Regulator open to allowing non-bank companies to build banking businesses

The Federal Deposit Insurance Corporation said Tuesday it hopes to allow non-financial companies to operate banks with full deposit insurance, re-opening the door for large retailers and fintech companies to compete in the industry.

The move could signal that the FDIC will soon clear Japanese e-commerce company Rakuten and fin-tech company Square (SQ) to build their own financing arms.

The FDIC unveiled a proposed rule that would formalize a procedure for companies to get a federal charter for an “industrial loan company” that can offer deposit products and loans, just as traditionally chartered banks do. 

Several ILCs exist already within companies that should be familiar to most households: BMW, Toyota (TM), and Harley-Davidson (HOG). Large and expensive purchases like a car often require financing so offering bank-like products was a natural evolution. 

Companies were free to apply for an ILC charter with the FDIC until 2005, when Wal-Mart (WMT) attempted to build its own financing arm. But public backlash pushed the regulator to freeze ILC charters and the ensuing financial crisis ultimately pushed Wal-Mart to withdraw its application.

Since then, few companies have attempted to ask for an ILC even though the FDIC’s self-imposed moratorium expired in 2013.

The next generation of ILCs

But over the last few years, a whole new cohort of business models hoping to integrate financial services into their products have expressed interest in getting an ILC. Square and Rakuten are among the five companies that have pending applications with the FDIC.

FDIC staff say the proposed rule Tuesday is a codification of the existing ILC application and regulatory process. A noticeable change is a “financial strength” requirement where the parent company is forced to set aside a standing pool of money to pay down to the ILC in the event that the financing arm falters in its capital levels.

The banking industry has been vocally opposed to the FDIC making the change. The Independent Community Bankers of America have expressed concern over the ILC structure allowing banks to avoid oversight from the Federal Reserve, which normally supervises bank holding companies. 

Bank holding companies will often be regulated by both the Fed and the FDIC (in some cases the Office of the Comptroller of the Currency).

The ICBA has said in the past that allowing ILC parent companies to avoid the Fed leaves “a dangerous gap in safety and soundness oversight.”

FDIC Chair Jelena McWilliams said in a statement that the “proposal would ensure that parent companies serve as a source of strength for their industrial bank subsidiaries.”

The proposal was unanimously approved by the FDIC board on Tuesday in a 4-0 vote.

Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.

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