[Federal Register Volume 89, Number 155 (Monday, August 12, 2024)]
[Proposed Rules]
[Pages 65556-65568]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2024-17637]


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 Proposed Rules
                                                 Federal Register
 ________________________________________________________________________
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 This section of the FEDERAL REGISTER contains notices to the public of 
 the proposed issuance of rules and regulations. The purpose of these 
 notices is to give interested persons an opportunity to participate in 
 the rule making prior to the adoption of the final rules.
 
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 

  Federal Register / Vol. 89 , No. 155 / Monday, August 12, 2024 / 
Proposed Rules  

[[Page 65556]]



FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 354

RIN 3064-AF88


Parent Companies of Industrial Banks and Industrial Loan 
Companies

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

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SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is seeking 
comments on proposed amendments to its regulation governing parent 
companies of industrial banks and industrial loan companies. This 
regulation, which was adopted in December 2020, requires certain 
conditions and written commitments in situations that would result in 
an industrial bank or industrial loan company becoming a subsidiary of 
a company that is not subject to consolidated supervision by the 
Federal Reserve Board. The proposed amendments would revise the 
definition of ``Covered Company'' to include conversions involving a 
proposed industrial bank or industrial loan company under section 5 of 
the Home Owners' Loan Act, or other transactions as determined by the 
FDIC; ensure that a parent company of an industrial bank subject to a 
change of control, or a parent company of an industrial bank subject to 
a merger in which it is the resultant entity, would be subject to the 
FDIC's regulation; and provide the FDIC the regulatory authority to 
apply the regulation to other situations where an industrial bank would 
become a subsidiary of a company that is not subject to Federal 
consolidated supervision. Additionally, the proposed amendments would 
clarify the relationship between written commitments and the FDIC's 
evaluation of the relevant statutory factors. The proposed amendments 
also would set forth additional criteria that the FDIC would consider 
when assessing the risks presented to an industrial bank or industrial 
loan company by its parent company and any affiliates and evaluating 
the institution's ability to function independently of the parent 
company and any affiliates.

DATES: Comments will be accepted until October 11, 2024.

ADDRESSES: Interested parties are invited to submit written comments, 
identified by RIN 3064-AF88, by any of the following methods:
     Agency Website: https://www.fdic.gov/resources/regulations/federal-register-publications/. Follow the instructions for 
submitting comments on the agency website.
     Email: [email protected]. Include RIN 3064-AF88 in the 
subject line of the message.
     Mail: James P. Sheesley, Assistant Executive Secretary, 
Attention: Comments--RIN 3064-AF88, Federal Deposit Insurance 
Corporation, 550 17th Street NW, Washington, DC 20429.
     Hand Delivery: Comments may be hand delivered to the guard 
station at the rear of the 550 17th Street NW building (located on F 
Street NW) on business days between 7 a.m. and 5 p.m.
     Public Inspection: Comments received, including any 
personal information provided, may be posted without change to https://www.fdic.gov/resources/regulations/federal-register-publications/. 
Commenters should submit only information that the commenter wishes to 
make available publicly. The FDIC may review, redact, or refrain from 
posting all or any portion of any comment that it may deem to be 
inappropriate for publication, such as irrelevant or obscene material. 
The FDIC may post only a single representative example of identical or 
substantially identical comments, and in such cases will generally 
identify the number of identical or substantially identical comments 
represented by the posted example. All comments that have been 
redacted, as well as those that have not been posted, that contain 
comments on the merits of the proposed rule will be retained in the 
public comment file and will be considered as required under all 
applicable laws. All comments may be accessible under the Freedom of 
Information Act.

FOR FURTHER INFORMATION CONTACT: Catherine Topping, Counsel, (202) 898-
3975, [email protected]; Gregory Feder, Counsel, (202) 898-8724, 
[email protected]; Amy Ledig, Senior Attorney, (571) 213-3644, 
[email protected], Legal Division; Scott Leifer, Senior Review Examiner, 
(703) 632-9153, [email protected], Division of Risk Management 
Supervision; Dawnelle Guyette, Senior Policy Analyst, (816) 234-8130, 
[email protected], Division of Depositor and Consumer Protection; 
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, 
DC 20429.

SUPPLEMENTARY INFORMATION:

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\ Through 12 
CFR part 354 of the FDIC Rules and Regulations (part 354),\3\ the FDIC 
formalized its framework to supervise industrial banks and mitigate 
risk to the Deposit Insurance Fund (DIF) that may otherwise be 
presented in the absence of Federal consolidated supervision \4\ of an 
industrial bank and its parent company.
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    \1\ See, e.g., 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 proposed rule, 
the FDIC is treating the two types of institutions as the same. The 
amended rule would not apply to limited purpose trust companies and 
credit card banks that also are exempt from the definition of 
``bank'' pursuant to section 1841(c)(2).
    \3\ 12 CFR part 354. See 86 FR 10703 (Feb. 23, 2021).
    \4\ In the context of this proposed rule, ``Federal consolidated 
supervision'' refers to the supervision of a parent company and its 
subsidiaries by the Federal Reserve Board (FRB). Consolidated 
supervision of a bank holding company (BHC) 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).
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    Industrial banks are exempted from the definition of ``bank'' for 
purposes of the Bank Holding Company Act (BHCA). As a result, both 
financial and commercial companies can control an industrial bank 
without being subject to

[[Page 65557]]

the BHCA's activities restrictions or Federal Reserve Board (FRB) 
supervision and regulation. Some of the companies recently pursuing an 
industrial bank charter engage in commercial activities or have 
diversified business operations and activities that would not otherwise 
be permissible for bank holding companies (BHCs) under the BHCA and 
applicable regulations. There has been 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 where the operations of the proposed 
industrial bank would be interconnected with, or reliant on, the 
operations of the parent company or its affiliates. The FDIC is 
concerned about increased risk to the DIF in situations where there is 
a significant degree of dependence on the parent company or affiliates, 
particularly with respect to the primary business functions of the 
proposed institution. The FDIC is also focused on ensuring that such 
business models would appropriately serve the convenience and needs of 
the community.
    Dependent relationships raise supervisory concerns because the 
industrial bank's operations and condition may be vulnerable to any 
financial distress or operational disruptions at the parent 
organization. In such circumstances, there may be undue pressures or 
influences from the parent organization that impair the industrial 
bank's ability to maintain independent oversight and decision-making at 
the bank level. Further, where financial distress is experienced across 
the organization, concerns may develop that negatively impact capital 
and liquidity levels, earnings prospects, and the capacity of 
affiliates to fulfill their service commitments or other obligations to 
the industrial bank.
    In addition, significant resolution concerns may be presented if 
the industrial bank's parent company fails or otherwise faces 
significant financial difficulty that impairs its ability to perform 
under the agreements required by part 354. An industrial bank could 
have its business operations disrupted if critical support services 
provided by a parent company or its affiliates are lost. Additionally, 
overreliance on parent company support for daily operations could leave 
the industrial bank with little independent franchise value in the 
event of a failure. In such a case, the FDIC as receiver potentially 
would be faced with limited and more costly resolution options, such as 
establishing a bridge bank or employing a deposit payout.
    In light of these concerns, the FDIC has identified a number of 
changes to part 354 that are warranted to clarify and enhance the 
supervisory framework with respect to industrial banks. The proposed 
rule addresses the FDIC's concerns regarding the potential risk 
presented to an industrial bank subsidiary from its parent 
organization, including the relevant interdependencies, operational 
risks, and other circumstances or events that could create safety and 
soundness concerns and attendant risk to the DIF. The proposed 
amendments would incorporate criteria that the FDIC will consider in 
assessing the overall impact of a parent company and its affiliates on 
its industrial bank subsidiary and would provide notice and 
transparency to those companies that would seek to establish or acquire 
an industrial bank.
    The FDIC has received a limited number of filings where the parent 
company would control an industrial bank as a result of a conversion 
pursuant to section 5(i)(5) of the Home Owners' Loan Act (HOLA).\5\ 
Such proposed conversions from a Federal savings association to an 
industrial bank, although infrequent, raise similar issues to those 
raised by the filings currently triggering the applicability of part 
354, namely that such conversions also would result in an industrial 
bank becoming a subsidiary of a company that is not subject to Federal 
consolidated supervision.\6\ Consequently, the FDIC is proposing to 
amend the definition of ``Covered Company'' to include filings made 
pursuant to section 5(i)(5) of the HOLA.
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    \5\ 12 U.S.C. 1464(i)(5).
    \6\ The FDIC considers the statutory factors applicable to each 
filing it receives. However, as a general matter, when the purpose 
for a filing is to avoid the application of requirements imposed by 
another Federal banking agency, such a purpose will be viewed 
negatively within the context of the FDIC's consideration of the 
relevant factors.
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    The FDIC is also proposing to amend the definition of ``Covered 
Company'' in order to ensure that if a parent company of an industrial 
bank organized before April 1, 2021, is subject to a change of control, 
or such parent company is subject to a merger in which it is the 
resultant entity, it would be subject to part 354. Finally, the FDIC is 
proposing an amendment that would provide the FDIC the regulatory 
authority to apply part 354 to other situations where an industrial 
bank would become a subsidiary of a company that is not subject to 
Federal consolidated supervision.

