Chairman of Financial Services Committee Warns of House Action If ILCs Permitted

Implications: Commercial firms aren't permitted to own banks, however, they can own ILCs (Industrial Loan Corporations/Industrial Banks), which resemble banks and are traditionally used to provide financing to consumers who are customers of the parent company who owns the commercial firm.

1.  Incoming Chairman of the House Financial Services Committee, Barney Frank, has submitted bipartisan legislation to close a loophole in the nation's banking laws that allow retailers and other commercial firms to own ILCs/Industrial Banks

2.  Rep. Barney Frank wants to bar non-financial companies from owning ILCs and has introduced the Industrial Bank Holding Company Act of 2006, which will enhance regulation of the parent companies of ILCs, restore the traditional separation between banking and commerce, prevent branch banking by some commercially owned ILCs, prohibit the FDIC from granting new charters to commercial companies and bolster the examination and enforcement authority of the FDIC as the ILC regulator




Analysis: Due to a loophole in the Bank Holding Company Act, ILCs are eligible for federal deposit insurance from the FDIC and can be owned by commercial firms, unlike other banks.  Additionally, the parent companies of ILCs aren't subject to supervision by the Federal Reserve as are bank holding companies, although they are subject to some supervision by the FDIC.

1.  However, in the past few years, commercial firms and large retail companies have begun to form or acquire ILCs, which raises concerns that they will offer a wide variety of banking services and potentially erode the separation between banking and commerce

2.  The FDIC imposed a six-month moratorium on ILC applications back in July 2006 after much outrage from banking associations, credit unions and consumer advocate groups and the moratorium is slated to expire at the end of January, 2007, which brings the issue back into focus and raises the question of will the FDIC approve the ILC applications or wait until Congress acts on the issues and loophole in the Bank Holding Company Act?