature and complexity of 
its activities, and its risk profile.
---------------------------------------------------------------------------

    Looking more specifically at financial performance, and 
notwithstanding their general focus on nontraditional business models, 
industrial banks have experienced, by most key measures of performance 
and condition, comparable results to other insured institutions. 
Industrial banks tend to maintain higher levels of capital and generate 
higher earnings. At year-ends 2009 through 2011, industrial banks 
maintained a median tier 1 leverage capital (T1LC) ratio between 13.1 
percent and 15.4 percent, whereas, other insured institutions 
maintained a median T1LC ratio between 9.3 percent and 9.7 percent. As 
of June 30, 2020, the median T1LC ratio for industrial banks was 14.6

[[Page 10713]]

percent as compared to 10.3 percent for other insured institutions.\90\
---------------------------------------------------------------------------

    \90\ FDIC Call Report Data, June 30, 2020.
---------------------------------------------------------------------------

    Similarly, industrial banks reported a median return on average 
assets (ROAA) ratio of between 0.6 percent and 2.5 percent at year-ends 
2009 through 2011, versus a median ROAA ratio of between 0.4 percent 
and 0.7 percent for other insured institutions. The median ROAA ratio 
for industrial banks and other insured institutions as of June 30, 
2020, were 1.1 percent and 0.9 percent, respectively.\91\
---------------------------------------------------------------------------

    \91\ Id.
---------------------------------------------------------------------------

    The capital and earnings ratios for industrial banks is reflective 
of the higher degree of risk inherent in their business models. The 
specialty nature of most industrial bank business models, particularly 
when compared to traditional community banks (which constitute a large 
proportion of all other insured institutions), have contributed to the 
maintenance of higher levels of capital and earnings, generally. 
Additionally, since the mid-2000s, approved filings for industrial 
banks have largely included CALMAs that required higher capital 
requirements than other insured institutions.
    Further, industrial banks have been assigned examination ratings 
for the capital and earnings components that, on average, were very 
similar to those of other insured institutions. This generally 
indicates that industrial banks have implemented and maintained 
appropriate risk management practices that, given financial condition 
and performance, have adequately compensated for the risks inherent in 
the business models.
    When compared to other insured institutions, industrial banks 
typically maintain a lower volume of liquid assets and rely more heavy 
on non-core liabilities to fund longer-term earning assets. As a 
result, while still satisfactory, the liquidity posture for industrial 
banks was considered slightly lower both during and subsequent to the 
2008-09 financial crisis. In the FDIC's experience, asset quality has 
been comparable between industrial banks and other insured 
institutions, indicating both a manageable volume of past due loans or 
other problem assets, as well as satisfactory risk management 
practices. In addition, management practices for industrial banks also 
have been in line with that of other insured institutions, both during 
and after the financial crisis.
    Despite the above, it is important to note that some industrial 
banks experienced stress during the 2008-09 financial crisis. The 
circumstances experienced by industrial banks during the crisis were 
not dissimilar from the circumstances confronting other insured 
institutions and were not the result of factors related to the 
industrial bank charter. In general, the FDIC's supervision helped to 
isolate the insured industrial bank from the stress of the parent 
organization, which helped in managing the potential risk to the 
industrial bank and the DIF.
    Nevertheless, as discussed above, several commenters noted the 
participation of industrial banks or their parent organizations in 
various government programs established during the crisis. There were 
six industrial banks (or their parent companies) among the more than 
110 companies that accessed the debt guarantee program component of the 
TLGP, including several owned by parent companies organized as thrift 
holding companies. However, it is important to note that establishment 
of the TLGP was prompted by the unexpected and precipitous market 
conditions brought on by the related housing, financial, and banking 
crises that occurred over the period of 2007 through 2011.\92\ These 
conditions impacted even the largest banking companies in the U.S. and 
abroad.\93\
---------------------------------------------------------------------------

    \92\ As has been noted in Crisis and Response, the housing 
bubble that developed during the early 2000s burst in 2007, bringing 
the financial system ``relatively quickly to the brink of collapse'' 
and resulted in the worst economic dislocation in decades. Large 
losses in economic output and large declines in economic indicators 
were evident, including with respect to steep declines in employment 
and household wealth, among other indicators. The related banking 
crisis was also severe, with almost 500 institutions failing during 
the period of 2008 through 2013. In addition, between March 2008 and 
December 2009, the number of problem banks rose from 90 to over 700, 
and ultimately peaked at almost 900 in early 2011. This level 
constituted nearly 12 percent of all FDIC-insured institutions. See 
note 49.
    \93\ Some of the industrial banks that were owned by thrift 
holding companies had sister financial institutions that were also 
FDIC-insured. Ownership of an industrial bank was not the driving 
force that caused or allowed these entities to issue guaranteed debt 
through the TLGP. Rather, the companies could have accessed the 
program simply by virtue of being a thrift holding company or owning 
an FDIC-insured institution.
---------------------------------------------------------------------------

    Some comments noted the crisis-era conversions of industrial banks 
and their parent organizations to commercial banks and BHCs. Of the 
conversions noted by commenters, the majority involved industrial banks 
that were fundamentally sound, based on the most recent examinations 
prior to the conversions. The same held with respect to the respective 
parent companies, one of which converted from a thrift holding company 
to a bank holding company during the crisis. In each case, the FRB 
determined that approval of the BHC applications was warranted, based 
on evaluation of the relevant statutory factors and regulatory 
requirements. Given these circumstances, the conversions and 
participation in crisis-related programs reflected responses to the 
broader conditions in all segments of the economy, including the 
financial sector.
    Finally, industrial banks did not experience a disproportionate 
rate of failures when compared to other types of institutions, and 
there have not been any industrial bank failures since 2010.\94\
---------------------------------------------------------------------------

    \94\ As noted above, Security Savings Bank, Henderson, Nevada, 
failed in February 2009, and Advanta Bank Corporation, Draper, Utah, 
failed in March 2010.
---------------------------------------------------------------------------

    This experience with supervision in the industrial banking space 
informs the present rulemaking. The heightened source of strength 
requirements, along with other regulatory requirements included in the 
final rule, are examples of how the FDIC is applying lessons learned in 
this rulemaking process.
    Some commenters also questioned why the proposed rule applies to 
industrial banks that would be owned by financial and commercial 
companies, when the FDIC's 2007 rulemaking was limited to financial 
companies and the FDIC's extended moratorium applied only to commercial 
companies. As the FDIC discussed in the proposed rule, commenters on 
the 2007 rulemaking observed that the FDIC lacked authority to draw a 
distinction between financial and nonfinancial industrial bank owners 
absent a change in law. The FDIC agrees that the CEBA exception does 
not distinguish between commercial and financial parent companies of 
industrial banks in excluding them from the definition of ``bank.'' As 
discussed above, the FDIC's supervisory experience has shown that a 
distinction based on the activities of the parent company is not 
warranted in this final rule.
    Most crucial, though, is the fact that the most recent of the 
moratoriums commenters reference expired in 2013. In the ensuing years, 
Congress has declined to act with regard to industrial banks. The FDIC, 
as all agencies, is charged with enacting the laws as they exist today. 
Therefore, given that the rule is permissible under the statute, that 
it is sufficiently supported by the reasoning presented in the NPR and 
this Supplementary Information section, and that there is a clear 
connection between the facts at hand and the choice to proceed, the 
rule is a permissible change in policy.
    The FDIC believes that the final rule, which is largely consistent 
with the

[[Page 10714]]

proposed rule, is an appropriate response to safety and soundness 
issues surrounding financial and commercial ownership of industrial 
banks under existing law. Specific suggestions from commenters on the 
regulation itself are described below in the appropriate sections of 
this preamble on the specific sections of the rule.

B. Description of the Final Rule

1. Section 354.1--Scope
    This section of the proposed rule described the industrial banks 
and parent companies that would be subject to the rule. The proposed 
rule applied to industrial banks that, after the effective date, become 
subsidiaries of companies that are Covered Companies, as such term is 
defined in Sec.  354.2. Industrial bank subsidiaries of companies that 
are subject to Federal consolidated supervision by the FRB would not 
have been covered by the proposed rule. An industrial bank that, on or 
before the effective date, is a subsidiary of a company that is not 
subject to Federal consolidated supervision by the FRB (a grandfathered 
industrial bank) generally would not have been covered by the proposed 
rule.\95\ A grandfathered industrial bank could become subject to the 
proposed rule following a grant of deposit insurance, change in 
control, or merger occurring on or after the effective date in which 
the resulting institution is an industrial bank that is a subsidiary of 
a Covered Company. Thus, a grandfathered industrial bank would have 
been subject to the proposed rule, as would its parent company that is 
not subject to Federal consolidated supervision, if such a parent 
company acquired control of the grandfathered industrial bank pursuant 
to a grant of deposit insurance after the effective date, a change in 
bank control transaction that closes after the effective date, or if 
the grandfathered industrial bank is the surviving institution in a 
merger transaction that closes after the effective date. Industrial 
banks that are not subsidiaries of a company, for example, those wholly 
owned by one or more individuals, would not have been subject to the 
proposed rule.
---------------------------------------------------------------------------

    \95\ Although generally not subject to the rule, grandfathered 
industrial banks and their parent companies that are not subject to 
Federal consolidated supervision by the FRB will remain subject to 
FDIC supervision, including but not limited to examinations and 
capital requirements. See also the discussion of the reservation of 
authority in section IV.B.6. of this Supplementary Information.
---------------------------------------------------------------------------

    The FDIC specifically sought comment on whether to apply the rule 
prospectively or to all industrial banks that, as of the effective 
date, are a subsidiary of a parent company that is not subject to 
Federal consolidated supervision by the FRB. A number of commenters 
expressed the view that the rule, if adopted, should apply only 
prospectively; that is, to industrial banks that become a subsidiary of 
a parent company that is a Covered Company as of the effective date of 
the rule, noting that existing industrial banks and their parents are 
subject to most of the standards of the proposed rule. Three commenters 
requested that the rule apply to a parent company and its subsidiary 
industrial bank if the parent company became a Covered Company after 
either the date of FDIC's notice announcing the FDIC board meeting at 
which the proposed rule was considered or the date of the FDIC board 
meeting, rather than the effective date.
    Some commenters supported the retroactive application of the 
proposed rule to all industrial banks that, as of the effective date, 
are a subsidiary of a parent that is not subject to Federal 
consolidated supervision. These commenters asserted that otherwise 
existing industrial banks would enjoy a regulatory advantage over new 
industrial banks. They also argued that retroactive application would 
enhance the FDIC's ability to perform its supervisory responsibilities. 
However, other commenters expressed concerns that applying the rule 
retroactively would violate the APA as parent companies of existing 
industrial banks had no opportunity to consider these requirements in 
their decision to establish or acquire an industrial bank. These 
commenters also argued that existing industrial banks have a record of 
sound operations under the existing supervisory framework.
    In addition, one commenter recommended that the final rule apply to 
grandfathered industrial banks that undergo certain other changes, such 
as when the industrial bank parent company acquires a subsidiary 
engaged in nonfinancial activities, or the industrial bank parent 
company engages in new nonfinancial activities. The final rule operates 
prospectively on the basis of a filing that would result in an 
industrial bank becoming a subsidiary of a company not subject to 
consolidated Federal supervision. In contrast, the suggested triggers, 
as described, would be applied to existing industrial banks and their 
parent companies, would not be related to a filing, and would not 
necessarily result in any impact to the industrial bank. Should such an 
impact be identified, the FDIC would rely on its supervisory or 
enforcement authority as the appropriate means to ensure the safe and 
sound operation of the industrial bank. Further, the commenter's 
suggestion would be difficult to administer because the recommended 
triggers for applicability of the rule--engaging in ``nonfinancial'' 
activities--historically has proven difficult to define and measure. 
Accordingly, the final rule does not adopt the commenter's 
recommendation. However, the FDIC will continue to apply all 
appropriate supervisory and enforcement authorities to existing 
industrial banks and their parent organizations, as appropriate, to 
ensure the continued safety and soundness of the industrial bank.
    The FDIC also sought comment on whether the rule should apply to 
industrial banks that do not have a parent company or to industrial 
banks that are controlled by an individual rather than a company. 
Several commenters asserted that it was not necessary to apply the 
requirements of the proposed rule to industrial banks without parent 
companies (or that are controlled by an individual rather than a 
company), in part because industrial banks themselves are subject to 
the same regulatory treatment as State nonmember banks. By contrast, 
several commenters asserted the requirements should be applied to such 
industrial banks and/or also to an individual that controls an 
industrial bank. The FDIC believes that industrial banks that are owned 
by individuals or do not have a parent company generally do not present 
the same potential risks as industrial banks owned by companies. 
Industrial banks that are controlled by a parent company, whether 
engaged in commercial or financial activities, that are not subject to 
Federal consolidated supervision present the risks that are addressed 
by the safeguards in this final rule. In addition, applying the rule to 
industrial banks that have a parent company and requiring that the 
parent company provide capital support is consistent with the statutory 
requirements of section 38A of the FDI Act.
    After considering these comments regarding the scope of the 
proposed rule, the final rule will apply only prospectively as of the 
effective date of the rule, to industrial banks that become 
subsidiaries of companies that are Covered Companies.\96\ The FDIC must