II. Background

A. 2020-2021 Rulemaking--Part 354

    On February 23, 2021, the FDIC published a final rule governing the 
parent companies of industrial banks, codified at part 354.\7\ Part 354 
took effect on April 1, 2021. The rule requires certain conditions and 
written commitments 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 that is not subject to Federal consolidated supervision by 
the FRB. The rule also requires that, before any industrial bank may 
become a subsidiary of a company that is not subject to Federal 
consolidated supervision, such industrial bank and company must enter 
into one or more written agreements with the FDIC. The rule 
additionally requires the FDIC's prior written approval for certain 
actions proposed by the industrial bank, such as making a material 
change in its business plan. The rule applies to any industrial bank 
that becomes a subsidiary of a company not subject to Federal 
consolidated supervision as a result of a change in bank control or 
merger, or that is granted deposit insurance, on or after April 1, 
2021.
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    \7\ 86 FR 10703 (Feb. 23, 2021).
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B. The Industrial Bank Charter

    Under the Federal Deposit Insurance Act (FDI Act), industrial banks 
are ``State banks'' \8\ and all of the existing FDIC-insured industrial 
banks are ``State nonmember banks.'' \9\ As a result, the FDIC is the 
appropriate Federal banking agency for industrial banks.\10\ Each 
industrial bank is also regulated by its respective State chartering 
authority. The FDIC exercises the same supervisory and regulatory 
authority over industrial banks as it does over other State nonmember 
banks and State savings associations.
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    \8\ 12 U.S.C. 1813(a)(2).
    \9\ 12 U.S.C. 1813(e)(2).
    \10\ 12 U.S.C. 1813(q)(2).
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    The Competitive Equality Banking Act of 1987 exempted industrial 
banks from the definition of ``bank'' in the BHCA.\11\ 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. Industrial banks today are owned by both 
financial firms and commercial firms.
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    \11\ Public Law 100-86, 101 Stat. 552 (Aug. 10, 1987).

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[[Page 65558]]

C. Industry Profile

    As of June 27, 2024, there were 23 industrial banks \12\ with $232 
billion in aggregate total assets. Six industrial banks reported total 
assets of $10 billion or more; seven 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 sources other than core deposits.
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    \12\ Of the 23 industrial banks existing as of June 27, 2024, 15 
were chartered in Utah, three in Nevada, three in California, one in 
Hawaii, and one in Minnesota.
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    Since 2008, there have been two newly established industrial banks: 
Nelnet Bank, Draper, Utah, and Square Financial Services, Inc., Salt 
Lake City, Utah, which became FDIC-insured in November 2020 and March 
2021, respectively. The applications for Nelnet Bank and Square 
Financial Services, Inc. were approved in March 2020.\13\ As part of 
the approvals, the FDIC required each industrial bank and their parent 
companies to enter into written agreements with the FDIC that contained 
provisions consistent with the requirements of part 354.
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    \13\ The FDIC Board approved an industrial bank deposit 
insurance application for Thrivent Bank, subject to conditions and 
written agreements, on June 20, 2024. The bank has not yet commenced 
operations.
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    When part 354 was finalized on February 23, 2021, there were six 
pending industrial bank deposit insurance applications. Since that 
time, the FDIC received three additional industrial bank deposit 
insurance applications. Of the nine applications received since March 
2020, one was approved, six have been withdrawn,\14\ one was returned 
as substantially incomplete, and one remains pending. 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.
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    \14\ 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.
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D. Supervision Framework

    Because industrial banks are insured State nonmember banks, they 
are subject to the FDIC Rules and Regulations, as well as other 
provisions of law, including restrictions under the Federal Reserve Act 
governing transactions with affiliates,\15\ anti-tying provisions of 
the BHCA,\16\ and insider lending regulations.\17\ Industrial banks are 
also subject to regular examination, including examinations focused on 
safety and soundness; anti-money laundering and countering the 
financing of terrorism compliance; consumer protection, including fair 
lending; Community Reinvestment Act; information technology; 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.\18\
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    \15\ See 12 U.S.C. 1828(j)(1)(A); 12 CFR part 223.
    \16\ 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(h)(1).
    \17\ See 12 CFR 337.3.
    \18\ 12 U.S.C. 1820(b)(4).
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    In addition, under section 38A of the FDI Act,\19\ 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.\20\ Subsection (d) of section 
38A 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.\21\
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    \19\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
    \20\ 12 U.S.C. 1831o-1(b).
    \21\ 12 U.S.C. 1831o-1(d).
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    Part 354 conforms to the FDIC's historical practice of requiring 
capital and liquidity maintenance agreements (CALMAs) 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.

III. Rulemaking Authority

    The FDIC amends its regulations under the general rulemaking 
authority prescribed in section 9 of the FDI Act \22\ and under 
specific authority granted by the FDI Act and other statutes.\23\ These 
include section 5 of the FDI Act, which authorizes the FDIC to grant 
deposit insurance, based on the factors in section 6 of the FDI Act; 
these factors generally focus on the safety and soundness of the 
proposed institution, any risk it may pose to the DIF, and the 
convenience and needs of the community.\24\ The FDIC is also authorized 
to permit or deny various transactions by State nonmember banks, 
including merger and change in bank control transactions.\25\ 
Conversions from a Federal savings association to an industrial bank, 
pursuant to section 5(i)(5) of the HOLA,\26\ are also subject to review 
and approval by the FDIC, as the resulting institution would be an 
industrial bank that is not subject to Federal consolidated 
supervision. While the statutory factors differ by filing type, safety 
and soundness considerations and other risk attributes are commonly 
addressed. In addition, section 39 of the FDI Act charges the FDIC with 
ensuring that the institutions it supervises operate in a safe and 
sound manner by prescribing standards through regulations or 
guidelines.\27\ Finally, section 38A of the FDI Act empowers the FDIC 
to ensure that a company that controls an industrial bank serves as a 
source of financial strength for that institution.
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    \22\ 12 U.S.C. 1819.
    \23\ See, e.g., 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a) 
(Seventh) and (Tenth), 1820(g), 1831o-1, 3108, 3207.
    \24\ 12 U.S.C. 1816.
    \25\ See 12 U.S.C. 1817(j) and 1828(c).
    \26\ 12 U.S.C. 1464(i)(5).
    \27\ FDI Act section 39, 12 U.S.C. 1831p-1.
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IV. Description of the Proposed Amendments to Part 354

A. Revisions to the Scope of Part 354's Application

1. Amending the Definition of ``Covered Company'' To Expressly Include 
Filings Made Pursuant to Section 5(i)(5) of the HOLA
    Part 354 applies to Covered Companies and industrial banks 
controlled by a Covered Company. ``Covered Company'' is defined in part 
354 to mean, in each case on or after April 1, 2021, 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.\28\ The effect of this definition,

[[Page 65559]]

