An Overview and Critique of Industrial Banks or Loan Companies
An industrial bank is a state-chartered financial organization that is not subject to federal banking agency regulation and is often held by a commercial company. Industrial banks take deposits from clients and lend money to individuals and small companies.
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Another name for industrial banks is industrial loan companies (ILCs). Only a few states grant charters to industrial banks; most of these charters are granted by the state of Utah.
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Comprehending Industrial Banks
In order to give low-to-moderate-income industrial workers who couldn’t get credit at regular lending institutions a way to access cash, industrial banks were first established in the early 1900s.
State authorities and the Federal Deposit Insurance Corp. oversee industrial banks (FDIC). Industrial banks have a unique corporate structure that allows for corporate ownership. They are not required to abide by the Bank Holding Company Act and are exempt from certain of the rules that apply to regular banks. Furthermore, the Federal Reserve does not have oversight over industrial banks.
Due to the absence of legal constraints, a large number of investment firms and financial technology businesses have begun to seek for industrial bank charters.
Despite having fewer banking authority nationally, industrial banks often have the same rights and advantages as conventional commercial banks. Those who favor a stricter separation of banks and commercial enterprises have strong opinions on industrial banks. Industrial banks are criticized for giving businesses the benefits of a bank charter but not the oversight.
Disapproval of Industrial Banks
Walmart Inc. applied to establish a new industrial bank in 2005 with the intention of lowering the costs associated with debit and credit card transactions. Financial regulators and commercial banks protested and voiced their strong objections to this.
Eventually, in 2006, the FDIC put an interim stop to applications from industrial banks.
Simultaneously, state laws were established to prevent any potential industrial banks from establishing branches in other jurisdictions.
In 2007, Walmart Inc. withdrew their application prior to the FDIC having the authority to decide how to proceed with it. Walmart’s application was met with opposition claiming that the company’s involvement in banking would endanger the FDIC Deposit Insurance Fund as well as the banking system.
The Independent Community Bankers of America (ICBA) lobbyists published a position paper at the beginning of 2019 advocating for a suspension of federal deposit insurance for industrial banks. A recent wave of fintech firms, such as payment processor Square Inc., that have applied for state bank licenses served as the impetus for their activities. Square Inc. would be able to offer loans and other financial services to its merchants directly if it were granted a bank charter. ICBA contends that Congress must close the loophole pertaining to industrial bank charters. Fintech businesses that get bank charters would not only be released from Federal Reserve monitoring, but they would also be excused from disclosing any commercial activity that is unrelated to banking.
The “Eliminating Corporate Shadow Banking Act of 2019,” a measure sponsored by Louisiana senator John Kennedy in November 2019, would essentially prohibit nonfinancial firms from establishing industrial banks. The Industrial and Commercial Bankers Association (ICBA) has endorsed Sen. Kennedy’s measure, stating that it would assist preserve the division of labor and banking, shut the loophole that industrial banks were using, and make the financial system safer.
An Industrial Bank: What Is It?
A depository institution with a state charter that is held by non-financial companies is known as an industrial bank. The states in which industrial banks are established have regulatory authority over them rather than the Federal Reserve.
An illustration and definition of an industrial bank
Industrial banks, often referred to as industrial lending companies (ILCs), are state-chartered financial organizations that provide non-financial businesses with operating freedom. In states where industrial banks are permitted and deposit insurance is provided by the FDIC, nonfinancial firms are able to charter and run these banks.
They have to abide by the same rules and laws pertaining to banking as other banks. The Federal Deposit Insurance Corp. (FDIC) oversees and insures them, while the state in which they conduct business controls their operations.
BMW Bank of North America is an illustration of an industrial bank. BMW Bank is an industrial bank that provides dealerships, affiliates, and owners of BMW and BMW MINI Cooper vehicles with internal financial services. This takes the shape of personal insurance, consumer lending products like credit cards, and indirect vehicle finance. Put another way, you’re working with an industrial bank when you finance a car through BMW Bank of North America.