[[Page 10715]]

consider the requirements of the APA and the Riegle Community 
Development and Regulatory Improvement Act (RCDRIA) in determining the 
effective date of new regulations, and both of these statutory schemes 
generally provide for an effective date that follows the date on which 
the regulations are published in final form. Thus, the final rule will 
be effective on April 1, 2021.\97\
---------------------------------------------------------------------------

    \96\ The proposed rule divided the rule into two temporal 
states, on or before the effective date on the one hand, and after 
the effective date on the other hand. The final rule amends the 
dividing line so that the relevant timeframes would be before the 
effective date and on or after the effective date. This change was 
made because the effective date is commonly understood to be the 
date upon which a rule is effective, not the day before a rule would 
take effect.
    \97\ During the period before the effective date of the final 
rule, the FDIC will consider pending deposit insurance applications, 
change in control notices, and merger applications for industrial 
banks on a case-by-case basis and impose conditions and requirements 
as appropriate and that are consistent with current practice.
---------------------------------------------------------------------------

    The FDIC also sought comment on whether an individual that controls 
the parent company of an industrial bank should be responsible for the 
maintenance of the industrial bank's capital and liquidity at or above 
FDIC-specified levels and for causing the parent company to comply with 
the written agreements, commitments, and restrictions imposed on the 
industrial bank. The FDIC also asked whether an individual who is the 
dominant shareholder of a Covered Company should be required to commit 
to the maintenance of appropriate capital and liquidity levels. As 
discussed below, Sec.  354.3(b) of the proposed rule provided that the 
FDIC may condition a grant of deposit insurance, issuance of a non-
objection to a change in control, or approval of a merger on an 
individual who is a controlling shareholder of a Covered Company 
joining as a party to the written agreements required under the rule. 
In such cases where the FDIC would require the controlling shareholder 
to join as a party, the controlling shareholder would be required to 
cause the Covered Company to fulfill its obligations under the written 
agreements through the voting of shares, or otherwise. These 
obligations include, among other things, maintaining each subsidiary 
industrial bank's capital and liquidity at such levels as the FDIC 
deems necessary for the safe and sound operation of the industrial bank 
(commitment (7)).
    Several commenters criticized the controlling shareholder 
requirement. Some commenters argued that an individual who controls or 
owns a parent company should not be held personally liable for 
maintaining the industrial bank's capital or liquidity. These 
commenters expressed concern that such a requirement would make it more 
difficult to attract shareholders and capital. As noted above, in cases 
where the FDIC would require a person that controls a Covered Company 
to join as a party, such person would be required to vote their shares 
or take such other appropriate actions to cause the Covered Company to 
fulfill its obligations under the written agreements. The obligation to 
maintain the subsidiary industrial bank's capital and liquidity rests 
with the Covered Company.
    Other commenters noted that the parent company already commits in 
the CALMA to provide support and were concerned that requiring the 
parent company's shareholders to also provide a guarantee of support 
will drive away investors. These commenters, however, were not opposed 
to a requirement for the controlling shareholder to commit to vote his 
or her shares to comply with the CALMA. One commenter noted that the 
Office of the Comptroller of the Currency (OCC) may impose certain 
commitments on the controlling shareholder related to the ownership of 
shares and how the controlling shareholder exercises shareholder 
rights.
    Several commenters supported the approach of imposing certain 
conditions at the level of the Covered Company's controlling 
shareholder as necessary to ensure the safety and soundness of the 
subsidiary industrial bank. Some commenters asserted that the FDIC 
should require the dominant shareholders of a parent company to 
maintain appropriate levels of capital and liquidity. Another commenter 
argued that the choice of ownership structure should not relieve an 
individual from source of strength and other obligations.
    The FDIC believes that in order to ensure that a Covered Company 
serves as a continuing source of financial strength to the subsidiary 
industrial bank, the FDIC may exercise its supervisory discretion to 
require a controlling, or dominant, shareholder of a Covered Company to 
join as a party to the written agreements required under the rule. An 
individual with controlling ownership has a direct and effective means 
by which to influence the major decisions of the Covered Company by 
voting shares or by exercising an influence as a member of the Covered 
Company's board of directors. Accordingly, the FDIC is finalizing this 
requirement in Sec.  354.3(b) as proposed. As discussed in the proposed 
rule, in such cases where FDIC would require the controlling 
shareholder to join as a party, the controlling shareholder would be 
required to cause the Covered Company to fulfill its obligations under 
the written agreements through voting shares, or otherwise, including 
to maintain the capital and liquidity levels of the subsidiary 
industrial bank at or above FDIC-specified levels. The FDIC intends to 
make such a determination on a case-by-case basis and will consider the 
business plan, capital structure, risk profile, and business activities 
of the Covered Company.
2. Section 354.2--Definitions
    This section of the proposed rule listed the definitions that 
applied to part 354. Terms that were not defined in the proposed rule 
that are defined in section 3 of the FDI Act had the meanings given in 
section 3 of the FDI Act.\98\
---------------------------------------------------------------------------

    \98\ 12 U.S.C. 1813.
---------------------------------------------------------------------------

    The term ``control'' was defined to mean the power, directly or 
indirectly, to direct the management or policies of a company or to 
vote 25 percent or more of any class of voting securities of a company 
and specifically would have included the rebuttable presumption of 
control at 12 CFR 303.82(b)(1) and the presumptions of acting in 
concert at 12 CFR 303.82(b)(2) \99\ in the same manner and to the same 
extent as if they applied to an acquisition of securities of a company 
instead of a ``covered institution.'' These definitions are nearly the 
same as the definitions of ``control'' in the CBCA \100\ and the FDIC's 
regulations implementing the CBCA \101\ except that they would have 
broadened the term to apply to control of a company and not solely 
insured depository institutions so that the definition can accurately 
describe the relationship between the parent company of an industrial 
bank and any of its nonbank subsidiaries, which also would be 
affiliates of the industrial bank.
---------------------------------------------------------------------------

    \99\ The proposed rule erroneously referred to the presumptions 
set forth at 12 CFR 303.83(b)(1) and (2). The final rule corrects 
that technical error to correctly refer to Sec.  303.82(b)(1) and 
(2).
    \100\ 12 U.S.C. 1817(j)(8)(B).
    \101\ 12 CFR 303.80 through 303.88.
---------------------------------------------------------------------------

    Two commenters suggested that the rule should incorporate the 
definition of control used in the BHCA and its implementing 
regulations. One trade group commenter argued that such an approach 
would lead to consistency in the treatment of parent companies of 
insured depository institutions. An industrial bank commenter suggested 
that aligning the proposed rule's definition of control with the BHCA 
and the FRB's regulatory framework \102\ would create a more uniform 
system that would make it easier for investors

[[Page 10716]]

to balance their investment decisions with the regulatory implications 
of certain levels of investment.
---------------------------------------------------------------------------

    \102\ 85 FR 12398 (Mar. 2, 2020); see also Regulation Y--
Frequently Asked Questions, available at https://www.federalreserve.gov/supervisionreg/reg-y-faqs.htm.
---------------------------------------------------------------------------

    The FDIC has considered these comments and has decided to retain 
the definition used in the proposed rule. First, the definition of 
control proposed in the NPR is consistent with the definition of 
control that the FDIC uses in other contexts, namely changes in bank 
control. The FDIC in 2015 amended its filing requirements and 
processing procedures for notices filed under the CBCA with respect to 
proposed acquisitions of State nonmember banks and certain parent 
companies thereof.\103\ Among other things, the FDIC's CBCA 
implementing regulations adopted the best practices of the related 
regulations of the OCC and FRB, rendering more consistent the CBCA 
implementing regulations of the Federal banking agencies.
---------------------------------------------------------------------------

    \103\ 80 FR 65889 (Oct. 28, 2015). The FDIC received no comments 
on its approach.
---------------------------------------------------------------------------

    Second, the FDIC is not the Federal banking agency responsible for 
implementing and interpreting the BHCA and has not developed precedent 
for the implementation of the BHCA. In adopting the CBCA implementing 
regulations, the FDIC noted that it found the logic of the FRB's 
interpretations regarding control under the BHCA useful in analyzing 
fact patterns under the CBCA, but did not adopt the FRB's 
interpretations, preferring instead to review each case based on the 
facts and circumstances presented.\104\
---------------------------------------------------------------------------

    \104\ 80 FR 65889, 65893.
---------------------------------------------------------------------------

    The term ``Covered Company'' meant any company that is not subject 
to Federal consolidated supervision by the FRB and that, directly or 
indirectly, controls an industrial bank (i) as a result of a change in 
bank control under section 7(j) of the FDI Act,\105\ (ii) as a result 
of a merger transaction pursuant to section 18(c) of the FDI Act,\106\ 
or (iii) that is granted deposit insurance under section 6 of the FDI 
Act,\107\ in each case after the effective date of the rule.
---------------------------------------------------------------------------

    \105\ 12 U.S.C. 1817(j).
    \106\ 12 U.S.C. 1828(c).
    \107\ 12 U.S.C. 1816.
---------------------------------------------------------------------------

    Under these provisions, a company would control an industrial bank 
if the company would have the power, directly or indirectly, (i) to 
vote 25 percent or more of any class of voting shares of any industrial 
bank or any company that controls the industrial bank (i.e., a parent 
company), or (ii) to direct the management or policies of any 
industrial bank or any parent company. In addition, the FDIC presumes 
that a company would have the power to direct the management or 
policies of any industrial bank or any parent company if the company 
will, directly or indirectly, own, control, or hold with power to vote 
at least 10 percent of any class of voting securities of any industrial 
bank or any parent company, and either the industrial bank's shares or 
the parent company's shares are registered under section 12 of the 
Securities Exchange Act of 1934, or no other person (including a 
company) will own, control, or hold with power to vote a greater 
percentage of any class of voting securities. If two or more companies, 
not acting in concert, will each have the same percentage, each such 
company will have control. As noted above, control of an industrial 
bank can be indirect. For example, company A may control company B, 
which in turn may control company C which may control an industrial 
bank. Company A and company B would each have indirect control of the 
industrial bank, and company C would have direct control. As a result, 
the industrial bank would be a subsidiary of companies A, B, and C.
    One commenter observed that the Supplementary Information for the 
proposed rule characterized BHCs and SLHCs as generally prohibited from 
engaging in commercial activities.\108\ This commenter noted that 
grandfathered unitary SLHCs are permitted to engage in certain 
``grandfathered'' activities, which may include commercial activities 
and requested that the FDIC clarify its position with respect to 
grandfathered unitary SLHCs. The FDIC recognizes that certain 
grandfathered unitary SLHCs may be able to engage in commercial 
activities. Further, as the FDIC intends to apply the final rule 
prospectively, a grandfathered unitary SLHC that is subject to Federal 
consolidated supervision would not be subject to the final rule.
---------------------------------------------------------------------------

    \108\ See 85 FR at 17772-73.
---------------------------------------------------------------------------

    In response to question 5 in the NPR, commenters were split on 
whether to require a Covered Company to form an intermediate holding 
company from which to conduct its financial activities.
    One commenter suggested that there would be limited benefit to 
requiring a Covered Company that conducts activities other than 
financial activities to conduct some or all of its financial activities 
(including ownership and control of an industrial bank) through an 
intermediate holding company, observing that any potential benefit 
could be significantly outweighed by the complexity and cost of 
implementing an intermediate holding company structure, and may only 
serve to organizationally distance the bank from the primary source of 
strength, most commonly the top tier parent company. Another commenter 
strongly opposed the possible requirement, arguing that in many cases 
it would not make sense to create a corporate structure in service of 
an industrial bank that is a small part of the overall activities or 
assets of a Covered Company.
    Another commenter argued that complex diversified Covered Companies 
that conduct nonfinancial activities must be required to structure 
their financial activities under an intermediate holding company so 
that the intermediate holding company may be subjected to enhanced 
supervision.
    The final rule will not require a Covered Company that conducts 
activities other than financial activities to conduct some or all of 
its financial activities (including ownership and control of an 
industrial bank) through an intermediate holding company.\109\ The FDIC 
believes that such a structure is not required to adequately supervise 
industrial banks and their parent companies.
---------------------------------------------------------------------------

    \109\ The FDIC may consider requiring an intermediate holding 
company in the case of a Covered Company that is not located in the 
United States and presents unique circumstances.
---------------------------------------------------------------------------