together with the scope provisions of Sec.  354.1, is that industrial 
banks organized on or after April 1, 2021, are subject to part 354, 
while those organized prior to April 1, 2021 (legacy institutions), are 
not subject to part 354 unless a Covered Company comes to control such 
an industrial bank through one of the three enumerated routes. As a 
result, a company that controls an industrial bank that has converted 
from a Federal savings association charter would not be a Covered 
Company.
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    \28\ 12 CFR 354.2.
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    Section 354.6 currently \29\ makes it clear that the adoption of 
part 354 does not impair the FDIC's authority to address supervisory 
concerns. Accordingly, even if part 354 does not apply to a legacy 
institution or to an industrial bank or its parent company that does 
not satisfy one of the three prongs of the Covered Company definition, 
the FDIC may impose some or all of the requirements of part 354 on a 
given institution as warranted. Such an approach makes sense because 
the requirements of part 354 reflect the supervisory practices of the 
FDIC with respect to industrial banks and their parent companies, 
codified to provide notice and transparency to those companies that 
would seek to establish or acquire an industrial bank.
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    \29\ As proposed, Sec.  354.6 would be renumbered to Sec.  
354.7.
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    As noted above, the FDIC has received a limited number of filings 
where the parent company would control an industrial bank as a result 
of a conversion pursuant to section 5(i)(5) of the HOLA.\30\ Section 
5(i)(5) allows a Federal savings association to convert to a State bank 
with the approval of the appropriate State bank supervisor and the 
appropriate Federal banking agency if the resulting State bank will 
meet all financial, management, and capital requirements applicable to 
the resulting national or State bank.\31\ Such proposed conversions 
from a Federal savings association to an industrial bank, although 
infrequent, raise similar issues to those raised by the filings 
currently triggering application of part 354, namely that such 
conversions also would result in an industrial bank becoming a 
subsidiary of a company that is not subject to Federal consolidated 
supervision. As a result, the FDIC has determined that such 
conversions, if approved, should be subject to the provisions of part 
354, as if part 354 applied.
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    \30\ 12 U.S.C. 1464(i)(5).
    \31\ 12 U.S.C. 1464(i)(5)(A), (B).
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    Consequently, the FDIC is proposing to amend the definition of 
``Covered Company'' to expressly include filings made pursuant to 
section 5(i)(5) of the HOLA. While Sec.  354.6 preserves the FDIC's 
authority to impose such conditions as it may deem necessary in 
connection with a conversion under section 5(i)(5) of the HOLA to an 
industrial bank, the FDIC believes specific regulatory language is 
appropriate.
2. Change in Control or Merger Involving the Parent Company of an 
Industrial Bank
    The FDIC is proposing a second amendment to the definition of 
``Covered Company'' to include companies that control an industrial 
bank if, on or after the effective date of the amendment to the 
definition of ``Covered Company,'' there is a change in control at the 
parent company or there is a merger transaction in which the parent 
company is the resultant entity. The proposed amendment would fill an 
unintended gap that results from the construction of the current 
definition of ``Covered Company.'' Currently, industrial banks and 
their parent companies would not be subject to part 354 unless the 
parent company controls the industrial bank as a result of one of three 
triggering events enumerated in the ``Covered Company'' definition, in 
each case after the effective date of part 354. This approach divides 
industrial banks into (1) legacy institutions to which part 354 does 
not apply, on the one hand and (2) legacy institutions that become 
subject to part 354 as a result of one of the three triggers, or new 
institutions, on the other, and (3) de novo industrial banks.
    The gap results where there is a change in control or merger that 
occurs at or above the level of the parent company that results in a 
change in the person that controls the parent company but does not 
result in a change in the relationship between the industrial bank and 
its parent company. Similarly, if the parent company were a party to a 
merger in which it is the resultant entity, then new management with a 
new plan for the industrial bank could be installed. The parent company 
would continue to control the industrial bank, but not as a result of 
one of the trigger events, thus failing to make the parent company a 
Covered Company subject to part 354.
    The FDIC has an interest in being able to review changes that 
impact the parent's control of the industrial bank. This interest is 
recognized specifically in the Change in Bank Control Act, which 
requires the prior FDIC approval of the acquisition of direct or 
indirect control of a State nonmember bank.\32\ The proposed amendment 
would ensure that a parent company subject to such a change of control, 
or a parent company subject to a merger in which it is the resultant 
entity, would be subject to part 354.
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    \32\ 12 U.S.C. 1817(j)(1).
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3. Applying Part 354 to Situations in Which an Industrial Bank Would 
Become a Subsidiary of a Company That Is Not Subject to Federal 
Consolidated Supervision
    Finally, the FDIC is proposing an amendment that would provide the 
FDIC the regulatory authority to apply part 354 to any other situation 
where an industrial bank would become a subsidiary of a company that is 
not subject to Federal consolidated supervision. The FDIC recognizes 
that such an amendment could potentially lead to the application of 
this part to a legacy institution, despite the April 2021 effective 
date of part 354. Accordingly, the FDIC proposes to allow a filer of an 
application or notice, or participant in a transaction, an opportunity 
to present its views in writing if the company does not agree with the 
FDIC's determination to apply part 354 to a particular filing. The 
proposed amendments to part 354 would make clear that such a written 
filing should be submitted in accordance with part 303 of the FDIC 
Rules and Regulations.\33\
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    \33\ See 12 CFR part 303.1 to 303.19.
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    This type of provision, with the opportunity for a filer to express 
its views regarding the FDIC's determination, is not without precedent 
in the FDIC Rules and Regulations.\34\ The FDIC believes the proposed 
amendment properly balances the FDIC's need for the flexibility to be 
able to respond to situations that it cannot foresee with a filer's 
need for an avenue to react and respond to the FDIC's determinations.
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    \34\ See 12 CFR 324.5 and 329.2 (allowing notice and opportunity 
to respond to FDIC determination that additional capital or 
liquidity is required). The Office of the Comptroller of the 
Currency (OCC) and FRB have similar provisions. See 12 CFR 3.404 and 
50.2 (OCC); 12 CFR 249.2 and 263.202 (FRB).
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    Question 1: What situations--other than those that require a notice 
subject to section 7(j) of the FDI Act or an application subject to 
sections 5 or 18(c) of the FDI Act or section 5(i)(5) of the HOLA--
present similar risks such that they should also subject the industrial 
bank and its parent company to part 354?

[[Page 65560]]

B. Clarifying the Relationship Between Written Commitments and the 
FDIC's Evaluation of Statutory Factors

    The FDIC has the responsibility to consider filings based on 
statutory criteria. For example, when reviewing an application for 
deposit insurance, the FDIC must consider the factors enumerated in 
section 6 of the FDI Act.\35\ These factors generally focus on the 
safety and soundness of the proposed institution, any risk it may pose 
to the DIF, and the convenience and needs of the community. The FDIC is 
also authorized to permit or deny other types of transactions by State 
nonmember banks, including those proposed in merger applications and 
change in bank control notices, as well as in HOLA conversion 
applications, based on an evaluation of the applicable statutory 
factors relevant to the underlying filing.\36\ While the specific 
statutory factors differ by filing type, safety and soundness 
considerations and the convenience and needs of the community are 
commonly addressed.
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    \35\ 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.
    \36\ See 12 U.S.C. 1817(j), 1828(c), and 1464(i)(5).
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    Generally, if all statutory factors are favorably resolved, FDIC 
staff will recommend approval of or non-objection to the filing, 
subject to prudential conditions and written commitments for filings 
involving an industrial bank. If FDIC staff finds unfavorably on one or 
more statutory factors based on the filing review, staff generally will 
recommend denial of or objection to the filing. Upon taking action on a 
filing, or if a proponent withdraws their filing during the review 
process, the FDIC Board of Directors may release a statement addressing 
the Board's views regarding the transaction if such a statement is 
considered to be in the public interest for purposes of creating 
transparency for the public and future applicants.\37\
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    \37\ Such a statement would be in addition to any statements 
individual Board members might choose to make addressing their 
personal views regarding the transaction.
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    Per Sec.  354.3, the FDIC requires written agreements among a 
Covered Company and the FDIC and the subsidiary industrial bank. These 
agreements include 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 the FDIC deems 
appropriate, when approving or non-objecting to certain filings 
involving an industrial bank. Section 354.4 requires 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 in order to 
maintain the safety and soundness of industrial banks that are 
controlled by Covered Companies. The FDIC included these required 
commitments in part 354 to provide transparency to current and 
potential industrial banks, the companies that control them, and the 
general public.
    Moreover, under its general supervision, examination, and 
enforcement authorities (as reserved by Sec.  354.6), 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 
characteristics of the activities, or the complexity of operations. The 
proposed relationships and transactions with the parent organization 
that may impact the industrial bank could also be taken into 
consideration in determining commitments.
    In considering recent industrial bank filings, the FDIC has become 
concerned that applicants may be misinterpreting part 354 and the 
effects of the written commitments required under the rule as they 
relate to the FDIC's assessment of the applicable statutory factors. 
While part 354 permits the FDIC to condition the approval of an 
application or non-objection to a notice on the Covered Company and 
industrial bank entering into written agreements and making required 
commitments, and the written agreements will be taken into account as 
part of the FDIC's consideration of the underlying filing, they do not 
replace any statutory factor applicable to the filing and will not 
necessarily lead to the favorable resolution of any statutory factor 
where the facts and circumstances are otherwise unfavorable. This is a 
longstanding tenet of FDIC's applications processing policy and 
procedures.\38\
---------------------------------------------------------------------------

    \38\ Applications Procedures Manual (hereinafter APM), 
Applications Overview, 1.1, https://www.fdic.gov/regulations/applications/resources/apps-proc-manual/index.html; APM, Standard 
and Non-Standard Conditions, 1.11; and Deposit Insurance 
Applications Procedures Manual Supplement--Applications from Non-
Bank and Non-Community Bank Applicants, https://www.fdic.gov/regulations/applications/depositinsurance/procmanual-supplement.pdf.
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    CALMAs and parent company agreements are intended to protect the 
industrial bank and mitigate potential risks to the DIF, as well as to 
provide a means for the FDIC to pursue a formal enforcement action 
under sections 8 and 50 of the FDI Act if a party fails to comply with 
the agreements. Such agreements also capture in writing the Covered 
Company's obligation to serve as a source of financial strength to the 
industrial bank. However, such agreements do not in and of themselves 
resolve any given statutory factor. If a filing presents material 
concerns and fundamental weaknesses with respect to any statutory 
factor, the written agreements will not compensate for such weaknesses 
for purposes of resolving the statutory factor. For example, a written 
agreement would not be appropriate if the situation involves weak or 
questionable earnings projections, an unacceptable or opaque control 
structure, insufficient capital levels, weak or marginal management or 
director candidates, apparent violations of a statute or regulation, a 
higher-risk business model, or a failure to meet the convenience and 
needs of the community.
    Consequently, the FDIC proposes to amend Sec.  354.4 to clarify the 
FDIC's implementation of part 354 to expressly address and make clear, 
consistent with long-standing applications processing policy, that 
written agreements will be taken into account as part of the FDIC's 
consideration of the underlying filing, but do not replace any 
statutory factor applicable to the filing and will not necessarily lead 
to the favorable resolution of any statutory factor where the facts and 
circumstances are otherwise unfavorable. This applies to the required 
commitments and provisions within any written agreements, the 
industrial bank subsidiary restrictions that are also included within 
part 354, and any other conditions that may be imposed as part of the 
FDIC's approval of, or non-objection to, a filing.
    Question 2: What other clarifications, if any, to part 354 and its 
relationship to the FDIC's evaluation of the applicable statutory 
factors should the FDIC consider?

