On March 17, 2020, the Federal Deposit Insurance Corporation (“FDIC”) published a proposed rule (the “Proposed ILC Rule”), which would govern applications for deposit insurance, changes in control, and mergers involving FDIC-insured industrial banks and industrial loan companies (“ILCs”). If adopted, the Proposed ILC Rule would open the door to widespread acquisitions of ILCs by commercial firms engaged in industrial, retail, information technology, and other types of nonfinancial activities. In addition, on March 18, 2020, the FDIC approved deposit insurance applications filed by ILCs owned by two commercial firms – Square and Nelnet.
The FDIC’s issuance of the Proposed ILC Rule and the FDIC’s approvals of Square’s and Nelnet’s applications represent a fundamental change in policy. Those actions effectively reverse the FDIC’s previous policy of barring acquisitions of ILCs by commercial firms. The FDIC imposed an 18-month moratorium on acquisitions of ILCs by commercial firms between July 2006 and January 2008. The Dodd-Frank Act placed a three-year moratorium on such acquisitions between July 2010 and July 2013. The FDIC did not allow any firms engaged in commercial activities to acquire ILCs from July 2006 (when the FDIC imposed its moratorium) until March 2020 (when the agency approved Square’s and Nelnet’s applications). The Proposed ILC Rule does not explain why the FDIC decided to initiate such a major change in policy with potentially transformative effects on our financial system, economy, and society.
If adopted, the Proposed ILC Rule would be contrary to the public interest and unlawful for the following reasons:
(1) Further acquisitions of ILCs by commercial firms would (a) undermine Congress’s longstanding policy of separating banking and commerce, (b) threaten to inflict large losses on the federal “safety net” for financial institutions during future systemic crises, and (c) pose grave dangers to the stability of our financial system and the health of our economy.
(2) Further acquisitions of ILCs by commercial firms – including “Big Tech” firms like Alphabet (Google), Amazon, Apple, Facebook, and Microsoft – would create toxic conflicts of interest and would also pose serious threats to competition and consumer welfare.
(3) The FDIC’s limited supervisory powers over parent companies and other affiliates of ILCs are plainly inadequate to prevent the systemic risks, conflicts of interest, and threats to competition and consumer welfare generated by commercially-owned ILCs.
(4) Adoption of the Proposed ILC Rule would be contrary to the public interest factors specified in the Federal Deposit Insurance Act and would also violate the Administrative Procedure Act (“APA”).
This article explains why adopting the Proposed ILC Rule would be contrary to the public interest and unlawful. In addition, the FDIC should not adopt the Proposed ILC Rule while our nation is preoccupied with the challenges of responding to the global COVID-19 pandemic. The FDIC should withdraw the Proposed ILC Rule, or postpone any further action on the Rule, until (1) the enormous problems caused by the pandemic have been successfully resolved, and (2) as required by the APA, the FDIC has completed the following actions: (a) explaining the factual, legal, and policy basis for its change in policy on acquisitions of ILCs by commercial firms, and (b) providing public notice of that explanation and affording the public a reasonable opportunity to submit comments on the FDIC’s change in policy and the agency’s stated reasons for making that change. The FDIC should not approve any additional acquisitions of ILCs by commercial firms until all of the foregoing actions have been completed.
GW Paper Series
39 Banking & Financial Services Policy Report No. 5 (May 2020), at 1-17