Advocacy

Close ILC Loophole

Allowing large retail or technology conglomerates to own banks violates the U.S. policy of maintaining the separation of banking and commerce, jeopardizes the impartial allocation of credit, creates conflicts of interest, a dangerous concentration of commercial and economic power.

ICBA Policy Resolution

Close ILC Loophole to Maintain Separation of Banking and Commerce

Position

  • Corporate conglomerates or other companies engaged in commercial activities should not be allowed to own full-service banks in violation of the longstanding U.S. policy of maintaining the separation of banking and commerce.
  • For safety and soundness reasons and to maintain the separation of banking and commerce, ICBA opposed the FDIC deposit insurance applications of SoFi Bank, Square Financial Services, Inc., Nelnet Bank, Rakuten Bank America, and Interactive Bank. These entities sought to hold industrial loan corporations (ILCs) charters issued by the state of Utah and operate on a nationwide basis.
  • The FDIC should impose a two-year moratorium on ILC deposit insurance applications.
  • Congress should close the ILC loophole because it not only threatens the financial system but creates an uneven playing field for community banks.

Background

The long-standing policy prohibiting affiliations or combinations between banks and non-financial commercial firms (such as Wal-Mart, Amazon, and Google) has served our nation well and was reaffirmed by the Gramm-Leach-Bliley Act (GLBA).

Allowing large retail or technology conglomerates to own banks violates the U.S. policy of maintaining the separation of banking and commerce, jeopardizes the impartial allocation of credit, creates conflicts of interest, a dangerous concentration of commercial and economic power, and unwisely extends the federal safety net to commercial interests.

ICBA was the first national bank trade association to oppose Wal-Mart’s ILC application in 2005 and continues to exercise national leadership on banking and commerce separation with its opposition to the deposit insurance applications of SoFi Bank, Square Financial Services, Inc., Nelnet Bank, and Rakuten Bank America.

The Square and Nelnet applications were approved in March 2020. ICBA is calling on the FDIC to refrain from approving additional application until the agency finalizes its proposed rule on ILC holding companies. The FDIC should hold hearings on each of the remaining applications and should require the applicants parent companies and affiliates to commit to diversting the commercial interests.

All of these applicants have holding companies and affiliates that engage in diverse, non-financial, commercial activities and chose the unique Utah ILC charter to avoid the legal prohibitions and restrictions on commercial activities under the Bank Holding Company Act. California is one of a handful of state permitted to charter ILCs, and its governor has recently begun to promote the ILC charter in a bid to keep Silicon Valley fintechs in state.

The ILC charter also allows the holding company to avoid examination and supervision requirements that otherwise apply to parent companies of full-service banks. Rakuten Bank America’s application presents the mixing of commerce and banking at a new and unprecedented level because Rakuten Inc.'s e-commerce and other commercial activities are extremely diverse and global. The conglomerate owns an online marketing business, has significant investments in a range of companies worldwide, and even formed its own professional baseball team.

ICBA believes that Rakuten and all other applicants for deposit insurance through ILCs should be subject to the same restrictions and supervision that apply to any bank holding company of a community bank. Congress should close the ILC loophole because it threatens the financial system and creates an uneven playing field for community banks.

There are thousands of fintech firms already engaged in financial activities, and it is not difficult to envision an Amazon or a Google joining their ranks. The integration of these technology and banking firms would not only result in an enormous concentration of financial and technological assets but would also pose immense conflicts of interest and privacy risks to our banking system.

Staff ContactChris Cole