[[Page 65561]]

C. Shell and Captive Industrial Bank Business Models

1. Supervisory Concerns
    Shell and captive bank business models create potentially 
significant supervisory concerns for industrial banks. The level of 
concern with these business models is inherently heightened due to the 
substantial reliance on the parent company or its affiliates, 
particularly with respect to the primary business operations of the 
industrial bank. This may include total or nearly exclusive reliance on 
the parent organization for sourcing business, conducting key 
operational elements (e.g., underwriting, administering, or servicing 
customer accounts or relationships), and obtaining a wide range of 
critical business support services.
    In shell or captive structures, the industrial bank's operations 
and condition may be vulnerable to any financial distress or 
operational disruptions at the parent company or any affiliates that 
provide key services to the industrial bank. The heavily integrated 
relationship between the industrial bank and the parent organization 
results in significant concentration risks that are typically not 
present in traditional community bank operating structures. Further, 
the industrial bank generally has limited or no ability to operate 
independently from the parent organization and, as discussed below, 
lacks franchise value on a standalone basis.
    The FDIC expects an industrial bank to have a sufficiently 
independent board of directors and management team, a sustainable 
financial structure with appropriate capital and liquidity maintained 
at the bank level, and a business model that is viable on a standalone 
basis (as defined in the proposed Sec.  354.6(b)). Some industrial bank 
proposals involving shell or captive structures have lacked one or more 
of these elements, causing managerial concerns (due to the lack of 
independent oversight and decision-making or fully dedicated officers/
staff at the industrial bank), as well as financial concerns (due to 
inadequate capital and liquidity levels, and earnings prospects that 
depend on maintaining internal organizational relationships).
    The existing part 354 addresses some of the aforementioned concerns 
by requiring any Covered Company to enter into written agreements 
including specific provisions and commitments intended to ensure that 
the Covered Company supports the industrial bank and its ability to 
operate in a safe and sound manner. Among other items, the written 
agreements address board independence, capital and liquidity 
maintenance and support, and if required by the FDIC, contingency 
planning.\39\ In the absence of Federal consolidated supervision, 
written agreements provide the FDIC information and ongoing access to 
information needed to assess and monitor the impact the parent 
organization may have on an industrial bank. The FDIC uses written 
agreements to mitigate risk to the industrial bank and to the DIF. 
However, as noted above in section IV.B of this SUPPLEMENTARY 
INFORMATION, the required commitments, written agreement provisions, 
and industrial bank subsidiary restrictions of part 354 will be taken 
into account as part of the FDIC's consideration of the underlying 
filing, but do not replace any statutory factor applicable to the 
filing and will not necessarily lead to the favorable resolution of any 
statutory factor where the facts and circumstances are otherwise 
unfavorable. In addition, where the primary business purpose and 
operations of the industrial bank are highly dependent upon the parent 
company, such agreements may have limited value if the parent company 
experiences operational or financial difficulties. Similarly, the 
managerial restrictions of part 354 intended to ensure the independence 
of the industrial bank's management may not be effective where the 
business purpose of the industrial bank is to support the parent 
company's operations because there may be direct or indirect 
organizational influences on business decisions from outside the 
industrial bank that would impact consideration of the relevant 
statutory factors.
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    \39\ See 12 CFR 354.4.
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    The FDIC's experience during the 2008-2009 Financial Crisis showed 
that business models involving an insured depository institution (IDI) 
inextricably tied to and reliant on the parent and/or its affiliates 
creates significant challenges and risks to the DIF, especially in 
circumstances where the parent organization experiences financial 
stress and/or declares bankruptcy.\40\ Where an industrial bank is 
significantly reliant on and interconnected with its parent 
organization to generate business on both sides of the balance sheet 
(e.g., for funding and for lending), as well as operational systems and 
support, financial difficulties at the parent organization could be 
transmitted to the dependent industrial bank. Such a captive model 
creates material concerns about the viability of the industrial bank's 
proposed business model on a standalone basis and the industrial bank's 
franchise value in the event the parent organization experiences 
financial difficulty or failure. These concerns are so significant that 
the FDIC is proposing a rebuttable presumption that certain 
characteristics, if present, will cause an industrial bank to be a 
shell or captive institution and a presumption that the shell or 
captive nature of an industrial bank will weigh heavily against 
favorably resolving one or more of the applicable statutory factors.
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    \40\ See, e.g., n.57 and n.59, infra (discussion of NextBank and 
Advanta).
---------------------------------------------------------------------------

    The proposed revisions to part 354 would renumber the existing 
Sec.  354.6 to Sec.  354.7 and at Sec.  354.6 would incorporate 
additional considerations that the FDIC would undertake to determine 
the degree of risk presented to the industrial bank from the parent 
company and its affiliates when considering the relevant statutory 
factors. These considerations address the business purpose for 
establishing or acquiring control of the industrial bank, intercompany 
relationships, the regulatory and consumer compliance history and 
supervisory record of each relevant entity, the novelty of the parent 
company's primary businesses (including any new or innovative 
processes), accessibility of information, and any plans or processes 
that mitigate risks presented by the parent company.\41\ Expanding part 
354 to include these considerations provides increased transparency 
regarding how the FDIC evaluates potential risks and concerns presented 
in an industrial bank filing.
---------------------------------------------------------------------------

    \41\ See proposed Sec.  354.6(a).
---------------------------------------------------------------------------

    In addition, the proposed revisions to part 354 include 
considerations aimed at identifying shell or captive structures and 
presumptions the FDIC would apply as a consequence of such 
identification. The FDIC would review each filing covered by the rule 
on a case-by-case basis, on the facts and circumstances presented 
within the context of the applicable statutory factors to determine the 
degree to which the industrial bank would have an independent board and 
management team, a business model that is viable on a standalone basis, 
and franchise value that is independent of the parent company and its 
affiliates.\42\ The proposed revisions to part 354 include factors that 
would focus this inquiry on identifying organizational structures in 
which the industrial bank is overly dependent on the parent. The 
results of

[[Page 65562]]

this inquiry would give rise to the presumptions the FDIC would apply 
as a consequence of such identification.
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    \42\ See proposed Sec.  354.6(b).
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    The proposed revisions would provide in Sec.  354.6(c)(1) that an 
industrial bank would be presumed to be a shell or captive institution 
if it (a) could not function independently of the parent company, or 
(b) would be significantly or materially reliant on the parent company 
or its affiliates, or (c) would serve only as a funding channel for an 
existing parent company or affiliate business line. The FDIC would 
presume that the shell or captive nature of an industrial bank would 
weigh heavily against favorably resolving one or more of the applicable 
statutory factors.\43\
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    \43\ See proposed Sec.  354.6(c)(2).
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    The proposed amendment to the scope of the definition of ``Covered 
Company'' would allow any company subject to a determination that a 
transaction would result in the application of part 354 to contest the 
determination in writing. Additionally, proposed Sec.  354.6(c)(2) 
would afford any company seeking to rebut a presumption described in 
paragraph (c)(1) an opportunity to present its views in writing. 
Section 354.6(c)(3) also would establish that a company's decision to 
provide written views regarding the applicability of part 354 or a 
presumption would place all related filings and transactions on hold so 
that the threshold applicability determinations can be resolved before 
further proceedings. Such a suspension would prevent the consummation 
of a transaction or transactions that may be difficult or costly to 
unwind.
2. Convenience and Needs Concerns
    As noted above, under the FDI Act, the FDIC must consider the 
convenience and needs of the community to be served when evaluating a 
deposit insurance or merger application. For some industrial bank 
proposals involving shell or captive structures, the primary deposit 
and credit products are both highly dependent upon the parent company 
and would target the customers of the parent company. Where a proposal 
for an industrial bank is presumed to be a shell or captive institution 
under the presumptions in proposed Sec.  354.6(c)(1), if the target 
market is such that the institution's products are only available to 
customers of an affiliated company or a narrow segment of the 
community, this would weigh heavily against favorably resolving the 
convenience and needs statutory factor.
    The public purpose of a bank charter with deposit insurance is that 
the bank will serve the convenience and needs of the community broadly. 
Business models that are not generally available to the members of the 
community absent purchasing a product by an affiliated entity raise 
serious questions as to whether the general community is sufficiently 
served to merit the grant of deposit insurance. Similar to the other 
presumption in proposed Sec.  354.6(c)(1), the FDIC would review each 
filing on a case-by-case basis and filers may present facts to 
demonstrate that the community is effectively served notwithstanding 
the fact that the product offerings would be limited to customers of 
the affiliated entity or to a narrow segment only.
    The evaluation of the convenience and needs of the community is a 
broad inquiry and would not be limited to strategies or plans under the 
Community Reinvestment Act. In assessing whether the convenience and 
needs of the community are met in industrial bank proposals, the FDIC 
would consider the customer base that the applicant intends to serve 
with its deposit and credit products and the market need filled through 
those products. The FDIC would also consider the convenience and 
benefits to the community that would not otherwise occur absent the 
creation of the industrial bank with deposit insurance. For instance, 
if there is a demonstrated lack of credit availability or competition 
(e.g., existing firms have not met the market demand), this may support 
a favorable finding on convenience and needs. On the other hand, if 
there are existing non-bank captive finance firms serving the proposed 
community, the FDIC would evaluate the additional benefits of an 
industrial bank in meeting the convenience and needs of the community, 
and if the benefits of the insured bank (such as lower cost funds) 
accrue primarily the parent rather than to the community, this may 
weigh against favorably resolving the convenience and needs statutory 
factor. The FDIC also would consider whether there would be any 
negative consequences to the community resulting from the ownership of 
the industrial bank by the parent company.
    In considering the convenience and needs of the community, the FDIC 
may require commitments or conditions from a Covered Company when the 
FDIC determines it is necessary to address specific elements of a 
filing, which may be derived from the business model.
    Given the unique nature of industrial banks and the facts and 
circumstances of a particular transaction, the FDIC may also consider 
whether public hearings would be an appropriate means to obtain further 
public input on whether a specific application meets the convenience 
and needs of the community.
3. Existing Industrial Banks--Structure and Supervision
    As noted previously, the universe of industrial banks is relatively 
small, with only 23 existing institutions. Several of the institutions 
primarily or entirely provide banking products and services to 
customers of affiliated entities within the parent organization (in 
general, these industrial banks do not broadly serve the general 
public, customers of unaffiliated businesses, or geographic markets 
that differ from those of the parent company or its affiliates). These 
include, but are not limited to, industrial banks established or 
acquired by commercial companies to support the sale or lease of 
manufactured products (e.g., postage meters, automobiles or 
motorcycles), by retailers to issue general-purpose credit cards, and 
by financial companies in order to enable brokerage customer funds to 
be swept into insured deposits at the industrial bank.
    Some of the existing industrial banks rely to a significant extent 
on their parent companies or affiliates for business generation, 
operational aspects, and/or a variety of corporate support services. 
While many of the industrial banks are closely integrated with their 
parent organizations, they typically maintain adequate capital, have 
sufficient liquidity, and reflect satisfactory overall risk profiles. 
For the most part, the existing industrial banks are seasoned in nature 
(all but two were established between 1984 and 2006), and fared 
similarly to other types of financial institutions during previous 
banking crises.\44\ Additionally, because part 354 was based on the 
FDIC's supervisory practice, written agreements are in place for five 
industrial banks: two are subject to capital maintenance agreements, 
one is subject to a CALMA, and two are subject to both CALMAs and 
parent company agreements.\45\
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    \44\ During the 2008-09 Financial Crisis, several parent 
companies pursued conversions of an industrial bank to a commercial 
bank, which required approval of the parent company to become a BHC 
subject to regulation and supervision by the FRB. The conversions 
allowed the respective companies to access programs such as the 
FDIC's Temporary Liquidity Guarantee Program and the Troubled Asset 
Relief Program administered by the Department of the Treasury.
    \45\ Previously 10 other industrial banks (that have since 
merged, converted, or voluntarily liquidated) were also subject to 
CALMAs and/or parent company agreements. The FDIC began imposing 
additional prudential requirements in Orders granting Federal 
deposit insurance in March 2004. The FDIC described its imposition 
of additional prudential requirements in FDIC: The FDIC's 
Supervision of Industrial Loan Companies: A Historical Perspective--
Summer 2004 Vol. 1, Issue 1. GAO further described the FDIC's 
approach in pages 41-44 of its 2005 audit, Industrial Loan 
Corporations: Recent Asset Growth and Commercial Interest Highlight 
Differences in Regulatory Authority, available at https://www.gao.gov/products/gao-05-621.

