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FDIC's Inspector General Fingers Risk to FDIC from ILCs

JANUARY 2, 2004


Banker Update: FDIC's Inspector General Fingers Risk to FDIC from ILCs

Every six months the Inspector General (IG) of the FDIC forwards a semi-annual report to the Congress that reviews FDIC management and performance challenges, details investigations that have been conducted, and includes an interesting section entitled "Management and Analysis of Risks to the Insurance Fund."

The most recent report covers April 1, 2003, to September 30, 2003. This edition reviews and highlights the report the IG issued earlier this year on the failure of the Southern Pacific Bank-a California industrial loan company (ILC).

As loyal Banker Update readers know, the supervision and regulation of ILCs is a very major public policy issue in Washington involving Federal Reserve Chairman Alan Greenspan, who is gravely concerned about ILCs, and FDIC Chairman Don Powell, who isn't. ILCs, which are located in some five states, are regulated by state supervisors and the FDIC. The parent companies of the ILCs escape bank holding company regulation. And given this escape hatch, ILCs are owned by commercial firms. Wal-Mart was in the hunt for an ILC bank charter-a hunt that was thwarted by efforts of the ICBA and the California Independent Bankers to get legislation passed and signed into law in California banning any such Wal-Mart (or other commercial company) purchase.

Interestingly, the IG's report hints at some of the same concerns that Chairman Greenspan has raised. The ICBA sides strongly with Chairman Greenspan on this key issue.

Here is a key quote from the FDIC IG's report to the Congress:

It is of interest to note that of the 10 material loss reviews [of bank failures] we have conducted, this is the second involving industrial loan companies-the 1999 failure of Pacific Thrift and Loan was the other. In the case of the Southern Pacific Bank, its parent holding company was not subject to the regulatory oversight provided under the Bank Holding Company Act (BHCA). However, the FDIC was authorized by law to examine any affiliate of SPB, including its parent company, to determine the relationship between SPB and its parent/affiliate and the effect of such a relationship on the bank. Our report contrasts the oversight and authority provided under the BHCA with that which is available by statute to the FDIC for parent holding companies of industrial loan companies. We may also conduct an audit specifically focusing on non-bank bank holding companies and the potential risks, if any, that may result from the reduced level of federal oversight for holding companies not covered by the BHCA.

Chairman Powell has publicly stated that ILCs pose no safety and soundness risks. Chairman Greenspan does not concur. This FDIC IG report squarely puts the ball-with enormous public policy implications for the structure, supervision and regulation of our financial system-back in Chairman Powell's court.

Happy New Year.