Order Code RL32767
CRS Report for Congress
Received through the CRS Web
Industrial Loan Companies/Banks and the
Separation of Banking and Commerce:
Legislative and Regulatory Perspectives
Updated June 27, 2005
William D. Jackson
Specialist in Financial Institutions
Government and Finance Division
Congressional Research Service ˜ The Library of Congress

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Industrial Loan Companies/Banks and the Separation
of Banking and Commerce: Legislative and Regulatory
Perspectives
Summary
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 active in financing automobiles and credit cards. The ILC form
reflects a persistent tendency to combine the financing of a business with its
operations. These mixtures are standard in many countries, especially Germany and
Japan, but have generally fallen into disfavor in America. ILCs, therefore, have
developed against a long U.S. tradition of the separation of banking and commerce.
Ownership interests that nonfinancial firms may have in banks are generally 25% or
less. 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 to 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 and pay interest on business checking
accounts, while H.R. 1375 would have allowed ILCs to open branches even without
permission from the states of the new branches. Taken together, such measures could
have transformed ILCs into a parallel banking system regulated primarily by a few
states, yet allowing ILCs to grow into large institutions with commercial ownership.
In 2005, Wal-Mart announced that it is again applying for an ILC charter, thus
affecting any banking “regulatory relief” legislation in the 109th Congress. The
current measure H.R. 1224, allowing business checking accounts, passed the House
on May 24, 2005, in a way to prevent ILCs owned by nonfinancial businesses from
becoming more bank-like via new accounts.
This report provides context for 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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Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Banking and Commerce in American Economic Development . . . . . . . . . . . . . . 2
Nineteenth Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Early Twentieth Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Holding Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nonbank Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Competitive Equality Banking Act of 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Savings and Loan Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Gramm-Leach-Bliley Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Industrial Loan Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
108th Congress Legislative Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
109th Congress Viewpoints and Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Arguments For ILC Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Arguments Against ILC Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
List of Tables
Table 1. Summary of ILC Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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Industrial Loan Companies/Banks and the
Separation of Banking and Commerce:
Legislative and Regulatory Perspectives
Introduction
Industrial Loan Companies (ILCs), are state-chartered and state-regulated
depository institutions whose deposits the Federal Deposit Insurance Corporation
(FDIC) may insure. Congress specifically exempted them from being defined strictly
as “banks” in statutes. Nonetheless, state banking codes may define them as
industrial banks. While they are subject to FDIC inspection and the same banking
laws that apply to all FDIC-insured institutions, parent companies may own them
without becoming bank holding companies or financial holding companies and,
therefore, are not subject to supervision by the Federal Reserve (Fed). ILCs are now
typically found in a few western states.
ILCs are arguably an institutional manifestation of a persistent tendency to
combine the financing of a business with its operations. Entrepreneurs may view this
combination as efficient, so that it emerges in this country periodically. Yet
policymakers and, especially, the Fed have often opposed it. In America, industrial
firms may have only noncontrolling interests in banks as defined in statutes, generally
25% or less of bank shares. The combination, however, is found in many other
nations with different financial systems. Germany and Japan are perhaps the most
prominent nations mixing capital sources and uses directly.
The 108th Congress considered legislation, detailed below, allowing ILCs to be
like regular commercial banks. Similar legislation may resurface in the 109th
Congress, especially since the Government Accountability Office may complete its
study of these institutions soon, and Wal-Mart has revived its attempts to control an
ILC that legislation had prevented in various states.
ILC underlying policy issues are twofold: first, if such measures become law,
could they become “alternative” nationwide banks, owned by commercial and
industrial, and financial, businesses? That would contravene long-standing policy,
prohibiting nonfinancial companies from owning banks. Second, could state and
federal (the FDIC rather than the Fed) supervisors regulate the resulting ILCs and
their owners comparably to other banking institutions and their holding companies?
Some observers believe that, should ILCs be allowed to expand, a less-regulated
banking system controlled by very large securities firms and nonfinancial businesses,
contrary to long-standing laws, would emerge. If so, deep-pocket companies could
operate nationwide ILCs as extensions of their corporate treasuries, in competition
with community banks, protypically a three-thousand-or-more branch “Bank of Wal-
Mart,” if so. Others note that ILCs are small players on the field of finance. They