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[[Page 65563]]

    Importantly, industrial banks are subject to all of the same 
restrictions and requirements, regulatory oversight, and safety-and-
soundness and consumer compliance examinations--including compliance 
with fair lending laws and regulations, and the Community Reinvestment 
Act--as any other kind of insured state nonmember bank. This includes 
examining the industrial bank for compliance with laws and regulations, 
including affiliate transaction limits and capital maintenance 
requirements. The FDIC also has the authority and capacity to regulate 
industrial banks and their parent companies.\46\ This framework of 
supervision, coupled with part 354 in its amended form as proposed,\47\ 
is expected to continue to protect industrial banks and the DIF from 
potential risks related to parent company and affiliate relationships.
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    \46\ See, e.g., 12 U.S.C. 1820(b)(4)(A) (in making a bank 
examination, an FDIC examiner shall have the power to examine the 
affairs of any affiliate of any depository institution as may be 
necessary to determine the relationship between such depository 
institution and any such affiliate and the effect of such 
relationship on the depository institution.); 12 U.S.C. 1831o-1(b).
    \47\ Part 354 applies prospectively to Covered Companies and is 
not applicable for existing industrial banks, absent any new filing 
related to the industrial bank that would be subject to the rule.
---------------------------------------------------------------------------

4. Resolution Considerations
    In addition to the supervisory concerns described above, an FDIC-
insured industrial bank with a shell or captive business model presents 
the risk of costly and delayed resolution in the event of the 
industrial bank's failure.\48\ The proposed amendments to part 354 
address the risks that captive or shell business models may present to 
the DIF. Addressing these risks will facilitate the FDIC's 
accomplishment of its statutory mandates, including as the receiver for 
a failed IDI.
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    \48\ In this context, ``resolution'' means not only the initial 
phase of the FDIC's receivership process for a failed IDI, but also 
the various responsibilities that fall to the FDIC to liquidate 
assets that are not purchased by a third party in that receivership 
process. This includes necessary bookkeeping, accounting, reporting, 
identifying and verifying claims, paying claims, determining whether 
to bring actions against parties responsible for the institution's 
failure, and monitoring ongoing agreements with asset purchasers, 
etc. See FDIC, Crisis and Response--An FDIC History, 2008-2013, 176-
77 (2017) (Crisis and Response). Additionally, resolution is 
distinct from ``recovery'' (i.e., the steps the industrial bank and 
the Covered Company could take to mitigate the impacts of financial 
and operational stress outside of the receivership process), which 
is the focus of part 354's provisions regarding contingency 
planning. 12 CFR 354.4(b). In addition, the FDIC as receiver of a 
state-chartered bank has the rights and powers that a state banking 
authority would have under applicable state law. 12 U.S.C. 
1821(c)(3)(B).
---------------------------------------------------------------------------

    As with any failed IDI, an FDIC-insured industrial bank must be 
resolved under the FDI Act.\49\ When the FDIC is appointed as the 
receiver for a failed IDI (FDIC-R), it succeeds, by operation of law, 
to all of the IDI's rights, titles, powers, and privileges, including 
the rights of stockholders, depositors, officers, and directors with 
respect to the failed IDI and its assets.\50\ The FDIC-R has the power 
to wind up a failed IDI's operations and transfer its assets and 
liabilities to third parties.\51\ Once appointed, FDIC-R's objectives 
are to (1) ensure that depositors receive access to their insured 
deposits as quickly as possible; (2) marshal and sell the IDI's assets; 
(3) determine claims; and (4) distribute net recoveries from asset 
liquidations by issuing dividends to the FDIC as subrogee to insured 
depositors, uninsured depositors, and creditors in accordance with the 
priority scheme set out in the FDI Act.\52\
---------------------------------------------------------------------------

    \49\ 11 U.S.C. 109(b)(2), (d); 12 U.S.C. 1821(c)(2)(A)(ii).
    \50\ 12 U.S.C. 1821(d)(2)(A)(i); (e)(13)(A).
    \51\ 12 U.S.C. 1821(d)(2)(B), (G).
    \52\ 12 U.S.C. 1821(d)(11)(A).
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    The most common method of resolution is a purchase and assumption 
transaction where a significant portion of a failed IDI's assets is 
sold to a healthy financial institution in exchange for its assumption 
of part or all of the failed IDI's deposit liabilities. Other 
resolution methods include direct payouts to depositors, the creation 
of a bridge bank that will perform certain functions of the failed bank 
and operate as an interim IDI, or the organization of a deposit 
insurance national bank. The FDIC-R's resolution options may be limited 
by the statutory requirement to use whichever option will be the least 
costly to the DIF.\53\ The FDIC's experience in resolving failed IDIs, 
including during the 2008-2009 Financial Crisis,\54\ shows that the 
franchise value of an IDI has implications for the resolution options 
that may be available to the FDIC, as discussed below.
---------------------------------------------------------------------------

    \53\ 12 U.S.C. 1823(c)(4).
    \54\ Between 2007 and 2013, the FDIC resolved 489 failed IDIs 
with total assets over $686 billion. See Crisis and Response at 182-
83.
---------------------------------------------------------------------------

    In some industrial bank proposals that the FDIC has received, the 
viability and operations of the bank are dependent on ongoing support 
from the parent organization. In such cases, financial or operational 
stress at the parent company or any of its affiliates reduces the 
franchise value of the industrial bank in the event of failure and 
complicates its resolution. The underlying value of such an industrial 
bank lies in its connection with the parent organization, which may 
provide benefits including, but not limited to, name recognition, 
clients or referrals, personnel and back-office support, and/or 
specific product offerings that complement the parent company's or 
affiliates' lines of business. If such connections were to be severed, 
the FDIC likely would find it more difficult to facilitate a resolution 
with a healthy bank, and it likely would be forced to employ less 
efficient resolution methods that are more lengthy, cumbersome, and 
costly, such as depositor payouts and piecemeal loan (or other asset) 
sales.\55\
---------------------------------------------------------------------------

    \55\ See, e.g., Crisis and Response at 185.
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    Similarly, the loss of critical support services previously 
provided to the industrial bank by its parent organization or 
affiliates would pose a potentially significant challenge in a 
resolution scenario, as the parent or affiliated entities may no longer 
be able to fulfill their obligations under existing service agreements. 
If the parent company or its affiliates remain open and operating, the 
FDIC-R would have the authority to enforce the failed IDI's 
arrangements in accordance with the contractual terms.\56\ However, if 
the parent organization becomes a debtor under the Bankruptcy Code 
(either before or after the FDIC-R's appointment), uncertainty likely 
would exist with regard to the parent's or the affiliates' willingness 
or ability to fulfill such obligations.\57\ If such arrangements are 
terminated, the industrial bank's franchise value would be 
significantly diminished.\58\ This situation could leave