    The final rule includes the definition of Covered Company as 
proposed with one revision: The proposed rule defined a Covered Company 
as a company that is not subject to Federal consolidated supervision by 
the FRB and that controls an industrial bank as a result of the non-
objection to a change in bank control, or approval of a merger 
transaction or deposit insurance after the effective date. The final 
rule applies where such a non-objection or approval occurs on or after 
the effective date. This revision is not a change in FDIC policy, but 
rather a recognition that the effective date is commonly understood to 
be the date upon which a rule is effective.\110\
---------------------------------------------------------------------------

    \110\ See also supra note 96.
---------------------------------------------------------------------------

    The FDIC received no comment on a number of definitions: The terms 
``FDI Act,'' ``filing,'' ``FRB,'' ``industrial bank,'' and ``senior 
executive officer.'' The final rule adopts these terms as proposed.
    In the NPR, the FDIC requested comment on whether the rule should 
include other types of nonbank banks, in addition to industrial banks. 
One commenter stated that all bank and financial service companies, 
including industrial banks and other institutions that have been 
excluded from the BHCA definition of bank (such as credit card

[[Page 10717]]

and limited purpose trust banks) should be subject to a level playing 
field, including subjecting the parent company to Federal consolidated 
supervision. Another commenter stated that it was not necessary to 
include credit card banks and trust companies in the scope of the rule 
because they are limited purpose institutions. Another commenter 
suggested that the rule may be appropriate for other kinds of banks 
whose owners are not subject to the BHCA, but cautioned that there may 
be unique issues related to those charters that should be considered 
before extending the rule to such institutions.
    The FDIC has decided not to extend the scope of the final rule at 
this time to other types of banking institutions that have parent 
companies not subject to Federal consolidated supervision. These other 
types of institutions (credit card banks and limited purpose trust 
companies) operate under a limited purpose charter, which narrows the 
range of services they may offer. As a result, the FDIC's experience 
indicates these charter types have generally not presented the broad 
issues as presented by industrial banks.
    Commenters also suggested additional terms for which definitions 
would be useful. The FDIC believes that the final rule is sufficiently 
clear that such additional definitions were not determined to be 
necessary, although section IV.B.5. of this Supplementary Information 
section provides examples of what will and will not be considered a 
``material change'' to a business plan requiring prior FDIC approval.
3. Section 354.3--Written Agreement
    This section of the proposed rule prohibited any industrial bank 
from becoming a subsidiary of a Covered Company unless the Covered 
Company enters into one or more written agreements with the FDIC and 
its subsidiary industrial bank. In such agreements, the Covered Company 
would make certain required commitments to the FDIC and the industrial 
bank, including those listed in paragraphs (a)(1) through (8) of Sec.  
354.4, the restrictions in Sec.  354.5, and such other provisions as 
the FDIC may deem appropriate in the particular circumstances. When two 
or more Covered Companies will control (as the term ``control'' is 
defined in Sec.  354.2), directly or indirectly, the industrial bank, 
each such Covered Company would be required to execute such written 
agreement(s). This circumstance could occur, for example, (i) when two 
or more Covered Companies will each have the power to vote 10 percent 
or more of the voting stock of an industrial bank or of a company that 
controls an industrial bank, the stock of which is registered under 
section 12 of the Securities Exchange Act of 1934, or (ii) when one 
Covered Company will control another Covered Company that directly 
controls an industrial bank. Section 354.3(a) of the final rule is 
unchanged from the proposal.
    As discussed above, proposed Sec.  354.3(b) allowed the FDIC, in 
its sole discretion, to require, as a condition to the approval of or 
non-objection to a filing, that a controlling shareholder of a Covered 
Company join as a party to any written agreement required in Sec.  
354.3. In such cases, the controlling shareholder would be required to 
cause the Covered Company to fulfill its obligations under the written 
agreement, through the voting of shares, or otherwise.
    In addition to the written agreements, commitments, and 
restrictions of the final rule, the FDIC will condition an approval of 
an application or a non-objection to a notice on one or more actions or 
inactions of the applicant or notificant, as deemed appropriate by the 
FDIC.\111\ The FDIC may enforce conditions imposed in writing in 
connection with any action on any application, notice, or other request 
by an industrial bank or a company that controls an industrial 
bank,\112\ so it is not necessary to include provisions regarding 
conditions in the proposed rule.
---------------------------------------------------------------------------

    \111\ See 12 CFR 303.11(a) (``The FDIC may approve, 
conditionally approve, deny, or not object to a filing after 
appropriate review and consideration of the record.''). See 12 CFR 
303.2(bb) for a list of standard conditions.
    \112\ 12 U.S.C. 1818(b); 1831aa(a).
---------------------------------------------------------------------------

4. Section 354.4--Required Commitments and Provisions of Written 
Agreement
    The FDIC historically has included conditions in deposit insurance 
approval orders for industrial banks that are intended to create a 
sufficient supervisory structure with respect to a Covered Company. The 
commitments that the FDIC has required industrial banks and their 
parent companies to undertake in written agreements have varied on a 
case-by-case basis, depending on the facts and circumstances and the 
particular concerns the FDIC has identified during the review of the 
application materials.
    Section 354.4 of the proposed rule required each party to a written 
agreement to comply with paragraphs (a)(1) through (8). These required 
commitments are intended to provide the safeguards and protections that 
the FDIC believes are prudent to impose to maintain the safety and 
soundness of industrial banks that are controlled by Covered Companies. 
These required commitments and other provisions are intended to 
establish a level of information reporting and parent company 
obligations similar to that which would be in place if the Covered 
Company were subject to Federal consolidated supervision. The 
requirements reflect commitments and additional provisions that, for 
the most part, the FDIC has previously required as a condition of 
granting deposit insurance to industrial banks. The FDIC proposed to 
include these required commitments in the rule to provide transparency 
to current and potential industrial banks, the companies that control 
them, and the general public.
    In order to provide the FDIC with more timely and more complete 
information about the activities, financial performance and condition, 
operations, prospects, and risk profile of each Covered Company and its 
subsidiaries, the proposed rule required that each Covered Company 
furnish to the FDIC an initial listing, with annual updates, of all of 
the Covered Company's subsidiaries (commitment (1)); consent to the 
FDIC's examination of the Covered Company and each of its subsidiaries 
to monitor compliance with any written agreements, commitments, 
conditions, and certain provisions of law (commitment (2)); submit to 
the FDIC an annual report on the Covered Company and its subsidiaries, 
and such other reports as the FDIC may request (commitment (3)); 
maintain such records as the FDIC deems necessary to assess the risks 
to the industrial bank and to the DIF (commitment (4)); and cause an 
independent audit of each subsidiary industrial bank to be performed 
annually (commitment (5)).
    In the NPR, the FDIC sought comment on whether the proposed 
commitments requiring examination and reporting serve the supervisory 
purpose of transparency and identifying any potential risks to the 
industrial bank and whether there was a better approach for supervising 
a Covered Company. As discussed above in section IV.A.2. of this 
Supplementary Information section, a number of commenters were 
generally critical of the proposed commitments as being inadequate and 
failing to achieve parity with the regime of consolidated supervision 
required for BHCs. The FDIC believes that the examination reviews 
envisioned under the final rule enhance the existing supervisory 
practices and allow for a more robust evaluation of the industrial 
bank's affiliate relationships. In addition, the FDIC believes the 
enhanced reporting

[[Page 10718]]

requirements in the final rule are consistent with section 38A(d) of 
the FDI Act, which provides explicit statutory authority for the FDIC 
to require reports from a controlling company of an industrial bank to 
assess the ability of the company to comply with the source of strength 
requirement, and to enforce compliance by such company.\113\ The final 
rule adopts these commitments as proposed, other than as described 
below. Implementation of the rule positions the FDIC to better protect 
the industrial bank from activities of a parent organization that 
present heightened risk to the organization and the bank and to ensure 
that the parent company is a continuing source of financial 
strength.\114\
---------------------------------------------------------------------------

    \113\ See 12 U.S.C. 1831o-1(d).
    \114\ See 12 U.S.C. 1820(b) and 1820(b)(4)(A).
---------------------------------------------------------------------------

    In response to the concerns expressed by commenters that a Covered 
Company that is not engaged in financial services would not be covered 
by the GLBA, the FDIC is revising the commitment in the final rule that 
a Covered Company submit an annual report to the FDIC (commitment (3)) 
to include a requirement for a Covered Company to inform the FDIC about 
its systems for protecting the security, confidentiality, and integrity 
of consumer and nonpublic personal information. This reporting will 
provide the FDIC appropriate information across all of a Covered 
Company's financial and nonfinancial activities to monitor for 
potential consumer protection risks.
    The FDIC also sought comment on whether the commitment and 
requirements of the rule are appropriately tailored in light of the 
GLBA's restrictions on the extent to which a Federal banking agency may 
regulate and supervise a functionally regulated affiliate of an insured 
depository institution.
    Most commenters supported the reporting \115\ and examination 
requirements that enable the FDIC to monitor and evaluate financial and 
other conditions in the parent organization that are relevant to the 
industrial bank. One commenter supported carving out functionally 
regulated entities from the scope of the required commitments in Sec.  
354.4 to be consistent with ``jurisdictional boundaries'' contemplated 
by the GLBA. While functionally regulated financial firms do not raise 
the types of concerns that commercial firms do with respect to 
industrial banks, different regulatory supervisors will have different 
supervisory approaches and will be focused, by design, on the aspects 
of a business that concern that regulator.\116\ The FDIC serves as the 
regulator for the industrial bank and exercises oversight of the parent 
company to the extent necessary to ensure the safety and soundness of 
the industrial bank subsidiary and to protect the DIF. Through 
examination and reporting, the FDIC will be able to gauge and monitor 
the operational risks an industrial bank affiliate, whether 
functionally regulated or unregulated, presents to the industrial bank. 
The FDIC may take action to prevent or redress an unsafe or unsound 
practice if action to address that risk when limited to the industrial 
bank would not effectively protect against the risk.
---------------------------------------------------------------------------

    \115\ If the Covered Company is required to submit reports to 
the Securities and Exchange Commission (SEC), the requirement to 
submit an annual report may be satisfied through submission of SEC 
Form 10-K (or equivalent), along with the company's annual audit 
report and management letter (with management responses), provided 
that the combination of reports addresses each requirement as stated 
in the rule. In some cases, it may be necessary or appropriate to 
also submit evaluations of the Covered Company's internal 
operations, along with management responses, satisfying the 
Statement on Standards for Attestation Engagements (SSAE) Number 18, 
Report on Controls at a Service Organization Relevant to User 
Entities' Internal Control over Financial Reporting, as issued or 
amended by the Auditing Standards Board, or similar reports or 
evaluations.
    \116\ For example, in a situation where a parent company issues 
securities, the SEC's role and expertise lies in supervising the 
parent company as an issuer of securities, not in the role of a 
parent company of an industrial bank.
---------------------------------------------------------------------------

    The FDIC sought comment on whether a Covered Company should be 
required to disclose to the FDIC certain additional affiliates or 
portfolio companies of the Covered Company because these affiliates 
could engage in transactions with, or otherwise impact, the subsidiary 
industrial bank. One trade association commenter opposed any further 
extension of the reporting requirement as being burdensome. A number of 
commenters acknowledged the FDIC's authority to understand affiliate 
relationships and their impact on the industrial bank, but suggested 
that the reporting be tailored by including a materiality threshold. 
Otherwise, these commenters believed the reporting would be burdensome 
while potentially providing information with no real relevance to the 
industrial bank.
    Other commenters argued that the final rule should require a 
Covered Company to disclose its affiliates and portfolio companies that 
could engage in transactions with, or otherwise impact, the subsidiary 
industrial bank in order to provide the FDIC a complete and transparent 
picture of the business model. These commenters observed that related 
entities may impact the financial condition and results of operations 
of the Covered Company, which may negatively impact its ability to 
serve as a source of strength for the industrial bank.
    The FDIC believes that the relationship of a bank with its 
affiliated organizations is important to the analysis of the condition 
of the bank itself. Because of commonality of ownership or management 
that may exist, transactions with affiliates may not be subject to the 
same sort of objective analysis that exists in transactions between 
independent parties. Also, affiliates offer an opportunity to engage in 
types of business activities that are prohibited to the bank itself yet 
those activities may affect the condition of the bank. In recognition 
of the importance of these relationships, the FDIC has been granted 
authority, under certain conditions to examine affiliates in connection 
with its examination of a bank to disclose the relationship between the 
bank and a given affiliate, as well as the effect of that relationship 
on the bank.\117\ The FDIC also has been granted authority to bring 
enforcement actions against insured State nonmember banks and their 
institution-affiliated parties.\118\ As discussed above in section 
IV.A.2., industrial banks are subject to these same examination and 
enforcement authorities as other banks, as well as sections 23A and 23B 
of the Federal Reserve Act and Regulation W, which govern transactions 
with affiliates. In addition, section 38A of the FDI Act provides 
authority for the FDIC to require reports from a company that controls 
an industrial bank to assess the ability of the company to comply with 
the source of strength requirement, and to enforce compliance by such 
company.\119\ Section 38A of the FDI Act therefore provides an 
additional supervisory tool to the FDIC in regulating Covered 
Companies, including their subsidiaries.
---------------------------------------------------------------------------

    \117\ 12 U.S.C. 1820(b)(4).
    \118\ 12 U.S.C. 1813(u) and 1818.
    \119\ See 12 U.S.C. 1831o-1(d).
---------------------------------------------------------------------------

    In supervising industrial banks, the FDIC considers each industrial 
bank's purpose and placement within the organizational structure and 
tailors reporting and other requirements accordingly. Requiring the 
disclosure of the Covered Companies' subsidiaries along with the other 
reporting tools available to the FDIC as discussed above are sufficient 
and will appropriately cover those affiliates of the industrial bank of 
most concern to the FDIC. Accordingly, the FDIC is adopting Sec.  
354.4(a)(1) as proposed.

