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Industrial Loan Companies/Banks and the Separation of Banking and Commerce: Legislative and Regulatory Perspectives

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Industrial Loan Companies (ILCs) are state-chartered and state-regulated depository institutions. The Federal Deposit Insurance Corporation (FDIC) may insure them. Their owners include nonfinancial companies that cannot own ("hold" stock of) a bank under the Bank Holding Company Act (i.e., to be a bank or financial holding company). Their primary federal regulator is not the Federal Reserve, which regulates bank holding companies, but the FDIC. While prominent large ILCs include subsidiaries of securities firms, their owners also include automotive and retailing companies. The ILC form reflects a persistent tendency to combine the financing of a business with its operations, standard in many countries, especially Germany and Japan, but in disfavor in America. ILCs, therefore, have developed against a long U.S. two-way tradition of the separation of banking and commerce. (1) Ownership interests that nonfinancial firms may have in banks are generally 25% or less. (2) Banks may generally hold only nominal amounts of corporate stock.

ILCs evoke two major policy concerns. First, should Congress grant ILCs powers that would allow them to be nationwide banks while in competition with community banks? Second, could the combination of state and FDIC regulation provide oversight comparable to that for nationwide banks, especially for bank holding companies? The interest shown by Wal-Mart in controlling an ILC with nationwide potential has heightened interest in these issues.

The 108th Congress considered these issues in two bills that passed the House. H.R. 758 would have allowed ILCs to provide business checking accounts, while H.R. 1375 would have allowed ILCs to open branches nationwide. These measures could have transformed ILCs into a parallel banking system regulated primarily by a few states, growing into large institutions with commercial ownership.

In 2005, Wal-Mart announced that it was again applying for an ILC charter. (DaimlerChrysler did likewise later in the year). In the 109th Congress, H.R. 1224, allowing business checking accounts, passed the House on May 24, 2005, in a way preventing ILCs owned by nonfinancial businesses from becoming more bank-like. H.R. 3882 independently seeks to make any company that controls an ILC become a financial holding company (as defined above.).The House Financial Services Committee voted out H.R. 3505, a regulatory relief measure, on November 16. This bill would restrict ILCs from opening branches on an interstate, national, basis.

This report analyzes the controversy by: (1) providing a historical overview of the separation of banking and commerce; (2) examining the nature of ILCs and their regulation; and (3) identifying and analyzing the relevant legislation in Congress.

This report will be updated as events warrant.


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