[[Page 65564]]

the FDIC in a position where it has no choice but to conduct resolution 
methods that are more disruptive and expensive.\59\
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    \56\ 12 U.S.C. 1821(e)(13)(A).
    \57\ 11 U.S.C. 365(a), (g)(1). This uncertainty exists because a 
bankruptcy debtor has the power to ``reject'' executory contracts, a 
process that amounts to a pre-bankruptcy breach of the contract 
where the debtor no longer performs and the counterparty is left 
with only a claim for damages. The Bankruptcy Courts apply a 
business judgment standard when determining whether to approve the 
rejection of an executory contract. See, e.g., In re Klein Sleep 
Prods., Inc., 78 F.3d 18 (2d Cir. 1996). See also FDIC Office of 
Inspector General, Material Loss Review of Advanta Bank Corp., 
Draper, Utah (Oct. 2010), https://www.fdicoig.gov/sites/default/files/reports/2022-08/11-002.pdf. The bank failed in March 2010. 
Advanta's parent company, Advanta Corp., filed for Chapter 11 
Bankruptcy protection in November 2009 and refused to provide 
capital support to Advanta.
    \58\ The 2008 bankruptcy of Lehman Brothers Holdings Inc. (LBHI) 
illustrates diminished franchise value concerns. As described in the 
debtor's Chapter 11 plan, LBHI's two IDI subsidiaries, Woodlands 
Commercial Bank and Aurora Bank, FSB, both fell to less than well 
capitalized status and were vulnerable to failure because of their 
dependence on LBHI. The LBHI organization provided the IDIs with 
operational services, as well as credit, market, and foreign 
exchange risk protection provided by a Master Forward Agreement with 
LBHI. The agreements were repudiated as a result of the bankruptcy 
filings. Consequently, the IDIs' earnings and capital were fully 
exposed to changes in credit spreads, interest rates, foreign 
exchange rates, commodity prices, and equity prices. Market value 
losses based on mark-to-market accounting depleted the capital base. 
While the bankrupt parent, LBHI, received court approval to support 
the two IDIs, notwithstanding the capital support, the two IDIs 
ultimately voluntarily liquidated. See Debtors' Disclosure Statement 
for Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and Its 
Affiliated Debtors Pursuant to Section 1125 of the Bankruptcy Code 
at 71-71, In re: Lehman Bros. Holdings Inc., et al, Ch. 11 Case No. 
08-13555 (Bankr. S.D.N.Y. 2010), https://www.sec.gov/Archives/edgar/data/806085/000110465910020165/a10-8193_1ex99d1.htm.
    \59\ The failure of NextBank, N.A., Phoenix, Arizona (NextBank) 
in 2002 illustrates some of these concerns. In this case, an IDI was 
dependent on its parent because its role was gathering deposits and 
booking credit card receivables marketed, screened, originated, and 
securitized by its sole owner and parent company. NextBank had 
virtually no staff or facilities at the time of its failure; all 
bank functions were performed by parent company employees in parent 
company facilities. The FDIC needed to negotiate with the parent 
company to continue critical credit card servicing functions for 
NextBank and to delay its bankruptcy filing so that staff who were 
knowledgeable about the IDI's operations could assist with the 
resolution. If NextBank had operated on a standalone basis, it may 
have been resolved more quickly and at a lower cost.
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    Importantly, under part 354, the FDIC may require a Covered Company 
and industrial bank to commit to provide, and thereafter implement and 
adhere to, a contingency plan.\60\ Contingency plans may include one or 
more strategies for the orderly disposition or dissolution of the 
industrial bank without the need for the appointment of a receiver or 
conservator. One objective of such a plan would be to mitigate the 
disruption and damage the IDI may suffer from significant financial or 
operational stresses within the parent organization. Such concerns, if 
not appropriately addressed, could jeopardize the safe and sound 
operation of the industrial bank.
---------------------------------------------------------------------------

    \60\ 12 CFR 354.4(b).
---------------------------------------------------------------------------

    Question 3: What features or aspects of a shell or captive bank 
business model (not already discussed above) should affect the FDIC's 
evaluation of industrial bank filings?
    Question 4: Should the FDIC assess the potential risks posed to 
safety and soundness, consumer protection, and the DIF differently for 
shell or captive bank business models involving significant or material 
reliance on the parent organization?
    Question 5: Are there other issues or facts that the FDIC should 
consider in determining whether to strengthen its supervisory framework 
with respect to industrial banks and in how the FDIC evaluates 
potential risks and concerns presented in an industrial bank filing?
    Question 6: How should the FDIC assess the ``convenience'' and 
``needs'' of the ``community'' served by dependent bank business 
models?

V. Expected Effects

A. Overview of Industrial Banks

    As of March 31, 2024, the FDIC supervised 2,920 IDIs, with combined 
assets of $4.2 trillion.\61\ Of these, 24 institutions were industrial 
banks, comprising 0.8 percent of all FDIC-supervised institutions.\62\ 
The industrial banks held combined assets of $234 billion, comprising 
approximately 5.6 percent of the combined assets of FDIC-supervised 
institutions.\63\
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    \61\ Data provided by the Division of Insurance and Research.
    \62\ One industrial bank was acquired by an institution 
supervised by the Office of the Comptroller of the Currency in a 
voluntary merger on June 1, 2024.
    \63\ FDIC Call Report Data as of March 31, 2024.
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    The proposed rule would apply prospectively to deposit insurance, 
change in control, merger, and conversion filings, and other situations 
as may be determined by the FDIC that result in an industrial bank that 
is controlled by a Covered Company. It is difficult to estimate the 
number of potential Covered Companies that would seek to establish, 
acquire, or convert a Federal savings association to an industrial 
bank, as such an estimate would depend 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.
    According to FDIC administrative data on application submissions, 
one industrial bank submitted a change in control application and three 
industrial banks submitted de novo bank applications between April 1, 
2021, and December 31, 2023, for a total of four applications, or 
approximately one-and-a-half applications per year. None of these 
applications have resulted in an industrial bank being controlled by a 
Covered Company. For purposes of this analysis, the FDIC assumes that 
part 354 would apply to two filings per year seeking to establish, 
acquire, or convert to an industrial bank.
    The FDIC anticipates that the proposed rule would benefit the 
public and the DIF by promoting the safe and sound operation of 
industrial banks controlled by companies that are not subject to 
consolidated supervision by the FRB. These public benefits cannot be 
reliably quantified. Specific proposed requirements and potential costs 
to filers of complying with these requirements are discussed below.
    One amendment in the proposed rule would expand the scope of 
Covered Companies under part 354. Specifically, the proposed amendment 
would apply part 354 to HOLA conversion applications as well as any 
other situation where an industrial bank would become a subsidiary of a 
company that is not subject to Federal consolidated supervision. The 
industrial bank and Covered Company in such situations would be 
required to enter into certain agreements. These agreements include 
commitments by the Covered Company to comply with each paragraph (a)(1) 
through (8) in Sec.  354.4, and such other written agreements, 
commitments or restrictions the FDIC deems appropriate when approving 
or non-objecting to certain filings involving industrial banks. Section 
354.4(b) also includes an optional contingency plan requirement that 
the FDIC may impose depending on the filer's business plan and other 
factors.\64\
---------------------------------------------------------------------------

    \64\ See 12 CFR 354.4.
---------------------------------------------------------------------------

    As discussed in the final rule that established part 354,\65\ the 
FDIC historically has imposed prudential conditions and CALMAs and 
other written agreements between the FDIC and controlling parties of 
industrial banks in connection with approving or not objecting to 
certain industrial bank filings. Further, Sec.  354.6 makes clear that 
the FDIC may impose some or all of the requirements of part 354 on a 
given industrial bank or parent company as warranted. Therefore, the 
FDIC does not believe that the proposed amendment to expand the 
definition of Covered Company would substantially increase the burden 
for newly affected industrial banks and Covered Companies. In addition, 
regarding the number of entities subject to the rule, HOLA conversion 
applications occur infrequently so the proposed expanded definition of 
Covered Company would

[[Page 65565]]

not substantially increase the number of filings subject to part 
354.\66\
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    \65\ See 86 FR 10703 (Feb. 23, 2021).
    \66\ For purposes of estimating Paperwork Reduction Act burden, 
the FDIC assumes that the change in scope in this proposed rule 
increases the estimated respondent counts for certain information 
collections by one. See section VII.B of this document.
---------------------------------------------------------------------------

    As part of the amendment to expand the definition of Covered 
Company, the proposed rule would allow any company subject to a 
determination that a situation would result in the application of part 
354 to present its views in writing. The FDIC believes that this 
proposed amendment would not affect the costs incurred by filers and 
that this proposed amendment will only serve to provide clarity by 
codifying existing practice.
    Another provision in the proposed rule would amend Sec.  354.4 to 
expressly address and make clear, consistent with long-standing 
applications processing policy, that written agreements shall not be 
used as a means to favorably resolve statutory factors or circumstances 
on which the FDIC would otherwise make an unfavorable finding. This 
proposed amendment would mitigate uncertainty and prevent 
misunderstandings among prospective filers subject to part 354. This 
improved clarity may reduce the time that the FDIC and a Covered 
Company may spend discussing and resolving issues with its filing. 
While the FDIC cannot quantify the time saved, the FDIC believes that 
an affected entity would not incur a significant cost as a result of 
this amendment.
    As discussed above, the proposed rule would include considerations 
to be applied in identifying shell or captive structures, and 
presumptions that the FDIC will apply as a consequence of such 
identification. The proposed rule would also incorporate additional 
considerations that the FDIC will undertake to determine the degree of 
risk presented to the industrial bank from the parent company and its 
affiliates. The existing part 354 already addresses some of the risks 
that captive or shell industrial bank business models may present to 
the DIF. For example, under both the current part 354 and the proposed 
rule, the FDIC may require a Covered Company and industrial bank to 
commit to provide to the FDIC, and thereafter adhere to, a contingency 
plan that sets forth recovery actions to address significant financial 
or operational stress that could threaten the safe and sound operation 
of the industrial bank and strategies for the orderly disposition of 
such industrial bank without the need for the appointment of a receiver 
or conservator.\67\ Filers that are covered under the expanded scope of 
part 354, as proposed, that commit to providing a contingency plan 
could therefore incur preparation and submission costs. The FDIC does 
not have data to estimate these costs, but believes that these costs 
would be outweighed by the expected benefits to the safety and 
soundness of the industrial bank and the DIF.
---------------------------------------------------------------------------

