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Federal Reserve Chairman Bernanke Comments on ILC Loophole

Federal Reserve Chairman Ben S. Bernanke Q&A
Following Speech to Independent Community Bankers of America
March 8, 2006
(Transcribed by ICBA)

Q.  Chairman Bernanke, community bankers are very concerned about the evolving status of industrial loan companies.  Notably, Wal-Mart’s pending application for a Utah, FDIC-insured ILC charter has really galvanized public interest in the ILC loophole.  The loophole raises serious public policy concerns, such as lack of consolidated supervision over ILCs and their parent companies.  What is the Federal Reserve’s view of the ILC loophole?

A. As you know, industrial loan companies or ILC banks are state chartered institutions, many included in Nevada, that are examined by the FDIC.   They benefit from a special exemption from the BHC Act which allows them to be acquired by commercial or retail firms, or even foreign banking firms that don’t have home consolidated supervision.  Now when this exemption was created, about 20 years ago, ILCs were very small and limited in number but recently they’ve become increasingly large, and increasingly part of strategies of commercial firms, and they are pressing for additional powers in the Congress.  So these developments raise a couple of I think very significant public policy issues that the Federal Reserve has talked about in Congress. 

First, the separation of banking and commerce.   The Congress has made clear, it has affirmed the principle of keeping commerce and banking separate, most recently affirmed in the GLB Act.  This loophole in the BHC Act circumvents that principle.  If Congress wants to revisit banking and commerce that’s their prerogative, but it doesn’t seem a good approach to allow a loophole to be the way in which that distinction breaks down. 

The second concern that the Federal Reserve has raised is the lack of consolidated supervision.   With banks and BHCs, both the bank itself and the ownership of the BHC are supervised.  In the case of an ILC, the FDIC can supervise the bank but it has no powers, nor does anyone else, to supervise the company that owns the ILC.  The GAO has issued a report suggesting that failure to supervise the owner of an ILC leads to risks to the deposit insurance fund and to safety and soundness, and we think it would be a good idea to move towards policies that eliminate that problem and make sure that if there is ownership of an ILC that there be consolidated supervision so that the owner as well as the ILC itself fall under the limitations, and activities fall under the supervisory requirements that other owners of banks will face.  So this equity and parity there also requires that step.    

So I just wanted to assure you that we’ve talked about this in Washington.   Governor Kohn just recently presented testimony to the Banking Committee in the Senate about EGRPRA in general and various measures we are proposing for reduced regulatory burden, and this is one of the issues that he brought out very clearly.  So we hope that Congress will listen and will have some good resolution to this issue. 

Thank you very much.




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