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CRS-2
would continue to be regulated by states and the FDIC, maintaining their safety and
soundness despite ownership by retailers, securities firms, and others.
This report addresses the controversy over expansion of ILCs by line of business
and by branching across the nation as follows, providing:
(1) a historical overview of the U.S. separation of banking and commerce;
(2) information on ILCs and their regulation; and
(3) identifying and analyzing relevant legislation in Congress.
Banking and Commerce in American
Economic Development
Overall, analysts think of banking as a source of funds, and all other activities,
including commercial and industrial business, as a use of funds. Much of the history
of banking in the United States revolves around the desire to avoid mixing the two.
(In the rest of the world, such combinations are prevalent.) Problems have occurred
when they have mixed, particularly when users of funds have treated a bank as a
captive financier of business activities, or an adjunct to a corporate treasury. The
potential for bank failure has been higher in such cases. The combination may
heighten potentials for systemic risk, in which the failure of one major lender leads
to failures of others, when regulatory oversight is not sufficiently strong.
Nineteenth Century
Following calamitous combinations of banking with commercial activities in the
early 1800s, New York and Georgia led the way into having banks be purely lending
and deposit-taking businesses in 1838. Chartered banks generally moved away from
commercial activities. The National Banking System, which Congress created to
finance the Civil War,1 patterned itself on the limited New York banks.
Other state banking systems still included banks with significant commercial
activities. One notable state-level bank/industry combination was The Bank of
California, which owned extensive gold and silver mining properties in Nevada.
Unincorporated private banks, often as partnerships, combined financing and
investing activities under one roof later in the century. The Morgan and Rockefeller
commercial/financial/banking empires were prominent among these aggregations.
Their deposits financed investments in stocks, often controlling other firms.
Early Twentieth Century
Around the beginning of the last century, many incorporated commercial banks
emulated private bank operations through “departments,” while trust companies
investing in corporate stock investments emerged. Deposits essentially funded both
types of banks, allowing them large bases of assets. The spread of mixed
commercial/investment banking lessened the distinction between financing an
1 12 Stat. 665, significantly amended by the National Bank Act of 1864, 13 Stat. 99.

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CRS-3
enterprise through credit and controlling it through ownership. Losses did occur,
especially after the stock market collapse in 1929, when many banks believed to have
had significant stock holdings could not meet depositor demands for their money.
“Runs” to withdraw deposits caused the failure of many other banks, including those
that had not suffered losses, because, although they had operated safely and were
solvent, they lacked adequate funds on hand (liquidity) to pay depositors seeking
withdrawals quickly. Many critics blamed the Great Depression that followed on
“financiers,” who abused banks in the service of nonbank business.
In reaction, the Glass-Steagall Act2 divided banking and industry (including
securities operations and their corporate investments) into separate businesses after
1933. The Morgan, Rockefeller, and other complex business combinations with
financial firms were split into separate banking and “nonbanking” parts. Glass-
Steagall prohibited most banks from holding significant amounts of stock in
commercial businesses. The new securities firms, no longer able to invest for their
own account based on deposit funding, became transactional financial businesses
focusing on commissions and fees. Subsequent attempts to mix sources and uses of
funds through corporate combinations generally involved “affiliates.”3
Holding Companies
Subsequent bank participation in commercial operations turned to the holding
company form that seemingly maintained a certain separation while gaining some
efficiencies. This form of an unregulated state-chartered corporation with potentially
unlimited authorities could control (“hold” the stock of) regulated banks and any
number of unregulated financial and nonfinancial businesses. The archetype of this
diversification was the giant Transamerica Corporation. Transamerica owned The
Bank of America, other large banks in several western states, large insurance
companies, real estate and oil development operations, a fish packer, a metal
fabricator, ocean shipping, and taxicab operations. Provisions addressing companies
holding bank stock in the 1933 Act did not prevent its rise.
Repeated Federal Reserve (Fed) efforts to restrain Transamerica culminated in
the Bank Holding Company Act of 1956 (BHCA).4 This act removed multi-bank
holding companies from commercial ownership and activities and interstate
expansion. The Fed became the supervisor of multi-bank holding companies, and
quickly limited their commercial ties and interstate operations.
Yet large businesses found it advantageous to own just a single bank. A “one-
bank” holding company could own only one bank, which nonfinancial businesses
could then control without restraint. By 1970, more than 700 of these companies had
2 48 Stat. 162, §§20, 21, 26, 32.
3 An analysis of such structures appears in CRS Report RS21680, Affiliates in Banking,
Finance, and Commerce: Development and Regulatory Background, by William Jackson.
4 70 Stat. 133.

