What Is an Industrial Bank?
Let me explain what an industrial bank is: it's a state-chartered financial institution, usually owned by a commercial firm, that isn't regulated by a federal banking agency. These banks accept customer deposits and provide loans for consumers and small businesses.
You might also hear them called industrial loan companies, or ILCs. They're only chartered by a few states, and Utah handles the majority of these charters in the U.S.
Key Takeaways
- An industrial bank—also referred to as an industrial loan company (ILC)—is a state-chartered financial institution, usually owned by a commercial firm, that is not regulated by a federal banking agency.
- Industrial banks are only chartered by a few states; the state of Utah provides the majority of charters for industrial banks in the U.S.
- Industrial banks have become controversial because they allow nonfinancial companies to offer banking services without oversight by the Federal Reserve.
Understanding Industrial Banks
Industrial banks were originally founded in the early 1900s to give low-to-moderate-income industrial workers—who couldn't qualify for credit at traditional lending institutions—a way to access capital.
These banks are regulated by state regulators and the Federal Deposit Insurance Corp. (FDIC). Because of their distinct corporate structure, they can be owned by companies. They aren't subject to some regulations that govern traditional institutions and don't have to comply with the Bank Holding Company Act. Plus, they don't face supervision by the Federal Reserve. As a result, many financial technology companies and investment firms are now applying for industrial bank charters.
While industrial banks have limited banking powers nationwide, they generally maintain the same powers and privileges as a traditional commercial bank. They're controversial among those who support a stricter division between banks and commercial firms. Critics argue that they give companies the privileges of a bank charter without the supervision.
Criticism of Industrial Banks
In 2005, Walmart Inc. filed an application to form a new industrial bank to reduce credit and debit card transaction fees. This led to widespread opposition and protests from commercial banks and financial regulators. The FDIC placed a temporary moratorium on industrial bank applications in 2006. At the same time, state-level legislation was passed to block prospective industrial banks from opening branches in different jurisdictions.
Walmart withdrew its application in 2007 before the FDIC could decide. Opponents claimed that Walmart's entry into banking posed a threat to the banking system and the FDIC Deposit Insurance Fund.
In early 2019, lobbyists from the Independent Community Bankers of America (ICBA) distributed a policy paper calling for a moratorium on federal deposit insurance for industrial banks. This was driven by a new wave of fintech companies, like payment processor Square Inc., submitting applications for state bank charters. A bank charter would let Square provide loans and other financial services directly to its merchants. But the ICBA says industrial bank charters are a loophole that Congress needs to address. Fintech companies with these charters would be exempt from Federal Reserve supervision and wouldn't have to disclose nonbanking-related commercial activities.
In November 2019, Senator John Kennedy of Louisiana introduced the 'Eliminating Corporate Shadow Banking Act of 2019,' which would effectively end the ability of nonfinancial companies to form industrial banks. The ICBA supports this bill, stating it would close the industrial bank loophole, create a safer financial system, and maintain the separation of banking and commerce.
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