[[Page 10719]]

    In order to limit the extent of each Covered Company's influence 
over a subsidiary industrial bank, the proposed rule required each 
Covered Company to commit to limit its representation on the industrial 
bank's board of directors to 25 percent of the members of the board, or 
if the bank is organized as a limited liability company and is managed 
by a board of managers, to 25 percent of the members of the board of 
managers, or if the bank is organized as a limited liability company 
and is managed by its members, to 25 percent of managing member 
interests (commitment (6)). For example, if company A, which has 15 
percent representation on the subsidiary industrial bank's board, 
controls company B, then the companies' representation would be 
aggregated and limited to no more than 25 percent. Thus, company B's 
representation would be limited to no more than 10 percent.
    The FDIC sought comment on whether this threshold is appropriate. 
Three commenters argued against any limitation of a Covered Company's 
representation on the board of a subsidiary industrial bank. These 
commenters noted the burden in identifying independent director 
candidates and obtaining the prior approval for candidates associated 
with a Covered Company. In addition, these commenters argued that the 
restriction would limit the coordination necessary and appropriate 
among entities within an organization. One commenter expressed the 
concern that there could be a negative effect on the remaining 
directors if an independent director leaves a board. That is, the 
potential need to eliminate a director associated with a Covered 
Company in order to comply with the rule on a continuing basis.
    One commenter asserted that there may be conflicts between the rule 
limitation and unspecified State law, while another noted the lack of 
comparable limitations on other legal structures, creating a distinct 
difference between Covered Companies and other operating entities. A 
number of commenters also suggested that relying on the simple majority 
of independent directors, as has been applied in other instances, has 
not led to issues or concerns regarding the subsidiary industrial bank.
    To address the concerns regarding the limitation, commenters 
suggested either raising the threshold from 25 percent to one-third, or 
requiring that a simple majority be independent. While acknowledging 
the need for some degree of director independence to limit the 
potential influence from Covered Companies, these commenters noted that 
the higher threshold may enhance coordination between the industrial 
bank and Covered Companies. By extension, the increased coordination 
would enable the Covered Companies to have a better understanding of 
the industrial bank's obligations. One comment also noted that the FDIC 
would retain its full enforcement authority should circumstances 
require action.
    The FDIC understands the challenges involved in the selection of 
directors of insured institutions. However, the prior approval 
requirement should not substantially interfere in a well-qualified 
candidate's ability to assume the responsibilities of the position in a 
timely manner, and thereby to achieve the noted benefits of appropriate 
coordination between the industrial bank and the Covered Company. As to 
the possibility that an independent director's departure from a board 
may result in temporary non-compliance with the established threshold, 
the FDIC's construction and use of written agreements provides 
sufficient mechanisms by which compliance can be timely achieved 
without the extreme consequence of removing other directors or 
requiring FDIC actions to enforce the commitment.
    As to the specific threshold, the FDIC is revising the commitment 
in the final rule to establish a less than 50 percent threshold, which 
will maintain a sufficient number of independent directors while 
addressing a number of the commenters' concerns. In making this change, 
the FDIC considered the potential numeric challenges that could 
confront industrial banks whose boards are comprised of a comparatively 
small number of directors. In addition, the change enables Covered 
Companies and industrial banks to select director candidates believed 
to be most qualified to direct and oversee the institution. As such, 
the change enables Covered Companies and industrial banks to exercise 
some additional flexibility when selecting directors. Nevertheless, the 
FDIC retains the authority, as appropriate, to require a higher 
threshold of director independence.
    Finally, one comment requested clarification as to whether officers 
of the industrial bank would be included within the limitation. In 
short, if an officer in question is associated with a Covered Company, 
the individual would be counted against the limitation.
    In order to ensure that a subsidiary industrial bank has available 
to it the resources necessary to maintain sufficient capital and 
liquidity, the proposed rule required each party to a written agreement 
to commit to maintain each subsidiary industrial bank's capital and 
liquidity at such levels as the FDIC deems necessary for the safe and 
sound operation of the industrial bank, and to take such other actions 
as the FDIC finds appropriate to provide each subsidiary industrial 
bank with the resources for additional capital or liquidity (commitment 
(7)). As discussed above, the FDIC is finalizing Sec.  354.3(b) as 
proposed, which provides that the FDIC may require the controlling or 
dominant shareholder of a Covered Company to join as a party to the 
written agreements required under the rule, including commitment (7). 
The final rule includes commitment (7) as proposed.
    Lastly, the proposed rule required that each Covered Company and 
its subsidiary industrial bank(s) enter into a tax allocation agreement 
that expressly recognizes an agency relationship between the Covered 
Company and the subsidiary industrial bank with respect to tax assets 
generated by such industrial bank, and that further states that all 
such tax assets are held in trust by the Covered Company for the 
benefit of the subsidiary industrial bank and promptly remitted to such 
industrial bank (commitment (8)). As proposed, a tax allocation 
agreement would have also provided that the amount and timing of any 
payments or refunds to the subsidiary industrial bank by the Covered 
Company should be no less favorable than if the subsidiary industrial 
bank were a separate taxpayer.
    One commenter questioned the FDIC's statutory authority to impose 
such a requirement. The FDIC has the power to issue rules to carry out 
the provisions of the FDI Act,\120\ including rules to ensure the 
safety and soundness of industrial banks and to protect the DIF. As the 
FDIC discussed in the proposed rule, companies and their subsidiaries, 
including insured depository institutions and their parent companies, 
will often file a consolidated income tax return. A 1998 interagency 
policy statement issued by the Federal banking agencies and the U.S. 
Department of the Treasury, and an addendum thereto \121\ 
(collectively,

[[Page 10720]]

Policy Statement), acknowledges this practice, noting that a 
consolidated group may prepare and file Federal and State income tax 
returns as a group so long as the interests of any insured depository 
institution subsidiaries are not prejudiced. Given the potential harm 
to insured subsidiary institutions, the Policy Statement encourages 
parent companies and their insured depository institution subsidiaries 
to enter into written, comprehensive tax allocation agreements, and 
notes that inconsistent practices regarding tax obligations may be 
viewed as an unsafe and unsound practice prompting either informal or 
formal corrective action. The final rule, consistent with the proposed 
rule, similarly seeks to avoid potential harm to a subsidiary 
industrial bank by requiring such a written tax allocation agreement. 
The final rule includes commitment (8) as proposed.
---------------------------------------------------------------------------

    \120\ ``[T]he Corporation . . . shall have power . . . [t]o 
prescribe by its Board of Directors such rules and regulations as it 
may deem necessary to carry out the provisions of this chapter or of 
any other law which it has the responsibility of administering or 
enforcing (except to the extent that authority to issue such rules 
and regulations has been expressly and exclusively granted to any 
other regulatory agency).'' 12 U.S.C. 1819(a)(Tenth).
    \121\ See Interagency Policy Statement on Income Tax Allocation 
in a Holding Company Structure, 63 FR 64757 (Nov. 23, 1998); 
Addendum to the Interagency Policy Statement on Income Tax 
Allocation in a Holding Company Structure, 79 FR 35228 (June 19, 
2014). The 2014 Addendum to the Interagency Policy Statement on 
Income Tax Allocation in a Holding Company Structure also clarifies 
that all tax allocation agreements are subject to the requirements 
of section 23B of the Federal Reserve Act, and tax allocation 
agreements that do not clearly acknowledge that an agency 
relationship exists may be subject to additional requirements under 
section 23A of the Federal Reserve Act.
---------------------------------------------------------------------------

    In addition to the eight commitments discussed above, Sec.  
354.4(b) of the proposed rule permitted the FDIC to condition the 
approval of an application or non-objection to a notice on the Covered 
Company and industrial bank committing to adopt, maintain, and 
implement an FDIC-approved contingency plan that presents one or more 
actions to address potential significant financial or operational 
stress that could threaten the safe and sound operation of the insured 
industrial bank. The plan also would reflect strategies for the orderly 
disposition of the industrial bank without the need for the appointment 
of a receiver or conservator. Such disposition could include, for 
example, sale of the industrial bank to, or merger with, a third party.
    The FDIC received two comments on the contingency plan requirement. 
One commenter stated that the FDIC should consider size, complexity, 
interdependencies, and other relevant factors in requiring, reviewing, 
and approving a contingency plan--similar to the ``living will'' 
requirements under section 165(d) of the Dodd-Frank Act where the FRB 
has tiered certain requirements based upon an institution's asset size. 
This commenter also suggested that the FDIC formalize these 
considerations in the final rule. The other commenter stated that, 
while dissolution requirements may be appropriate for large complex 
institutions that pose a risk to the DIF, smaller banks do not pose the 
same risks nor require the same level of complex planning. According to 
this commenter, the cost of contingency planning would outweigh its 
benefit for smaller institutions. This commenter also stated that, at a 
minimum, any contingency planning requirement should be no more 
stringent than the requirement for other FDIC-insured intuitions of the 
same size.
    As discussed in the NPR, a contingency plan commitment would only 
be required in certain circumstances based upon the facts and 
circumstances presented, and after taking into consideration size, 
complexity, interdependencies, and other relevant factors. The final 
rule preserves the FDIC's supervisory discretion to tailor the contents 
of any contingency plan to a specific Covered Company and its insured 
industrial bank subsidiary. This ability to tailor the requirements of 
a contingency plan serves to minimize the burdens of developing and 
implementing such a plan. It should also be noted that contingency 
plans are not the same as resolution plans under section 165(d) of the 
Dodd-Frank Act or Sec.  360.10 of the FDIC's Rules and Regulations, and 
the contents of a contingency plan (if required) would be far less 
complex. A contingency plan is an explanation of the steps the 
industrial bank and Covered Company could take to mitigate the impacts 
of financial and operational stress outside of the receivership 
process. Finally, the FDIC believes that a contingency plan, when 
required, may help the FDIC, the Covered Company, and its industrial 
bank subsidiary to better understand the relevant interdependencies, 
operational risks, and other circumstances or events that could create 
safety and soundness concerns and attendant risk to the DIF. 
Accordingly, the FDIC is finalizing this requirement as proposed.
    While the contingency plan is one type of commitment that the FDIC 
would be able to require of Covered Companies and their industrial bank 
subsidiaries, there may be other commitments that the FDIC may 
determine to be appropriate given the business plan, capital levels, or 
organizational structure of a Covered Company or its subsidiary 
industrial bank. Section 354.4(c) of the proposed rule provided that 
the FDIC may require such additional commitments from a Covered Company 
or controlling shareholder of a Covered Company in addition to those 
described in Sec.  354.4(a) or (b) in order to ensure the safety and 
soundness of the industrial bank and reduce potential risk to the DIF.
    Several commenters specifically addressed Sec.  354.4(c).\122\ One 
commenter raised concerns that the rule would be applied to Covered 
Companies or controlling shareholders of existing industrial banks. As 
discussed above, because the rule is constructed to apply 
prospectively, parties will become subject to the rule only as the 
result of (1) the formation of an industrial bank on or after the 
effective date of the final rule, or (2) a merger transaction or change 
in control on or after the effective date of the final rule, assuming 
the institution retains its industrial bank charter.
---------------------------------------------------------------------------

    \122\ These commenters raised the same or similar concerns with 
respect to Sec.  354.5(b), which the FDIC also is deleting in the 
final rule.
---------------------------------------------------------------------------

