Moratorium on Certain Industrial Loan Company Applications and Notices, 43482-43484 [E6-12449]

Agencies

• FEDERAL DEPOSIT INSURANCE CORPORATION

[Federal Register Volume 71, Number 147 (Tuesday, August 1, 2006)]
[Notices]
[Pages 43482-43484]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E6-12449]


=======================================================================
-----------------------------------------------------------------------

FEDERAL DEPOSIT INSURANCE CORPORATION


Moratorium on Certain Industrial Loan Company Applications and 
Notices

AGENCY: Federal Deposit Insurance Corporation (FDIC).

ACTION: Notice; The Imposition of a Moratorium.

-----------------------------------------------------------------------

SUMMARY: This notice announces the imposition of a six-month moratorium 
on FDIC action to accept, approve, or deny any application for deposit 
insurance submitted to the FDIC by, or on behalf of, any proposed or 
existing industrial loan company, industrial bank or similar 
institution (collectively, ILC),\1\ or accept, disapprove, or issue a 
letter of intent not to disapprove, any change in bank control notice 
submitted to the FDIC with respect to any ILC. The FDIC Board of 
Directors (Board) may exclude from the moratorium any particular 
application or notice if it determines that the moratorium would 
present a significant safety and soundness risk to any FDIC-insured 
institution or a significant risk to the deposit insurance fund, or 
failure to act would otherwise impair the mission of the FDIC.
---------------------------------------------------------------------------

    \1\ See 12 U.S.C. 1813(a)(2), 1841(c)(2)(H).

---------------------------------------------------------------------------
DATES: The moratorium is effective through Wednesday, January 31, 2007.

FOR FURTHER INFORMATION CONTACT: For questions regarding the 
moratorium: contact Robert C. Fick, Counsel, (202) 898-8962; Federal 
Deposit Insurance Corporation, Washington, DC 20429.

SUPPLEMENTARY INFORMATION:

I. Background

Nature and Brief History of ILCs

    ILCs were first chartered in the early 1900's as small loan 
companies for industrial workers. Over time the chartering states have 
gradually expanded the powers of their ILCs to the extent that ILCs now 
generally have the same powers as state commercial banks.\2\
---------------------------------------------------------------------------

    \2\ If an ILC is authorized to, and does, in fact, offer demand 
deposits, any company that owns such an ILC may be required to 
register as a bank holding company. As a result, most of the ILCs 
have chosen not to offer demand deposits.
---------------------------------------------------------------------------

    ILCs are state-chartered banks, and all of the existing FDIC-
insured ILCs are ``state nonmember banks'' under the FDI Act. As a 
result, their primary Federal banking supervisor is the FDIC. The FDIC 
generally exercises the same supervisory and regulatory powers over 
ILCs that it does over other state non-member banks. The only material 
exceptions to the FDIC's authority over ILCs are that the cross-
guarantee liability provisions, the golden parachute provisions, and 
the management interlocks provisions are not applicable to ILCs, their 
affiliates or holding companies. Legislation to make these provisions 
applicable to ILCs is currently pending.
    While ILCs are ``banks'' under the FDI Act,\3\ they generally are 
not ``banks'' under the Bank Holding Company Act (BHCA).\4\ One result 
of this difference in treatment is that a company that owns an ILC 
could engage in commercial activities and may not be subject to Federal 
consolidated supervision. By contrast, domestic bank holding companies 
and financial holding companies that are subject to Federal 
consolidated supervision are prohibited from engaging in commercial 
activities. As a result of these differences, some of the companies 
that own ILCs are not subject to Federal consolidated supervision. The 
FDIC has noted a recent increase in deposit insurance applications for, 
and change in control notices with respect to, ILCs that will be 
affiliated with commercial concerns or other companies that will not 
have a Federal consolidated supervisor. Some members of Congress, the 
Government Accountability Office, the FDIC's Office of Inspector 
General, and members of the public have expressed concerns regarding 
the lack of Federal consolidated supervision, the potential risks from 
mixing banking and commerce and the potential for an unlevel playing 
field.
---------------------------------------------------------------------------

    \3\ 12 U.S.C. 1813(a)(2).
    \4\ See 12 U.S.C. 1841(c)(2)(H).
---------------------------------------------------------------------------