    \67\ 12 CFR 354.4(b).
---------------------------------------------------------------------------

    As part of the amendment aimed at identifying shell or captive 
structures and resulting presumptions, the proposed rule would afford 
any company seeking to rebut a presumption an opportunity to present 
its views in writing. While there may be costs incurred in the 
preparation of such a rebuttal, the FDIC believes that this burden 
would not be substantially greater than the costs incurred by filers in 
existing practice, absent this amendment, to respond to and allay FDIC 
concerns about the characteristics of their structures. Furthermore, 
filers who opt to prepare a rebuttal likely would believe that the 
costs of preparation would be outweighed by the expected benefits.
    The proposed 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 proposed 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, given the FDIC's experience as the primary 
Federal regulator of industrial banks,\68\ the FDIC believes that the 
number of subsidiaries of the prospective Covered Companies affected by 
the proposed rule is likely to be small. For these affected 
subsidiaries, the FDIC believes that the proposed amendments would 
clarify, provide transparency, and prevent misinterpretation of part 
354. To that end, the proposed rule would reduce the time spent by 
affected subsidiaries discussing and resolving issues related to their 
affiliated industrial banks and Covered Companies.
---------------------------------------------------------------------------

    \68\ 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 
IDIs.
---------------------------------------------------------------------------

VI. Request for Comment

    The FDIC is inviting comment on all aspects of the proposed 
amendments to part 354, in addition to the questions above.

VII. Regulatory Analysis

A. Regulatory Flexibility Act

    The Regulatory Flexibility Act (RFA) generally requires an agency, 
in connection with a proposed rule, to prepare and make available for 
public comment an initial regulatory flexibility analysis that 
describes the impact of the proposed rule on small entities.\69\ 
However, an initial regulatory flexibility analysis is not required if 
the agency certifies that the proposed rule will not, if promulgated, 
have a significant economic impact on a substantial number of small 
entities. The Small Business Administration (SBA) has defined ``small 
entities'' to include banking organizations with total assets of less 
than or equal to $850 million.\70\ Generally, the FDIC considers a 
significant economic impact to be a quantified effect in excess of 5 
percent of total annual salaries and benefits or 2.5 percent of total 
noninterest expenses. The FDIC believes that effects in excess of one 
or more of these thresholds typically represent significant economic 
impacts for FDIC-supervised institutions.
---------------------------------------------------------------------------

    \69\ 5 U.S.C. 601 et seq.
    \70\ The SBA defines a small banking organization as having $850 
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 by 87 FR 69118, effective December 19, 2022). 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.'' See 13 CFR 121.103. Following 
these regulations, the FDIC uses an IDI's affiliated and acquired 
assets, averaged over the preceding four quarters, to determine 
whether the IDI is ``small'' for the purposes of the RFA.
---------------------------------------------------------------------------

    The FDIC has considered the potential impact of the proposed rule 
on small entities in accordance with the RFA. For the reasons stated 
below, the FDIC certifies that the proposed rule will not, if 
promulgated, have a significant economic impact on a substantial number 
of small entities.
---------------------------------------------------------------------------

    \71\ FDIC Call Report Data as of March 31, 2024.
    \72\ As mentioned previously, one industrial bank was acquired 
in a voluntary merger on June 1, 2024. This industrial bank was not 
considered a ``small entity'' for purposes of the RFA as of March 
31, 2024.
---------------------------------------------------------------------------

    As of March 31, 2024, the FDIC supervised 2,920 institutions, of 
which 2,198 are considered small entities for purposes of the RFA.\71\ 
Of these 2,920 institutions, 24 were industrial banks,\72\ and the FDIC 
estimates that no more than 10 of these industrial banks would

[[Page 65566]]

be considered small industrial banks for purposes of the RFA.\73\
---------------------------------------------------------------------------

    \73\ The FDIC uses the assets of an IDI's affiliated and 
acquired financial institutions to determine whether the IDI is 
``small'' for the purposes of RFA. This methodology may over-count 
the number of industrial banks that are small entities because it 
does not take into account the size of non-financial institutions 
that are affiliated with the industrial bank. For purposes of RFA 
certification, this methodology results in a conservative over-
estimate of the number of affected small entities.
---------------------------------------------------------------------------

    As previously discussed, the requirements under part 354 apply to 
industrial banks organized on or after April 1, 2021, and industrial 
banks coming under the control of a Covered Company as a result of a 
transaction pursuant to either section 7(j) or 18(c) of the FDI Act. 
The proposed rule would amend the definition of Covered Companies to 
include prospective conversions \74\ pursuant to section 5(i)(5) of the 
HOLA or any other type of transaction where an industrial bank would 
become a subsidiary of a company that is not subject to Federal 
consolidated supervision, as determined by the FDIC.\75\ Since 
September 2019, the FDIC has received only two conversion filings 
related to HOLA and estimates one or fewer such filing per year going 
forward. Not all of these filings would involve small entities; for 
context, only 10 out of 24 existing industrial banks are small entities 
for purposes of the RFA. Therefore, the FDIC expects the proposed 
amendment to the definition of Covered Company to affect one or fewer 
small entities per year. Given this limited number of anticipated 
filings, the FDIC believes the proposed amendment is unlikely to affect 
a substantial number of small entities.
---------------------------------------------------------------------------

    \74\ The proposed amended definition would only apply to filings 
involving an industrial bank or Covered Company after the effective 
date of the proposed rule.
    \75\ The proposed amendment would also allow any company subject 
to a determination that a transaction would result in the 
application of part 354 to present its views in writing.
---------------------------------------------------------------------------

    Notwithstanding the effect due to the change in the scope of 
affected entities described above, the FDIC also examined whether the 
other changes reflected in the proposed rule would have a significant 
effect on affected small entities. As discussed above, these amendments 
clarify certain provisions in part 354, provide increased transparency 
regarding how the FDIC evaluates potential risks and concerns, and 
serve to prevent any misinterpretation of part 354 that would be 
inconsistent with the FDIC's long-standing applications processing 
policy. The proposed rule affords any company seeking to rebut a 
presumption of a shell or captive institution an opportunity to present 
its views in writing--such filings should comport with the FDIC's 
existing rules regarding filing procedures. These amendments may reduce 
the time that the FDIC and a filer would spend discussing and resolving 
issues with its filing. While the FDIC cannot quantify the time saved, 
the FDIC believes that an affected entity would not incur a significant 
economic effect as a result of these amendments.
    Based on the preceding information, the FDIC certifies that the 
proposed rule does not significantly affect a substantial number of 
small entities. The FDIC invites comments on all aspects of the 
supporting information provided in this RFA section. In particular, 
would this proposed rule have any significant effects on a substantial 
number of small entities that the FDIC has not identified?

B. Paperwork Reduction Act

    Certain provisions of the proposed rule contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act (PRA).\76\ In accordance with the requirements of the 
PRA, 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. 
The FDIC's OMB control number associated with this proposed rule is 
3064-0213 and is titled ``Industrial Banks and Industrial Loan 
Companies.''
---------------------------------------------------------------------------

    \76\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

    As stated above, the proposed rule would change the scope of the 
existing regulations by revising the definition of ``Covered Company'' 
to include conversions involving a proposed industrial bank or 
industrial loan company under section 5 of the HOLA, or other 
situations as determined by the FDIC; clarifying the relationship 
between written commitments and the FDIC's evaluation of the relevant 
statutory factors; and setting forth additional criteria that the FDIC 
would consider when assessing the risks presented to an industrial bank 
by its parent company and any affiliates, and evaluating the industrial 
bank's ability to function independently of the parent company and any 
affiliates.
    For these reasons, the information collection requirements 
contained in this proposed rulemaking will be submitted by the FDIC to 
OMB for review and approval under section 3507(d) of the PRA (44 U.S.C. 
3507(d)) and Sec.  1320.11 of the OMB's implementing regulations (5 CFR 
part 1320). Given the change in scope in the proposed rule, the FDIC 
has increased the estimated respondent count by one in information 
collections 1-4. Comments are invited on:
    (a) Whether the collection of information is necessary for the 
proper performance of the FDIC's functions, including whether the 
information has practical utility;
    (b) The accuracy of the estimate of the burden of the information 
collection, including the validity of the methodology and assumptions 
used;
    (c) Ways to enhance the quality, utility, and clarity of the 
information to be collected;
    (d) Ways to minimize the burden of the information collection on 
respondents, including through the use of automated collection 
techniques or other forms of information technology; and
    (e) Estimates of capital or start-up costs and costs of operation, 
maintenance, and purchase of services to provide information.
    All comments will become a matter of public record. Comments on the 
collection of information should be sent to the address listed in the 
ADDRESSES section of this document. Written comments and 
recommendations for the proposed information collection(s) should also 
be sent within 30 days of publication of this notice to 
www.reginfo.gov/public/do/PRAMain. Find this particular information 
collection by selecting ``Currently under 30-day Review--Open for 
Public Comments'' or by using the search function.
    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 65567]]