    A second commenter raised concerns that Sec.  354.4(c) vests open-
ended authority in the FDIC to change, at any time and for any reason, 
the obligations of a Covered Company or controlling shareholder. The 
commenter further suggested that agreements should be negotiated at the 
outset. Another commenter also suggested that the FDIC should rely on 
its enforcement authority rather than including additional commitments 
in the written agreements.
    In response to commenters' concerns about the application of this 
section, the FDIC is removing Sec.  354.4(c) to avoid confusion that 
the FDIC would unilaterally impose additional commitments (or 
restrictions). Notwithstanding this deletion, the FDIC retains its 
general supervision, examination, and enforcement authorities (as 
reserved by Sec.  354.6) to take any actions beyond the scope of the 
final rule, including actions to ensure the safe and sound operation of 
any insured depository institution, including an industrial bank, and 
further to ensure that a parent of an industrial bank acts as a source 
of financial strength to that insured institution. For example, the 
FDIC may require additional, unique commitments from a Covered Company 
or a controlling shareholder of a Covered Company when the FDIC 
determines it is necessary to address specific elements of a filing or 
circumstances related to the filer. Additional commitments may be 
derived, for instance, from elements of the business model presented, 
including the nature and scope of activities conducted, the risk 
profile of the activities, and the complexity of operations. The 
proposed relationships

[[Page 10721]]

and transactions with the parent organization that may impact the 
industrial bank also could be taken into consideration.
    The FDIC also sought comment on whether the rule should include a 
commitment that the parent company will maintain its own capital at 
some defined level on a consolidated basis. A number of commenters 
argued that creating consolidated capital requirements for the parent 
company would ensure that it is able to serve as a source of strength 
for its subsidiary industrial bank. Some commenters argued that such 
capital standards should be comparable to those imposed on BHCs of 
similar size and systemic significance. These commenters also argued 
that the absence of a consolidated capital standard for the parent 
company creates a lower standard of supervision than is imposed by the 
BHCA. One commenter recommended that such requirements should be 
greater than the requirements applicable to other FDIC-insured 
depository institutions due to the enhanced risk of the Covered Company 
on the industrial bank and the DIF.
    By contrast, several commenters argued that applying a capital 
standard on the parent company itself is not encompassed within the 
FDIC's statutory mandate to preserve the safety and soundness of 
insured depository institutions. Other commenters observed that for 
many industrial bank parent companies, measures of tangible equity are 
not often the most pertinent indicator of the financial health of the 
company or its ability to serve as a source of strength. These 
commenters argued that given the diversity of industrial bank parent 
company operations, a more tailored approach would be appropriate.
    The FDIC does not believe that the final rule should impose capital 
requirement commitments on Covered Companies because a one-size-fits 
all regulatory approach to capital requirements would not be 
appropriate, given the idiosyncratic business models and operations of 
such parent companies. The FDIC believes that the final rule and its 
supervisory framework adequately ensure that a parent company of an 
industrial bank has the ability to serve as a source of strength.
5. Section 354.5--Restrictions on Industrial Bank Subsidiaries of 
Covered Companies
    Section 354.5 of the proposed rule required the FDIC's prior 
written approval before an industrial bank that is a subsidiary of a 
Covered Company may take certain actions. These restrictions, like the 
required commitments discussed above, are generally intended to provide 
the safeguards and protections that the FDIC believes would be prudent 
to impose with respect to maintaining the safety and soundness of 
industrial banks that become controlled by companies that are not 
subject to Federal consolidated supervision. Accordingly, the proposed 
rule required prior FDIC approval for the subsidiary industrial bank to 
take any of five actions set forth in Sec.  354.5(a).
    In order to ensure that the industrial bank does not immediately 
after becoming a subsidiary of a Covered Company engage in high-risk or 
other inappropriate activities, the subsidiary industrial bank would 
have been required to obtain the FDIC's prior approval to make a 
material change in its business plan after becoming a subsidiary of a 
Covered Company (paragraph (a)(1)). In order to limit the influence of 
the parent Covered Company, the subsidiary industrial bank would have 
been required to obtain the FDIC's prior approval to add or replace a 
member of the board of directors or board of managers or a managing 
member, as the case may be (paragraph (a)(2)); add or replace a senior 
executive officer (paragraph (a)(3)); employ a senior executive officer 
who is associated in any manner with an affiliate of the industrial 
bank, such as a director, officer, employee, agent, owner, partner, or 
consultant of the Covered Company or a subsidiary thereof (paragraph 
(a)(4)); or enter into any contract for material services with the 
Covered Company or a subsidiary thereof (paragraph (a)(5)). Pursuant to 
proposed Sec.  354.5(b), the FDIC would have been able to, on a case-
by-case basis, impose additional restrictions on the Covered Company or 
its controlling shareholder if circumstances warrant. The FDIC is 
adopting revisions to the restrictions in Sec.  354.5(a)(2), (3), and 
(4) and removing Sec.  354.5(b), as discussed below.
    The FDIC sought comment on whether these restrictions should be 
time-limited. A number of commenters generally argued that the 
restrictions should only apply during the industrial bank's de novo 
period (i.e., the first three-years of operation). Some commenters 
suggested that the FDIC should or could apply ongoing restrictions 
(beyond the de novo period) when special circumstances exist. One 
commenter proposed that the FDIC implement a process to allow an 
industrial bank to request a waiver of the requirements at the 
conclusion of the de novo period. Two commenters recommended limiting 
the restrictions to the de novo period except for paragraph (a)(4) 
covering employment of a senior executive officer who is also currently 
associated with an affiliate of the industrial bank. Most of these 
commenters were concerned that the ongoing restrictions in these 
sections created greater burdens on industrial banks than required of 
non-industrial banks.
    By contrast, other commenters argued that these restrictions should 
be perpetual in duration and viewed them as important safeguards on the 
actions of a Covered Company with respect to an industrial bank 
subsidiary. One commenter argued that given the unique and significant 
risks posed by industrial banks and their parent companies, the 
restrictions should not be limited to any number of years after an 
industrial bank becomes a subsidiary of a Covered Company.
    The FDIC previously has imposed restrictions similar to those 
contained in Sec.  354.5 in prior actions on filings involving 
industrial banks. The agency's experience indicates that there are 
advantages and disadvantages to imposing such restrictions on a 
perpetual basis, just as there are advantages and disadvantages to 
imposing the restrictions on a time-limited basis. The relative 
advantages and disadvantages vary depending on the nature of the 
particular restriction. Nevertheless, certain items are believed so 
directly related to the industrial bank's ongoing safe and sound 
operation that a perpetual restriction is warranted. As such, the FDIC 
is adopting the restrictions regarding material changes to business 
plans, entering into contracts for material services with a Covered 
Company or its subsidiaries, and employing a senior executive officer 
that is associated with an affiliate of the industrial bank as 
proposed, with one exception noted below.
    However, having considered commenters' suggestions regarding the 
restrictions on the appointment of directors (paragraph (a)(2)) and 
senior executive officers (paragraph (a)(3)), the FDIC is modifying the 
final rule to apply a three-year period to filings approved by the FDIC 
for an industrial bank that is a subsidiary of a Covered Company. This 
modification provides flexibility for industrial banks to timely 
appoint directors and officers. The FDIC's supervisory efforts and 
enforcement authorities remain fully accessible if an industrial bank's 
director or officer selection raises concerns. Further, consistent with 
Sec.  354.6 of the final rule, the FDIC may impose additional 
restrictions if appropriate to a particular

[[Page 10722]]

filing. Thus, as circumstances warrant, the FDIC may extend the three-
year period or impose the restriction on a perpetual basis.
    In light of the changes to paragraphs (a)(2) and (3) above, the 
FDIC is also adopting a revision to the restriction on employment of a 
senior executive officer who is currently associated with an affiliate 
of the industrial bank (paragraph (a)(4)). The restriction is modified 
in the final rule to cover a senior executive officer who is or was 
during the past three years associated with an affiliate of the 
industrial bank to prevent evasion of the restriction. As noted above, 
this restriction is not otherwise modified with respect to its 
perpetual duration.
    As discussed above, proposed Sec.  354.5(b) has been removed to 
align with the change the FDIC made to Sec.  354.4(c).
    Several commenters requested that the FDIC clarify what is meant by 
a ``material change'' to the industrial bank's business plan that 
requires the FDIC's written approval prior to effecting such change. 
Because business plan changes or deviations may alter the facts and 
circumstances that supported the FDIC's action on a filing in which the 
business plan condition was imposed, the following generally have been 
determined to constitute a material change in or deviation from an 
institution's business plan:
     Increases in financial statement categories or 
subcategories (such as types of loans, funding, revenue, or capital) of 
25 percent or more;
     Introduction of distinctly new or different business 
strategies or objectives, including products or services, target 
markets, delivery channels, or business development strategies;
     Changes to the institution's financial strategies, or the 
acquisition of assets, an operating entity, or the assumption of 
deposits or other liabilities; or
     Changes in organizational relationships such that the 
manner in which the institution implements or carries out its business 
strategies or objectives is impacted.
6. Section 354.6--Reservation of Authority
    The FDIC proposed to clarify that it retains the authority to take 
supervisory or enforcement actions, including actions to address unsafe 
or unsound practices, or violations of law.
    The FDIC has broad supervision, examination and enforcement powers 
and authorities granted to it by the FDI Act and other laws.\123\ The 
reservation of authority in Sec.  354.6 clarifies that, notwithstanding 
the final rule, the FDIC retains the authority to exercise those 
powers, as it would for any insured depository institution where it is 
the appropriate Federal banking agency, which includes industrial 
banks. While the final rule establishes certain commitments and 
restrictions with respect to industrial banks and Covered Companies, 
Sec.  354.6 recognizes that the FDIC could require industrial banks and 
their parent companies that are not subject to Federal consolidated 
supervision by the FRB to enter into written agreements, provide 
additional commitments, or abide by additional restrictions if 
necessary to maintain the safety and soundness of the industrial bank. 
Additionally, the FDIC's powers and authorities may be applied to 
require written commitments and/or to impose restrictions in the 
context of a particular industrial bank and its parent to mitigate risk 
and ensure the safe and sound operation of the insured depository 
institution, even if not in connection with a filing pursuant to this 
part.
---------------------------------------------------------------------------

    \123\ See supra notes 59-62 and accompanying text.
---------------------------------------------------------------------------

    The FDIC received only one comment that addressed the proposed 
reservation of authority, noting that the FDIC's use of its discretion 
in applying the restrictions on industrial banks contained in Sec.  
354.5, together with a reservation of its examination authority, would 
allow for a practical implementation of the FDIC's powers. The FDIC is 
adopting Sec.  354.6 as proposed. During the period before the 
effective date of the final rule, the FDIC will consider pending 
deposit insurance applications, change in control notices, and merger 
applications for industrial banks on a case-by-case basis and impose 
conditions and requirements as appropriate and that are consistent with 
current practice and the FDIC's general examination, supervision, and 
enforcement authorities.
7. Responses to Additional Questions
    In addition to the questions discussed above, the FDIC sought 
responses to several additional questions. In response to the FDIC's 
question whether there were additional categories of information that 
the FDIC should consider in evaluating an industrial bank's ability to 
meet the convenience and needs of the community to be served, some 
commenters opposed to the rule expressed concern that the CRA requires 
modernization or is otherwise inadequate to ensure industrial banks are 
properly serving the credit needs of the communities in which the 
industrial bank operates. Two community group commenters went further 
indicating that the FDIC should not move forward with this rule until 
CRA assessment area procedures are updated.
    In January of 2020, the FDIC joined the OCC in issuing a CRA 
proposal to modernize CRA regulations.\124\ On May 20, 2020, the OCC 
issued its CRA final rule.\125\ The FDIC did not move forward with a 
final rule following the proposal and continues to enforce its existing 
CRA regulation.\126\ More recently, on September 21, 2020, the FRB 
issued an ANPR to solicit public input regarding modernizing the FRB's 
CRA regulatory and supervisory framework.\127\ Modernizing CRA 
regulations applicable to FDIC-supervised institutions is an important 
endeavor, and the FDIC is considering further rulemaking in this area, 
which may include seeking additional public input and engaging with the 
other prudential regulators. For the time being, however, the FDIC will 
continue to operate under the existing CRA regulations, which contain 
provisions including public participation in strategic plans and 
consideration for community development activity in insured 
institutions' broader State-wide and regional areas.
---------------------------------------------------------------------------

    \124\ 85 FR 1204.
    \125\ 85 FR 34734.
    \126\ State savings associations will be examined by the FDIC 
under the CRA regulations of the OCC, 12 CFR part 25 and 12 CFR part 
195, as may be amended from time to time.
    \127\ 85 FR 66410.
---------------------------------------------------------------------------

    However, the statutory factor addressing convenience and needs of 
the community to be served is broader than the CRA. In assessing the 
statutory factor convenience and needs of the community to be served, 
the essential considerations are the deposit and credit needs of the 
community to be served, the nature and extent of the opportunity 
available to the applicant in that location, and the willingness and 
ability of the applicant to serve those financial needs.\128\ The 
markets to be served and the economic and competitive conditions within 
the markets are important to these considerations. The applicant's CRA 
Plan is an important part of the FDIC's evaluation of the convenience 
and needs to be served, but it is not the only consideration. The FDIC 
believes the benefits to finalizing this rule are significant, and 
formalizing and strengthening FDIC's existing supervisory processes and 
policies that