Summary of ILC Portfolio

    The ILC industry has evolved since the enactment of the Competitive 
Equality Banking Act (CEBA) in 1987, when Congress initially excepted 
ILCs from the BHCA. As of July 24, 2006, there were 61 operating 
insured ILCs; 48 of the 61 were chartered in Utah or California. ILCs 
also operate in Colorado, Hawaii, Indiana, Minnesota and Nevada.
    As of year-end 1987, 105 ILCs reported aggregate total assets of 
$4.2 billion and aggregate total deposits of $2.9 billion. The reported 
total assets for these ILCs ranged from $1.0 million to $411.9 million, 
with the average ILC reporting $40.0 million in total assets and $27.3 
million in total deposits. Of the current portfolio of 61 ILCs, 14 were 
insured during 1987 or prior years.
    As of year-end 1999, the FDIC insured 55 ILCs with aggregate total 
assets of $43.6 billion and aggregate total deposits of $22.5 billion. 
The reported total assets for these ILCs ranged from $2.4 million to 
$15.6 billion, with 10 institutions reporting total assets of more than 
$1 billion. The four largest institutions reported total assets of 
$15.6 billion, $4.4 billion, $3.8 billion, and $3.0 billion. Six other 
institutions reported total assets of $1.1 billion to $2.5 billion. The 
remaining portfolio of ILCs, on average, reported total assets of 
$152.5 million. Of the current portfolio of 61 ILCs, 37 were insured 
during 1999 or prior years.
    Since January 1, 2000, 24 ILCs became insured.\5\ As of March 31, 
2006, the 61 insured ILCs reported aggregate total assets of $155.1 
billion; ILCs owned by four financial services firms, including Merrill 
Lynch & Co. Inc.; UBS AG, Lehman Brothers Holdings, Inc.; and Morgan 
Stanley, accounted for 63 percent of the growth in ILC assets since 
1987. These four firms all operate under some form of consolidated 
supervision by the Federal Reserve Board (FRB), the Office of Thrift 
Supervision (OTS) or the Securities and Exchange Commission (SEC) 
account for 61.4% of the total ILC industry assets as of March 31, 
2006. Reported total assets of all ILCs, as of March 31, 2006, ranged 
from $2.7 million to $62.0 billion. ILCs reporting total assets of $10 
billion or more include Merrill Lynch Bank USA ($62.0 billion), UBS 
Bank USA ($19.0 billion), American Express Centurion Bank ($13.8 
billion), Fremont Investment & Loan ($12.9 billion), and Morgan

[[Page 43483]]

Stanley Bank ($10.9 billion); 9 other ILCs reported total assets of $1 
billion or more. The remaining 47 institutions, on average, reported 
total assets of $223.6 million.
---------------------------------------------------------------------------

    \5\ During 2000, 4 new ILCs were insured; 2 during each of 2001 
and 2002; 5 during 2003; 6 during 2004; 4 during 2005; and 1 thus 
far in 2006. The insurance date for each institution reflects the 
date the institution began operating.
---------------------------------------------------------------------------

    While many of the ILCs insured after CEBA are subject to some form 
of consolidated supervision, many of the recent applications are from 
companies that would have no consolidated Federal supervisor. 
Currently, nine applications for deposit insurance for ILCs are pending 
before the FDIC. The FDIC has also received five notices of change in 
bank control to acquire an ILC. None of the potential parent companies 
of the current ILC applicants or the potential acquirers of ILCs will 
be subject to Federal consolidated supervision.

II. Recent Developments and Expressions of Concern

    The ILC industry has grown and evolved since its inception in 1910, 
and that growth and evolution appears to be continuing in ways that may 
not have been anticipated at the time CEBA was enacted in 1987 and even 
at the time that the Gramm-Leach-Bliley Act (GLBA) was enacted in 1999, 
when Congress last addressed the issue of mixing banking and commerce. 
Over time the chartering states have gradually expanded the powers of 
their ILCs to the extent that ILCs now generally have the same powers 
as state commercial banks.\6\ That fact, coupled with the ability of a 
company that controls an ILC to possibly engage in activities not 
permissible for a Federally-supervised holding company, has attracted 
the interest of a wide range of potential owners. For some of these 
companies, the ILC charter was the only way the company could own a 
bank. Some of these companies plan to use an ILC to support their non-
financial activities; others plan to use an ILC to augment the services 
of their financial services units.
---------------------------------------------------------------------------

    \6\ See n.1 supra.
---------------------------------------------------------------------------

    In 2005 the GAO issued a report that concluded that while ``from an 
operations standpoint [ILCs] do not appear to have a greater risk of 
failure than other types of depository institutions,'' \7\ commercial 
firm ownership of ILCs constituted a mixing of banking and commerce and 
created an unlevel playing field when compared to the holding companies 
of banks and thrifts subject to consolidated supervision, and that the 
FDIC's examination, regulation and supervision authorities may not 
adequately protect the bank and the insurance fund when an ILC is held 
by a commercial firm. Previously, the FDIC's OIG had issued a 2004 
report expressing a concern that ILCs may present additional risks to 
the deposit insurance fund because the parent holding companies of ILCs 
are not always subject to consolidated supervision, consolidated 
capital requirements, or enforcement actions imposed on parent 
organizations subject to the BHCA.
---------------------------------------------------------------------------