                                   Table 1--Summary of Estimated Annual Burden
                                               [OMB No. 3064-0213]
----------------------------------------------------------------------------------------------------------------
                                                                               Number of     Time per    Annual
 Information collection (obligation        Type of burden       Number of    responses per   response    burden
             to respond)              (frequency of response)  respondents    respondent     (HH:MM)    (hours)
----------------------------------------------------------------------------------------------------------------
1. Initial Listing of Subsidiaries,   Reporting (On Occasion)            3               1      04:00         12
 12 CFR 354.4(a)(1) (Mandatory).
2. Annual Update of Subsidiaries      Reporting (Annual).....            3               1      04:00         12
 List, 12 CFR 354.4(a)(1)
 (Mandatory).
3. Annual Report of Covered Company   Reporting (Annual).....            3               1      10:00         30
 and Subsidiaries and Other Reports
 as the FDIC may require, 12 CFR
 354.4(a)(3) (Mandatory).
4. Recordkeeping requirements in      Recordkeeping (Annual).            3               1      10:00         30
 written agreement, 12 CFR
 354.4(a)(4) (Mandatory).
5. Contingency Plan, 12 CFR 354.4(b)  Reporting (Annual).....            1               1     345:00        345
 (Mandatory).
                                                              --------------------------------------------------
    Total Annual Burden (Hours):....  .......................  ...........  ..............  .........        429
----------------------------------------------------------------------------------------------------------------
Source: FDIC.
Note: The annual burden estimate for a given collection is calculated in two steps. First, the total number of
  annual responses is calculated as the whole number closest to the product of the annual number of respondents
  and the annual number of responses per respondent. Then, the total number of annual responses is multiplied by
  the time per response and rounded to the nearest hour to obtain the estimated annual burden for that
  collection. This rounding ensures the annual burden hours in the table are consistent with the values recorded
  in the OMB's regulatory tracking system. The FDIC has increased the estimated respondent count by one in
  Information Collections 1-4 to account for the effect in the change in scope in this proposed rule.

C. Plain Language

    Section 722 of the Gramm-Leach-Bliley Act \77\ 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 proposed rule in a simple and straightforward manner.
---------------------------------------------------------------------------

    \77\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

     Has the FDIC organized the material to suit your needs? If 
not, how could it present the proposed rule more clearly?
     Has the FDIC clearly stated the requirements of the 
proposed rule? If not, how could the proposed rule be more clearly 
stated?
     Does the proposed rule contain technical jargon that is 
not clear? If so, which language requires clarification?
     Would a different format (grouping and order of sections, 
use of headings, paragraphing) make the proposed rule easier to 
understand? If so, what changes would make the proposed rule easier to 
understand?
     What else could the FDIC do to make the proposed rule 
easier to understand?

D. Riegle Community Development and Regulatory Improvement Act of 1994

    Pursuant to section 302(a) of the Riegle Community Development and 
Regulatory Improvement Act of 1994 \78\ (RCDRIA), in determining the 
effective date and administrative compliance requirements for new 
regulations that impose additional reporting, disclosure, or other 
requirements on IDIs, 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 the RCDRIA 
requires new regulations and amendments to regulations that impose 
additional reporting, disclosures, or other new requirements on IDIs 
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.\79\ The FDIC invites comments that further will inform its 
consideration of RCDRIA.
---------------------------------------------------------------------------

    \78\ 12 U.S.C. 4802(a).
    \79\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

E. Providing Accountability Through Transparency Act of 2023

    The Providing Accountability Through Transparency Act of 2023 \80\ 
requires that a notice of proposed rulemaking include the internet 
address of a summary of not more than 100 words in length of a proposed 
rule, in plain language, that shall be posted on the internet.
---------------------------------------------------------------------------

    \80\ 12 U.S.C. 553(b)(4).
---------------------------------------------------------------------------

    The FDIC proposes to modify the regulations governing the parent 
companies of industrial banks in 12 CFR part 354. The amendments would 
revise the regulation's scope to include conversions involving proposed 
industrial banks under section 5 of the Home Owners' Loan Act and other 
situations as determined by the FDIC; clarify the relationship between 
written commitments and the FDIC's evaluation of relevant statutory 
factors; and set forth additional criteria the FDIC would consider when 
assessing the risks presented to an industrial bank by its parent 
company and affiliates and evaluating the institution's ability to 
function independently of its parent company and affiliates.
    The proposal and the required summary can be found at https://www.fdic.gov/resources/regulations/federal-register-publications/index.html.

List of Subjects in 12 CFR Part 354

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

Authority and Issuance

    For the reasons stated in the preamble, the Federal Deposit 
Insurance Corporation proposes to amend 12 CFR part 354 as follows:

PART 354--INDUSTRIAL BANKS

0
1. The authority citation for part 354 is revised to read as follows:

    Authority:  12 U.S.C. 1464, 1811, 1815, 1816, 1817, 1818, 
1819(a) (Seventh) and (Tenth), 1820(g), 1831o 1, 3108, 3207.

0
2. Amend Sec.  354.2 by revising the definition for Covered Company to 
read as follows:


Sec.  354.2  Definitions.

* * * * *
    Covered Company means.
    (a) In each case on or after April 1, 2021, any company that is not 
subject to

[[Page 65568]]

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;
    (3) As a result of a conversion pursuant to section 5(i)(5) of the 
Home Owners' Loan Act;
    (4) That is granted deposit insurance by the FDIC pursuant to 
section 6 of the FDI Act; or
    (5) As determined by the FDIC after providing the company an 
opportunity to present its views in writing as to why the provisions of 
this part should not apply; or
    (b) A company that controls an industrial bank, if, on or after 
[the effective date of the final rule]:
    (1) The control of such company changes, requiring a notice subject 
to section 7(j) of the FDI Act; or
    (2) The company is the resultant entity following a merger 
transaction.
* * * * *
0
3. Amend Sec.  354.4 by revising paragraph (a) introductory text and 
adding paragraph (c) to read as follows:


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, 
each approval of a merger, each approval of a conversion, and each 
determination of Covered Company status on compliance with paragraphs 
(a)(1) through (8) of this section by the parties to the written 
agreement. As required, each Covered Company must:
* * * * *
    (c) For each type of filing through which an industrial bank would 
become subject to this part, the FDIC must evaluate the appropriate 
statutory factors pursuant to applicable law. The required commitments, 
written agreement provisions, and industrial bank subsidiary 
restrictions, as described in this part, will be taken into account as 
part of the FDIC's consideration of the underlying filing, but do not 
replace any statutory factor applicable to an underlying filing and 
will not necessarily lead to the favorable resolution of any statutory 
factor where the facts and circumstances are otherwise unfavorable.
0
4. Redesignate Sec.  354.6 as Sec.  354.7, and add a new Sec.  354.6 to 
read as follows:


Sec.  354.6  Additional considerations.

    (a) Parent company. The FDIC will consider the degree of risk 
presented to the industrial bank from the parent company and its 
affiliates. In assessing the degree of risk presented from the parent 
company and its affiliates, the FDIC will consider the following 
elements:
    (1) The parent company's business purpose for establishing or 
acquiring control of the industrial bank;
    (2) The existing and proposed relationships among the parent 
company and its affiliates;
    (3) The parent company's history of regulatory and consumer 
compliance, including the status of any significant pending or 
outstanding enforcement actions, investigations, administrative 
matters, or contingent liabilities;
    (4) The supervisory record of the parent company and any affiliates 
regulated by the Federal banking agencies;
    (5) The novelty of the parent company's primary businesses, and the 
extent to which new or innovative processes are being implemented or 
utilized;
    (6) The accessibility of information, including the books and 
records of the parent company and any affiliated domestic or foreign 
entities; and
    (7) Any plans or processes that mitigate risks presented by the 
parent company.
    (b) Industrial bank. In every case, the FDIC will also consider the 
degree to which the industrial bank will have:
    (1) An independent board and management team; and
    (2) A business model that is viable on a standalone basis and that 
has franchise value independent of the parent organization. A business 
model is viable on a standalone basis and has franchise value if the 
main business functions of the industrial bank will not be reliant on 
the parent organization, including the industrial bank's operations, 
loans and investments, deposits and other funding sources, client 
sourcing, and any other primary business activities.
    (c) Rebuttable presumptions regarding shell or captive industrial 
banks--(1) Presumptions. Any proposal for an industrial bank that 
presents the following characteristics will be presumed to be a shell 
or captive industrial bank. The industrial bank--
    (i) Could not function independently of the parent company;
    (ii) Would be significantly or materially reliant on the parent 
company or its affiliates; or
    (iii) Would serve only as a funding channel for an existing parent 
company or affiliate business line.
    (2) Impact of the presumptions. The FDIC will presume that the 
shell or captive nature of an industrial bank involved in a filing 
weighs heavily against favorably resolving one or more applicable 
statutory factors.
    (3) Rebuttal of presumptions. The FDIC will afford any company 
seeking to rebut a presumption in this paragraph (c) an opportunity to 
present its views in writing. While the FDIC is considering any such 
materials, the FDIC will suspend consideration of any related filings, 
time periods will be tolled, and transactions will not be consummated.

Federal Deposit Insurance Corporation.

    By order of the Board of Directors.

    Dated at Washington, DC, on July 30, 2024.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2024-17637 Filed 8-9-24; 8:45 am]
BILLING CODE 6714-01-P