[[Page 10723]]

apply to parent companies of industrial banks that are not subject to 
Federal consolidated supervision should proceed even in the absence of 
a unified interagency rule on CRA.
---------------------------------------------------------------------------

    \128\ See Statement of Policy on Applications for Deposit 
Insurance, 63 FR 44756 (Nov. 20, 1998), amended by 67 FR 79276 (Dec. 
27, 2002).
---------------------------------------------------------------------------

    The FDIC also sought comment on the FDIC's approach to foreign 
ownership of industrial banks. Some commenters argued that foreign 
ownership of industrial banks should not be permitted, or if permitted, 
should be heavily regulated. A commenter argued that the FDIC would not 
be well positioned to foresee the risks that a might arise for a 
foreign Covered Company in its home market. Another commenter asserted 
that the proposed supervisory approach fell short of the FRB's 
consolidated supervision framework, leaving the FDIC with limited 
examination authority and therefore unable to adequately monitor 
foreign companies whose risks might be spread across multiple entities. 
Another commenter opposed foreign ownership of industrial banks, but 
suggested that if such arrangements were permitted, further commitments 
such as a high net stable funding ratio and a prefunded orderly 
liquidation fund should be required of foreign Covered Companies.
    On the other hand, a number of commenters indicated that there was 
no need to build in additional restrictions specific to foreign Covered 
Companies. These commenters noted that the FDIC already has robust 
supervisory authority to address unsafe and unsound conditions 
impacting insured depository institutions, and that the FDIC's practice 
of securing additional commitments from foreign parent companies of 
industrial banks has been effective. Other commenters also argued for 
flexibility, indicating that determining what additional commitments 
would be necessary in such instances is a fact-specific inquiry and 
should be based on the parent company's ability to be a source of 
strength for the industrial bank.
    The final rule does not contain any specific requirements for 
foreign Covered Companies beyond those to which U.S.-based Covered 
Companies are subject. The FDIC's supervisory experience with foreign 
parent companies of industrial banks has shown that retaining the 
flexibility to secure additional commitments from such entities as 
needed is an effective approach. Such commitments would be in addition 
to the substantial requirements a Covered Company is subject to in the 
written agreements with the FDIC required by the final rule, including 
examination and reporting requirements, capital maintenance of the 
industrial bank, and contingency planning. These commitments allow the 
FDIC to ensure that a Covered Company can and will serve as a source of 
strength for its industrial bank, and along with the added flexibility 
to require additional commitments as needed, they are sufficient to 
address both domestic and foreign Covered Companies.\129\
---------------------------------------------------------------------------

    \129\ The FDIC may require, in the case of a Covered Company 
located outside the United States, United States-based capital and 
liquidity support of the subsidiary industrial bank.
---------------------------------------------------------------------------

V. Expected Effects

    As previously discussed, the final rule requires or imposes certain 
conditions, commitments, and restrictions for each deposit insurance 
application approval, non-objection to a change in control notice, and 
merger application approval that would result in an industrial bank 
becoming, pursuant to the rule, a subsidiary of a Covered Company. The 
final rule requires such Covered Company to enter into one or more 
written agreements with the FDIC and the industrial bank subsidiary.

A. Overview of Industrial Banks

    As of June 30, 2020, the FDIC supervised 3,270 insured depository 
institutions, with combined assets of $3.84 trillion. Of these, 23 
institutions were industrial banks, comprising 0.7 percent of all FDIC-
supervised institutions. The industrial banks hold combined assets of 
$169 billion, comprising 4.54 percent of the combined assets of FDIC-
supervised institutions.\130\ The majority of industrial banks are 
headquartered in Utah and Nevada, and hold nearly all of the combined 
assets of industrial banks. As of June 30, 2020, 14 industrial banks 
were headquartered in Utah, four in Nevada, three in California, one in 
Hawaii, and one in Minnesota.
---------------------------------------------------------------------------

    \130\ FDIC Call Report Data, June 30, 2020.
---------------------------------------------------------------------------

    The final rule applies prospectively to deposit insurance, change 
in control, and merger transactions resulting in an industrial bank 
that is controlled by a Covered Company. It is difficult to estimate 
the number of potential Covered Companies that will seek to establish 
or acquire an industrial bank, as such an estimate depends on 
considerations that affect Covered Companies' decisions. These 
considerations, and how they affect decision making, are difficult for 
the FDIC to forecast, estimate, or model, as the considerations include 
external parties' evaluations of potential business strategies for the 
industrial bank as well as future financial conditions, rates of return 
on capital, and innovations in the provision of financial services, 
among others. However, during the period of 2017 through 2019, the FDIC 
received nine industrial bank deposit insurance applications and one 
change in control application.\131\ Consistent with the Paperwork 
Reduction Act (PRA) \132\ estimates presented elsewhere in this rule, 
for this analysis the FDIC is estimating the final rule applies to four 
filings per year seeking to establish or acquire an industrial bank.
---------------------------------------------------------------------------

    \131\ During the same period, the FDIC did not receive any 
merger applications involving industrial banks.
    \132\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    The final rule could indirectly affect subsidiaries of Covered 
Companies. Such Covered Companies operate through a variety of 
structures that include a range of subsidiaries and affiliates. 
Further, the final rule includes the FDIC's reservation of authority to 
require any industrial bank and its parent company, if not otherwise 
subject to part 354, to enter into written agreements, provide 
commitments, or abide by restrictions, as appropriate. Therefore, it is 
difficult to estimate the number of subsidiaries and affiliates of 
prospective Covered Companies, based on information currently available 
to the FDIC. However, based on the FDIC's experience as the primary 
Federal regulator of industrial banks,\133\ the FDIC believes that the 
number of subsidiaries of the prospective Covered Companies affected by 
the final rule is likely to be small.
---------------------------------------------------------------------------

    \133\ Historically, industrial banks have elected not to become 
members of the Federal Reserve System. The FDIC is the primary 
Federal regulator for State nonmember banks and the insurer for all 
insured depository institutions.
---------------------------------------------------------------------------

B. Analysis of the Commitments

    Under the final rule, prospective Covered Companies are required to 
agree to the eight commitments, and may be required to agree to 
additional commitments under certain circumstances, which in summary 
include commitments by the Covered Company to:
     Furnish an initial listing, with annual updates, of the 
Covered Company's subsidiaries.
     Consent to the examination of the Covered Company and its 
subsidiaries.
     Submit an annual report on the Covered Company and its 
subsidiaries, and such other reports as requested.
     Maintain such records as deemed necessary.
     Cause an independent annual audit of each industrial bank.
     Limit the Covered Company's representation on the 
industrial bank's board of directors or managers (board),

[[Page 10724]]

as the case may be, to less than 50 percent.
     Maintain the industrial bank's capital and liquidity at 
such levels as deemed appropriate and take such other action to provide 
the industrial bank with a resource for additional capital or 
liquidity.
     Enter into a tax allocation agreement.
     Depending on the facts and circumstances, provide, adopt, 
and implement a contingency plan that sets forth strategies for 
recovery actions and the orderly disposition of the industrial bank 
without the need for a receiver or conservator.
    The FDIC historically has imposed prudential conditions similar to 
the commitments listed above in connection with approving or not 
objecting to certain industrial bank filings. These conditions 
generally relate to the board and senior management, the business plan, 
operating policies, financial records, affiliate relationships, and 
other conditions on a case-by-case basis, depending on the facts and 
circumstances identified during the review of the respective 
filings.\134\
---------------------------------------------------------------------------

    \134\ See FDIC Deposit Insurance Application Procedures Manual 
Supplement, Applications from Non-Bank and Non-Community Bank 
Applicants, FIL-8-2020 (Feb. 10, 2020).
---------------------------------------------------------------------------

    The table below presents the FDIC's analysis of the estimated costs 
to institutions that would be affected by the final rule of each 
required commitment. In each case, the FDIC used a total hourly 
compensation estimate of $94.15 per hour.\135\ The FDIC received no 
comments regarding the estimated burden of the rule as proposed.
---------------------------------------------------------------------------

    \135\ Subject matter experts in the FDIC's Division of Risk 
Management Supervision estimated that time devoted to complying with 
the commitments is broken down as follows: 25 percent (Executives 
and Managers), 15 percent (Legal), 15 percent (Compliance Officers), 
15 percent (Financial Analysts), 15 percent (IT Specialists), and 15 
percent (Clerical). The Standard Occupational Classification System 
occupations and codes used by the FDIC are: Executives and Managers 
(Management Occupations, 110000), Lawyers (Lawyers, Judges, and 
Related Workers, 231000), Compliance Officers (Compliance Officers, 
131041), Financial Analysts (Financial Analysts, 132051), IT 
Specialists (Computer and Mathematical Occupations, 150000), and 
Clerical (Office and Administrative Support Occupations, 430000). To 
estimate the weighted average hourly compensation cost of these 
employees, the 75th percentile hourly wages reported by the Bureau 
of Labor Statistics (BLS) National Industry-Specific Occupational 
Employment and Wage Estimates as used for the relevant occupations 
in the Depository Credit Intermediation sector, as of May 2018. The 
75th-percentile wage for lawyers is not reported, as it exceeds $100 
per hour, so $100 per hour is used. The hourly wage rates reported 
do not include non-monetary compensation. According to the September 
2019 Employer Cost of Employee Compensation data, compensation rates 
for health and other benefits are 33.8 percent of total 
compensation. To account for non-monetary compensation, the hourly 
wage rates reported by BLS are adjusted by that percentage. The 
hourly wage is adjusted by 2.28 percent based on changes in the 
Consumer Price Index for Urban Consumers from May 2018 to September 
2019 to account for inflation and ensure that the wage information 
is contemporaneous with the non-monetary compensation statistic. 
Finally, the benefit-and-inflation-adjusted wages for each 
occupation are weighted by the percentages listed above to arrive at 
a weighted hourly compensation rate of $94.15.

------------------------------------------------------------------------
                                Estimated annual      Estimated annual
     Proposed commitment        compliance hours      compliance costs
------------------------------------------------------------------------
Lists of Subsidiaries.......                     4               $376.60
Consent to the FDIC                            100              9,415.00
 Examination................
Annual and Such Other                           10                941.50
 Reports as the FDIC may
 Request....................
Maintain Such Records as the                    10                941.50
 FDIC Deems Necessary.......
Independent Audit \1\.......                   100              9,415.00
Limit Membership on Board                        0                  0.00
 \2\........................
Maintain Capital and                            12              1,129.80
 Liquidity..................
Tax Allocation Agreement \3\                     0                  0.00
                             -------------------------------------------
    Total...................                   236             22,219.40
------------------------------------------------------------------------
\1\ The disclosure requirement and time to fulfill it are due to
  satisfying regulatory inquiries about the audit, and do not include
  the cost of the audit itself because Covered Companies already conduct
  audits for other purposes.
\2\ Determinations regarding board membership are considered in the
  normal course of business.
\3\ Tax allocation agreements are normal and customary among affiliated
  corporate entities.