    \7\ U.S. Government Accountability Office, GAO-05-621, 
Industrial Loan Corporations: Recent Asset Growth And Commercial 
Interest Highlight Differences In Regulatory Authority (2005), 
available at https://www.gao.gov/highlights/d05621high.pdf 
(hereinafter GAO-05-621).
---------------------------------------------------------------------------

    The FDIC also received more than 13,000 comment letters and heard 
substantial testimony in three days of hearings on the proposed Wal-
Mart Bank's deposit insurance application. Most of the comments and 
testimony expressed opposition to the granting of deposit insurance to 
this particular applicant. As of June 30, 2006 over 640 of those 
comments specifically raised concerns over the risk to the deposit 
insurance fund posed by an ILC that has a parent without a consolidated 
Federal supervisor or in which an ILC is owned or affiliated with a 
commercial concern.
    Recently, numerous members of Congress have expressed their 
concerns about ILCs in comments on applications and notices pending 
before the FDIC, in recent Congressional hearings on ILCs, and by 
introducing a number of bills affecting ILCs.

III. Need for a Moratorium

    From a safety and soundness standpoint, ILCs have not presented the 
FDIC thus far with any greater risk of failure than other types of 
insured depository institutions and the FDIC's current statutory 
authority has proved adequate to supervise ILCs. However, as a result 
of the continued evolution of the ILC industry and the various issues 
and concerns expressed regarding the ILC industry mentioned above, it 
is appropriate for the FDIC to further evaluate (i) industry 
developments, (ii) the various issues, facts, and arguments raised with 
respect to the ILC industry, (iii) whether there are emerging safety 
and soundness issues or policy issues involving ILCs or other risks to 
the insurance fund, and (iv) whether statutory, regulatory, or policy 
changes should be made in the FDIC's oversight of ILCs in order to 
protect the deposit insurance fund or important Congressional 
objectives.

IV. The Moratorium

    The FDIC has imposed a six-month moratorium on FDIC action to (i) 
accept, approve, or deny any application for deposit insurance 
submitted to the FDIC by, or on behalf of, any proposed or existing 
ILC, or (ii) accept, disapprove, or issue a letter of intent not to 
disapprove, any change in bank control notice submitted to the FDIC 
with respect to any ILC. The FDIC Board of Directors may exclude from 
the moratorium any particular application or notice if it determines 
that (i) the moratorium would present a significant safety and 
soundness risk to any FDIC-insured institution or a significant risk to 
the deposit insurance fund, or (ii) failure to act would otherwise 
impair the mission of the FDIC.
    During the moratorium, the FDIC will not ``accept'' applications 
for deposit insurance for any ILC or notices of change in control with 
respect to any ILC, regardless of whether the application or notice is 
substantially complete. The moratorium includes all pending ILC 
applications for deposit insurance and notices of change in control 
with respect to an ILC in order to maintain the status quo. In that way 
the FDIC would be able to focus carefully and comprehensively on 
further evaluating the developments, facts, issues, and arguments 
mentioned above, and to ensure that no new ILCs will be insured and no 
new changes in control will be permitted that would be inconsistent 
with the FDIC's findings and conclusions.
    During the moratorium, all ILC applications and notices other than 
those subject to the moratorium will be acted upon only by the FDIC's 
Board of Directors.
    Finally, it is expected that during the moratorium the FDIC will 
seek public input on the issues and concerns raised with regard to the 
ILC industry.
    Imposition of a limited-duration moratorium at this time is 
necessary to insure that the FDIC achieves and preserves the broad 
statutory objectives of the FDI Act which include maintenance of public 
confidence in the banking system by insuring deposits and maintaining 
the safety and soundness of insured depository institutions. The FDIC 
recognizes that the moratorium may appear inconsistent with specific 
timetables for agency action on certain applications or notices. 
However, adherence to a strict statutory timeline without an 
opportunity to re-evaluate the FDIC's standards for determining the 
public interest may frustrate the substantive policies the agency is 
charged with promoting.
    The moratorium will not implement any new standards for any 
regulatory approvals, but rather will seek to maintain the status quo 
while the FDIC evaluates its standards in light of its

[[Page 43484]]

statutory objectives and congressional policies.

    By Order of the Board of Directors.

    Dated at Washington, DC, this 28th day of July, 2006.

Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
 [FR Doc. E6-12449 Filed 7-31-06; 8:45 am]
BILLING CODE 6714-01-P