    The final rule also authorizes the FDIC to require additional 
commitments, including a contingency plan that sets forth strategies 
for recovery actions and the orderly disposition of the industrial bank 
without the appointment of a receiver or conservator. The additional 
contingency plan commitment would be required only in certain 
circumstances, based on the facts and circumstances presented and 
taking into consideration the size, complexity, interdependencies, and 
other factors relevant to the industrial bank and Covered Company.
    It is difficult to estimate the recordkeeping, reporting, and 
disclosure costs associated with the contingency plan aspect of the 
final rule because such an estimate would depend on the organizational 
structure and activities of potential future Covered Companies. The 
FDIC currently lacks such detailed information on potential future 
Covered Companies. While the contingency plan commitment is 
meaningfully different from resolution plan requirements for large 
banks, and while industrial banks that might need to develop such 
contingency plans are meaningfully different from large banks subject 
to resolution planning requirements, the FDIC considered prior analyses 
regarding resolution planning requirements imposed on certain 
institutions to inform its analysis.
    Based in part on the FDIC's experience implementing and managing 
the resolution planning requirements of Sec.  360.10, the FDIC 
estimates that Covered Companies and their industrial banks subject to 
the contingency plan commitment could incur $326,000 in recordkeeping, 
reporting, and disclosure compliance costs annually. To put the 
estimated cost of this commitment into context, the pre-tax net income 
of the median industrial bank in 2019 was $64,515,000.\136\ But, 
because the FDIC would have the supervisory discretion to tailor the 
contents of any contingency plan to a given Covered Company and its 
industrial bank, and because of the unique circumstances of the 
respective Covered Companies and industrial banks, the compliance costs 
incurred by Covered Companies would vary on a case-by-case basis, and 
could be lower.
---------------------------------------------------------------------------

    \136\ FDIC Call Report Data, December 31, 2019.
---------------------------------------------------------------------------

    The final rule incorporates an additional element as part of the 
reporting commitment to address Covered Companies' systems for 
protecting the security, confidentiality, and integrity of consumer and 
nonpublic personal information. However, the rule is constructed to

[[Page 10725]]

enable affected parties to comply with the various commitments by 
relying on established and ongoing reports and records, to the extent 
possible. As such, while recognizing the difficulty in estimating the 
costs associated with this additional element due to the unique 
circumstances of each affected party, the FDIC believes the enhanced 
commitment should have no material impact on the estimated overall 
burden.
    As illustrated by the preceding analysis, the final rule could pose 
as much as $348,000 in additional recordkeeping, reporting, and 
disclosure compliance costs for each Covered Company that seeks to 
establish or acquire an industrial bank.\137\ Covered Companies would 
also be likely to incur some regulatory costs associated with making 
the necessary changes to internal systems and processes. For context, 
the estimated $348,000 recordkeeping, reporting, and disclosure costs 
only comprise 0.8 percent of the median noninterest expense for the 23 
existing industrial banks.\138\
---------------------------------------------------------------------------

    \137\ $22,219.40 for all Covered Companies that seek to 
establish or acquire an industrial bank, and an additional $326,000 
for those institutions required to adopt, implement, and adhere to a 
contingency plan.
    \138\ FDIC Call Report Data, December 31, 2019.
---------------------------------------------------------------------------

    The FDIC believes that the final rule would benefit the public by 
providing transparency for market participants and other interested 
parties. Additionally, the FDIC believes that the final rule would 
benefit the public by formalizing a framework by which the FDIC would 
supervise industrial banks and mitigate risk to the DIF that may 
otherwise be presented.
    It is difficult to estimate whether the final rule would serve as 
an incentive or disincentive for affected parties. Decisions to 
establish or acquire an industrial bank depend on many considerations 
that the FDIC cannot accurately forecast, estimate, or model, such as 
future financial conditions, rates of return on capital, and 
innovations in the provision of financial services. The final rule 
would enhance transparency in the FDIC's evaluation of filings, which 
could increase the number of applications received. However, such 
transparency could also serve to limit the number of applications 
received.
    The FDIC analyzed historical trends in filings that would be 
subject to the final rule. Based on that analysis, and consistent with 
the FDIC's PRA analysis, the FDIC assumes four applications: Three 
deposit insurance applications, and one change in bank control notice 
per year, on average. Between 2000 and 2009, the FDIC received as many 
as 12 and as few as two deposit insurance applications from entities 
seeking to organize an industrial bank; between 2017 and 2019, the FDIC 
received as many as four and as few as two such applications. 
Therefore, the FDIC believes it is reasonable to assume an annual 
deposit insurance application volume of four for the purpose of this 
analysis. In addition, the FDIC has received three change in bank 
control notices relating to industrial banks since 2010; therefore, the 
FDIC believes it is reasonable to assume an annual volume of one for 
the purpose of this analysis.

C. Safety and Soundness of Affected Banks

    The FDIC believes the final rule is consistent with supervisory 
approaches the FDIC has used to insulate industrial banks from risks 
posed by their parent companies, and that these supervisory approaches 
have been effective. For example, as previously noted, only two small 
industrial banks failed during the crisis. The FDIC believes the final 
rule would provide a prudentially sound framework for reaching 
decisions on industrial bank filings that the FDIC receives from time 
to time.

D. Broad Effects on the Banking Industry

    To the extent that the final rule results in higher numbers of 
industrial banks, the increase could lead to increased competition for 
depositors and borrowers. The increased competition could result in one 
or more of: Higher yields on deposit products, lower interest rates on 
loan products, reduced fees, less restrictive underwriting standards, 
greater account opening bonuses for new customers, and other benefits. 
To the extent that the final rule does not result in a higher number of 
industrial banks, this would not be expected to lead to increased 
competition for depositors and borrowers.

E. Expected Effects on Consumers

    To the degree the final rule results in an increase in the number 
of industrial banks, consumers could benefit from increased competition 
within the banking industry. These benefits could take the form of 
higher rates on deposit accounts, improved access to credit with better 
terms or lower rates, and lower fees for banking services. To the 
extent that the proposed rule does not result in a higher number of 
industrial banks, this would not be expected to lead to potential 
benefits from increased competition within the banking industry. 
Finally, in response to comments the final rule includes a commitment 
for a Covered Company to inform the FDIC about the Covered Company's 
systems for protecting the security, confidentiality, and integrity of 
consumer and nonpublic personal information. This aspect of the final 
rule is expected to benefit consumers by helping to mitigate potential 
consumer protection risks.

F. Expected Effects on the Economy

    The final rule's effects on the economy are likely to be modest, in 
line with its potential effects on the banking industry and consumers. 
If the final rule results in a modest increase in the number of 
industrial banks or improvement in the provision of banking products 
and services, the effects on the economy are likely to be modest.

VI. Regulatory Analysis

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency, 
in connection with a final rule, to prepare and make available for 
public comment a final regulatory flexibility analysis that describes 
the impact of a final rule on small entities.\139\ However, a final 
regulatory flexibility analysis is not required if the agency certifies 
that the rule will not have a significant economic impact on a 
substantial number of small entities.\140\ The Small Business 
Administration (SBA) has defined ``small entities'' to include banking 
organizations with total assets of less than or equal to $600 
million.\141\
---------------------------------------------------------------------------

    \139\ 5 U.S.C. 601 et seq.
    \140\ 5 U.S.C. 605(b).
    \141\ The SBA defines a small banking organization as having 
$600 million or less in assets, where an organization's ``assets are 
determined by averaging the assets reported on its four quarterly 
financial statements for the preceding year.'' See 13 CFR 121.201 
(as amended, effective Aug. 19, 2019). In its determination, the SBA 
``counts the receipts, employees, or other measure of size of the 
concern whose size is at issue and all of its domestic and foreign 
affiliates, regardless of whether the affiliates are organized for 
profit.'' 13 CFR 121.103. Following these regulations, the FDIC uses 
a covered entity's affiliated and acquired assets, averaged over the 
preceding four quarters, to determine whether the covered entity is 
``small'' for the purposes of RFA.
---------------------------------------------------------------------------

    Generally, the FDIC considers a significant effect to be a 
quantified effect in excess of 5 percent of total annual salaries and 
benefits per institution, or 2.5 percent of total noninterest expenses. 
The FDIC has considered the potential impact of the final rule on small 
entities in accordance with the RFA. Based on its analysis and for the 
reasons stated below, the FDIC believes that this final rule will not 
have a significant economic impact on a substantial number of small 
entities.

[[Page 10726]]

    As of June 30, 2020, the FDIC supervises 3,270 institutions, of 
which 2,492 are defined as small institutions by the terms of the 
RFA.\142\ Of these 3,270 institutions, 23 are industrial banks.
---------------------------------------------------------------------------

    \142\ FDIC Call Report Data, September 30, 2019. In order to 
determine whether an entity is ``small'' for purposes of the 
Regulatory Flexibility Act, the FDIC uses its ``affiliated and 
acquired assets'' as described in the immediately preceding 
footnote. The latest available bank and thrift holding company 
reports, which the FDIC uses to determine an entity's ``affiliated 
and acquired assets,'' are as of September 30, 2019.
---------------------------------------------------------------------------

    As previously discussed, a currently chartered industrial bank 
would be subject to the final rule, as would its parent company that is 
not subject to Federal consolidated supervision, if such a parent 
company acquired control of the grandfathered industrial bank pursuant 
to a change in bank control transaction that closes after the effective 
date of the final rule, or if the grandfathered industrial bank is the 
surviving institution in a merger transaction that closes after the 
effective date of the final rule.
    Of the 23 existing industrial banks, eight reported total assets 
less than $600 million, indicating that they could be small entities. 
However, to determine whether an institution is ``small'' for the 
purposes of the RFA, the SBA requires consideration of the receipts, 
employees, or other measure of size of the concern whose size is at 
issue and all of its domestic and foreign affiliates.\143\ The FDIC 
conducted an analysis to determine whether each industrial bank's 
parent company was ``small,'' according to the SBA size standards 
applicable to each particular parent company.\144\ Of the eight 
industrial banks that reported total assets less than $600 million, the 
FDIC was able to determine that three of these potentially small 
industrial banks were owned by holding companies which were not small 
for purposes of the RFA. However, the FDIC currently lacks information 
necessary to determine whether the remaining five industrial banks are 
small. Therefore, of the 23 existing industrial banks, 18 are not small 
entities for purposes of the RFA, but no more than five, or about 22 
percent, may be small entities.
---------------------------------------------------------------------------

    \143\ 12 CFR 121.103.
    \144\ For example, if a particular industrial bank's parent 
company was a motorcycle manufacturer, then the size standards 
applicable to motorcycle manufacturers were used.
---------------------------------------------------------------------------

    Additionally, the FDIC has received three change in control notices 
relating to industrial banks since 2010. Of those three, only one was 
from an industrial bank that could possibly be small for purposes of 
the RFA.
    Therefore, given that no more than five of the 23 existing 
industrial banks are small entities for the purposes of the RFA, and 
that no more than one change in control notice received by the FDIC 
since 2010 may be from a small entity, the FDIC believes the aspects of 
the final rule relating to change in control notices or merger 
applications involving industrial banks is not likely to affect a 
substantial number of small entities among existing industrial banks.
    As previously discussed, the final rule applies to industrial banks 
that, as of the effective date, become subsidiaries of companies that 
are Covered Companies, as such term is defined in Sec.  354.2. It is 
difficult for the FDIC to estimate the volume of future applications 
from entities who seek to own and operate an insured industrial bank, 
or whether those entities would be considered ``small'' according to 
the terms of RFA, with the information currently available to the FDIC. 
Such estimates would require detailed information on the particular 
business models of institutions, prevailing economic and financial 
conditions, the decisions of senior management, and the demand for 
financial services, among other things. However, the FDIC reviewed the 
firms with industrial bank applications pending before the FDIC as of 
December 31, 2019. Each publically traded applicant had a market 
capitalization of at least $1 billion as of March 6, 2020. Each 
applicant operates either nationally within the United States, or 
operates worldwide, and none appear likely to be small for purposes of 
the RFA. Therefore, the FDIC believes that the aspects of the final 
rule relating to entities who seek to own and operate an insured 
industrial bank is not likely to affect a substantial number of small 
entities among existing industrial banks.
    Therefore, based on the preceding information, the FDIC certifies 
that the final rule does not significantly affect a substantial number 
of small entities.

B. Paperwork Reduction Act

    In accordance with the requirements of the PRA,\145\ the FDIC may 
not conduct or sponsor, and the respondent is not required to respond 
to, an information collection unless it displays a currently valid 
Office of Management and Budget (OMB) control number.
---------------------------------------------------------------------------

    \145\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    As discussed above, the final rule imposes PRA reporting and 
recordkeeping requirements for each industrial bank subject to the rule 
and its Covered Company. In particular, each industrial bank, and each 
Covered Company that directly or indirectly controls the industrial 
bank, must (i) agree to furnish the FDIC an initial listing, with 
annual updates, of all of the Covered Company's subsidiaries; (ii) 
submit to the FDIC an annual report on the Covered Company and its 
subsidiaries, and such other reports as the FDIC may request; \146\ 
(iii) maintain such records as the FDIC deems necessary to assess the 
risks to the industrial bank and to the DIF; and (iv) in the event that 
the FDIC has concerns about a complex organizational structure or based 
on other circumstances presented by a particular filing, the FDIC may 
condition the approval of an application or the non-objection to a 
notice--in each case that would result in an industrial bank being 
controlled, directly or indirectly, by a Covered Company--on the 
Covered Company and industrial bank committing to providing to the 
FDIC, and thereafter adopting and implementing, a contingency plan that 
sets forth, at a minimum, one or more strategies for recovery actions 
and the orderly disposition of such industrial bank, without the need 
for the appointment of a receiver or conservator.
---------------------------------------------------------------------------

    \146\ The final rule requires additional reporting by Covered 
Companies regarding systems for protecting the security, 
confidentiality, and integrity of consumer and nonpublic personal 
information as part of the annual report.
---------------------------------------------------------------------------

    The FDIC submitted its request to OMB for review and approval under 
section 3507(d) of the PRA (44 U.S.C. 3507(d)) and Sec.  1320.11 of 
OMB's implementing regulations (5 CFR part 1320) at the proposed rule 
stage. OMB filed a comment assigning the FDIC OMB control number 3064-
0213 and indicated that OMB would re-review the PRA submission once the 
proposed rule was finalized. The FDIC did not receive any comments on 
the PRA. In addition, as stated above, because the final rule has been 
constructed to enable affected parties to comply with the various 
reporting commitments by relying on established and ongoing reports and 
records, the FDIC believes that the enhanced reporting commitment 
should have no effect on the PRA burden listed at the proposed rule 
stage.
Information Collection
    Title: Industrial Banks and Industrial Loan Companies.
    OMB Number: 3064-0213.
    Affected Public: Prospective parent companies of industrial banks 
and industrial loan companies.

[[Page 10727]]



                                                       Summary of Annual Burden and Internal Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                                Total
                                                                                Estimated       Estimated     Estimated                         annual
                                      Type of burden        Obligation to       number of     frequency of     time per      Frequency of     estimated
                                                               respond         respondents      responses      response        response         burden
                                                                                                                                               (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial listing of all of the    Reporting..............  Mandatory........               4            1.00            4  One Time.........           16
 Covered Company's subsidiaries.
Annual update of listing of all  Reporting..............  Mandatory........               4            1.00            4  Annual...........           16
 of the Covered Company's
 subsidiaries.
Annual report on the Covered     Reporting..............  Mandatory........               4            1.00           10  Annual...........           40
 Company and its subsidiaries,
 and such other reports as the
 FDIC may request.
Maintain records to assess the   Recordkeeping..........  Mandatory........               4            1.00           10  Annual...........           40
 risks to the industrial bank
 and to the DIF.
Contingency Plan...............  Reporting..............  Mandatory........               1            1.00          345  On Occasion......          345
                                                                            ---------------------------------------------                   ------------
    Total Hourly Burden........  .......................  .................  ..............  ..............  ...........  .................          457
--------------------------------------------------------------------------------------------------------------------------------------------------------

C. Plain Language

    Section 722 of the GLBA \147\ requires each Federal banking agency 
to use plain language in all of its proposed and final rules published 
after January 1, 2000. The FDIC sought to present the final rule in a 
simple and straightforward manner and did not receive any comments on 
the use of plain language in the proposed rule.
---------------------------------------------------------------------------

    \147\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

D. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the RCDRIA,\148\ in determining the 
effective date and administrative compliance requirements for new 
regulations that impose additional reporting, disclosure, or other 
requirements on insured depository institutions, each Federal banking 
agency must consider, consistent with principles of safety and 
soundness and the public interest, any administrative burdens that such 
regulations would place on affected depository institutions, including 
small depository institutions, and customers of depository 
institutions, as well as the benefits of such regulations. In addition, 
section 302(b) of RCDRIA requires new regulations and amendments to 
regulations that impose additional reporting, disclosures, or other new 
requirements on insured depository institutions generally to take 
effect on the first day of a calendar quarter that begins on or after 
the date on which the regulations are published in final form.\149\ The 
FDIC considered the administrative burdens and benefits of the final 
rule in determining its effective date and administrative compliance 
requirements. As such, the final rule will be effective on April 1, 
2021.
---------------------------------------------------------------------------

    \148\ 12 U.S.C. 4802(a).
    \149\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

E. Congressional Review Act

    For purposes of the Congressional Review Act, OMB makes a 
determination as to whether a final rule constitutes a ``major'' 
rule.\150\ If a rule is deemed a ``major rule'' by the OMB, the 
Congressional Review Act generally provides that the rule may not take 
effect until at least 60 days following its publication.\151\
---------------------------------------------------------------------------

    \150\ 5 U.S.C. 801 et seq.
    \151\ 5 U.S.C. 801(a)(3).
---------------------------------------------------------------------------

    The Congressional Review Act defines a ``major rule'' as any rule 
that the Administrator of the Office of Information and Regulatory 
Affairs of the OMB finds has resulted in or is likely to result in (1) 
an annual effect on the economy of $100,000,000 or more; (2) a major 
increase in costs or prices for consumers, individual industries, 
Federal, State, or local government agencies or geographic regions, or 
(3) significant adverse effects on competition, employment, investment, 
productivity, innovation, or on the ability of United States-based 
enterprises to compete with foreign-based enterprises in domestic and 
export markets.\152\
---------------------------------------------------------------------------

    \152\ 5 U.S.C. 804(2).
---------------------------------------------------------------------------

    The FDIC will submit the final rule and other appropriate reports 
to Congress and the Government Accountability Office for review.

List of Subjects in 12 CFR Part 354

    Bank deposit insurance, Banks, banking, Finance, Holding companies, 
Industrial banks, Industrial loan company, Insurance, Parent company, 
Reporting and recordkeeping requirements, Savings associations.

12 CFR Chapter III

Authority and Issuance

    For the reasons stated in the preamble, the Federal Deposit 
Insurance Corporation amends title 12 of the Code of Federal 
Regulations by adding part 354 to read as follows:

PART 354--INDUSTRIAL BANKS

Sec.
354.1 Scope.
354.2 Definitions.
354.3 Written agreement.
354.4 Required commitments and provisions of written agreement.
354.5 Restrictions on industrial bank subsidiaries of Covered 
Companies.
354.6 Reservation of authority.

    Authority: 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a) 
(Seventh) and (Tenth), 1820(g), 1831o-1, 3108, 3207.


Sec.  354.1   Scope.

    (a) In addition to the applicable filing procedures of part 303 of 
this chapter, this part establishes certain requirements for filings 
involving an industrial bank or a Covered Company.
    (b) The requirements of this part do not apply to an industrial 
bank that is organized as a subsidiary of a company that is not subject 
to Federal consolidated supervision by the Federal Reserve Board (FRB) 
before April 1, 2021. In addition, this part does not apply to:
    (1) Any industrial bank that is or becomes controlled by a company 
that is subject to Federal consolidated supervision by the FRB; and
    (2) Any industrial bank that is not or will not become a subsidiary 
of a company.


Sec.  354.2   Definitions.

    Unless defined in this section, terms shall have the meaning given 
to them in section 3 of the FDI Act.
    Control means the power, directly or indirectly, to direct the 
management or policies of a company or to vote 25 percent or more of 
any class of voting securities of a company, and includes the 
rebuttable presumptions of control at Sec.  303.82(b)(1) of this 
chapter and of acting in concert at Sec.  303.82(b)(2) of this chapter. 
For purposes of this part, the

[[Page 10728]]

presumptions set forth in Sec.  303.82(b)(1) and (2) of this chapter 
shall apply with respect to any company in the same manner and to the 
same extent as if they applied to an acquisition of securities of the 
company.
    Covered Company means any company that is not subject to Federal 
consolidated supervision by the FRB and that controls an industrial 
bank:
    (1) As a result of a change in bank control pursuant to section 
7(j) of the FDI Act;
    (2) As a result of a merger transaction pursuant to section 18(c) 
of the FDI Act; or
    (3) That is granted deposit insurance by the FDIC pursuant to 
section 6 of the FDI Act, in each case on or after April 1, 2021.
    FDI Act means the Federal Deposit Insurance Act, 12 U.S.C. 1811, et 
seq.
    Filing has the meaning given to it in Sec.  303.2(s) of this 
chapter.
    FRB means the Board of Governors of the Federal Reserve System and 
each Federal Reserve Bank.
    Industrial bank means any insured State bank that is an industrial 
bank, industrial loan company, or other similar institution that is 
excluded from the definition of the term ``bank'' in section 2(c)(2)(H) 
of the Bank Holding Company Act, 12 U.S.C. 1841(c)(2)(H).
    Senior executive officer has the meaning given it in Sec.  
303.101(b) of this chapter.


Sec.  354.3   Written agreement.

    (a) No industrial bank may become a subsidiary of a Covered Company 
unless the Covered Company enters into one or more written agreements 
with both the Federal Deposit Insurance Corporation (FDIC) and the 
subsidiary industrial bank, which contain commitments by the Covered 
Company to comply with each of paragraphs (a)(1) through (8) in Sec.  
354.4 and such other written agreements, commitments, or restrictions 
as the FDIC deems appropriate, including, but not limited to, the 
provisions of Sec. Sec.  354.4 and 354.5.
    (b) The FDIC may, at its sole discretion, condition a grant of 
deposit insurance, issuance of a non-objection to a change in control, 
or approval of a merger on an individual who is a controlling 
shareholder of a Covered Company joining as a party to any written 
agreement required by paragraph (a) of this section.


Sec.  354.4   Required commitments and provisions of written agreement.

    (a) The commitments required to be made in the written agreements 
referenced in Sec.  354.3 are set forth in paragraphs (a)(1) through 
(8) of this section. In addition, with respect to an industrial bank 
subject to this part, the FDIC will condition each grant of deposit 
insurance, each issuance of a non-objection to a change in control, and 
each approval of a merger on compliance with paragraphs (a)(1) through 
(8) of this section by the parties to the written agreement. As 
required, each Covered Company must:
    (1) Submit to the FDIC an initial listing of all of the Covered 
Company's subsidiaries and update such list annually;
    (2) Consent to the examination by the FDIC of the Covered Company 
and each of its subsidiaries to permit the FDIC to assess compliance 
with the provisions of any written agreement, commitment, or condition 
imposed; the FDI Act; or any other Federal law for which the FDIC has 
specific enforcement jurisdiction against such Covered Company or 
subsidiary, and all relevant laws and regulations;
    (3) Submit to the FDIC an annual report describing the Covered 
Company's operations and activities, in the form and manner prescribed 
by the FDIC, and such other reports as may be requested by the FDIC to 
inform the FDIC as to the Covered Company's:
    (i) Financial condition;
    (ii) Systems for identifying, measuring, monitoring, and 
controlling financial and operational risks;
    (iii) Transactions with depository institution subsidiaries of the 
Covered Company;
    (iv) Systems for protecting the security, confidentiality, and 
integrity of consumer and nonpublic personal information; and
    (v) Compliance with applicable provisions of the FDI Act and any 
other law or regulation;
    (4) Maintain such records as the FDIC may deem necessary to assess 
the risks to the subsidiary industrial bank or to the Deposit Insurance 
Fund;
    (5) Cause an independent audit of each subsidiary industrial bank 
to be performed annually;
    (6) Limit the Covered Company's direct and indirect representation 
on the board of directors or board of managers, as the case may be, of 
each subsidiary industrial bank to less than 50 percent of the members 
of such board of directors or board of managers, in the aggregate, and, 
in the case of a subsidiary industrial bank that is organized as a 
member-managed limited liability company, limit the Covered Company's 
direct and indirect representation as a managing member to less than 50 
percent of the managing member interests of the subsidiary industrial 
bank, in the aggregate;
    (7) Maintain the capital and liquidity of the subsidiary industrial 
bank at such levels as the FDIC deems appropriate, and take such other 
actions as the FDIC deems appropriate to provide the subsidiary 
industrial bank with a resource for additional capital and liquidity 
including, for example, pledging assets, obtaining and maintaining a 
letter of credit from a third-party institution acceptable to the FDIC, 
and providing indemnification of the subsidiary industrial bank; and
    (8) Execute a tax allocation agreement with its subsidiary 
industrial bank that expressly states that an agency relationship 
exists between the Covered Company and the subsidiary industrial bank 
with respect to tax assets generated by such industrial bank, and that 
further states that all such tax assets are held in trust by the 
Covered Company for the benefit of the subsidiary industrial bank and 
will be promptly remitted to such industrial bank. The tax allocation 
agreement also must provide that the amount and timing of any payments 
or refunds to the subsidiary industrial bank by the Covered Company 
should be no less favorable than if the subsidiary industrial bank were 
a separate taxpayer.
    (b) The FDIC may require such Covered Company and industrial bank 
to commit to provide to the FDIC, and, thereafter, implement and adhere 
to, a contingency plan subject to the FDIC's approval that sets forth, 
at a minimum, recovery actions to address significant financial or 
operational stress that could threaten the safe and sound operation of 
the industrial bank and one or more strategies for the orderly 
disposition of such industrial bank without the need for the 
appointment of a receiver or conservator.


Sec.  354.5   Restrictions on industrial bank subsidiaries of Covered 
Companies.

    Without the FDIC's prior written approval, an industrial bank that 
is controlled by a Covered Company shall not:
    (a) Make a material change in its business plan after becoming a 
subsidiary of such Covered Company;
    (b) Add or replace a member of the board of directors, board of 
managers, or a managing member, as the case may be, of the subsidiary 
industrial bank during the first three years after becoming a 
subsidiary of such Covered Company;
    (c) Add or replace a senior executive officer during the first 
three years after becoming a subsidiary of such Covered Company;
    (d) Employ a senior executive officer who is, or during the past 
three years has been, associated in any manner (e.g.,

[[Page 10729]]

as a director, officer, employee, agent, owner, partner, or consultant) 
with an affiliate of the industrial bank; or
    (e) Enter into any contract for services material to the operations 
of the industrial bank (for example, loan servicing function) with such 
Covered Company or any subsidiary thereof.


Sec.  354.6   Reservation of authority.

    Nothing in this part limits the authority of the FDIC under any 
other provision of law or regulation to take supervisory or enforcement 
actions, including actions to address unsafe or unsound practices or 
conditions, or violations of law.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on December 15, 2020.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2020-28473 Filed 2-22-21; 8:45 am]
BILLING CODE 6714-01-P