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CRS-4
emerged. In that year, major amendments to the BHCA5 limited such combinations.
The amended BHCA’s definition of a bank applied only to institutions that both
accepted demand deposits (checking accounts) and made commercial loans.
The 1956 statute specified that “control” of banks occurred when a single
“company” such as a nonfinancial business or investment enterprise owned 25% or
more stock ownership of voting shares in banks, with significant exceptions; this
figure still critically defines the span of prohibited “control” of a bank by a
nonfinancial company. The Change in Bank Control Act of 19786 extending the 25%
value to unincorporated firms, individuals, etc.
Nonbank Banks
Shortly afterwards, limited-service “nonbank banks” (NBBs) arose. NBBs (1)
accepted either demand or other deposits, or (2) made commercial loans, but,
critically, not both. Corporate buyers would purchase or create a bank with a national
or state charter and divest either its business loans or its deposits payable on demand.
Thus, their banking operations fell outside the BHCA’s redefinition in 1970. Yet,
the FDIC insured their deposits.
The Office of the Comptroller of the Currency, which charters national banks,
chartered the first such institution in 1982. This agency soon became flooded with
applications. Because NBBs fell outside the strict legal definition of a bank, they,
their parent corporations, and related companies, were not subject to BHCA activity
and interstate banking restrictions. Most apparently accepted deposits but made no
commercial loans. Prominent NBBs thus became known as “credit card banks.”
Others apparently functioned as extensions of corporate treasuries and invested
largely in money market instruments. This “nonbank bank loophole” allowed
financial conglomerates such as Merrill Lynch, Shearson/American Express, and
Prudential; and industrial companies such as General Electric, Textron, Gulf and
Western, Sears Roebuck, Archer-Daniels-Midland, J.C. Penney, and Control Data,
to offer FDIC-insured banking services.
Competitive Equality Banking Act of 1987
With strong Fed backing, the Competitive Equality Banking Act of 1987
(CEBA)7 prohibited new NBBs, reasserting both Fed control and interstate banking
restrictions. CEBA more stringently defined “banks” under the BHCA to include
institutions insured by the FDIC, with certain exceptions. CEBA broadly defined the
terms “demand deposit” and “commercial loan” to cover many variations. Thus, it
stopped prospective owners of NBBs from creating more institutions combining
5 84 Stat. 1760.
6 92 Stat. 3683.
7 101 Stat. 552.

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CRS-5
banking and commerce across state lines. (A decade later, the Economic Growth and
Regulatory Paperwork Act of 19968 relaxed some of its numerical restraints.)
In amending the BHCA, this law significantly exempted industrial loan
companies or industrial banks, from being defined as banks. In language still in
effect in 2005, CEBA legislated that the term “bank” in the BHCA does not generally
refer to ILCs, if (1) their chartering state then required them to obtain FDIC
insurance, or was considering such a requirement; (2) they do not accept demand
deposits; (3) they do not incur payments system overdrafts leading to Fed credit on
behalf of affiliated companies; (4) they do not offer checking accounts for
commercial customers if they grow to $100 million in assets; and (5) they do not
become acquired by new owners after March 1987.9 CEBA affected about fifty ILCs,
and now governs a handful more.
Savings and Loan Associations
Created as housing finance lenders when banks could or would not lend on the
security of residential real estate, these associations specialized in consumer
mortgage financing and deposit-taking. Policymakers did not perceive these “thrift”
institutions as “banks” for many years. A holding company act, put into much of its
present form in 1968,10 eventually came to govern them, too. The Change in Savings
and Loan Control Act of 197811 statutorily made their ownership standards the same
as for bank ownership. Nevertheless, for many years their holding company law
contained no activity restrictions on companies owning just a single (“unitary”) thrift
institution. They included Ford, National Steel, Sears, and, again, Transamerica.
By the early 1980s, thrift institutions were suffering large losses. Their
mortgage rates, particularly on mortgages made in earlier years and carrying low
fixed rates, could not match the high rates then needed to attract and keep deposits.
Remediation efforts included regulatory liberalization of ownership with reduced
capital in 1982, which allowed new owners to contribute stock, land, real estate, etc.
as “in-kind capital.” Lawmakers authorized thrifts to make direct investments via the
Garn-St Germain Depository Institutions Act of 1982,12 and in states having
permissive laws such as California, Florida, and Texas. Thrifts owned casinos, fast-
food franchises, ski resorts, and windmill farms, among their direct investments.
While such commercial activities were only one of many elements of the
financial plight of thrifts, they became viewed as highly visible sources of trouble.
In 1985, regulatory tightening restricted direct investments of thrifts without special
federal permission to 10% of assets. Systemic disintegration of insolvent thrifts led
to strong and costly remedies in the Financial Institutions Reform, Recovery, and
8 110 Stat. 3009, Title II, §2304.
9 12 U.S.C. §1841(c)(2)(H).
10 82 Stat. 5.
11 92 Stat. 3687.
12 96 Stat. 1469.

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Enforcement Act of 1989,13 followed by the Federal Deposit Insurance Corporation
Improvement Act of 1991.14 Both measures, among their many safety and soundness
provisions, severely limited commercial investments for the remaining thrifts, and
the latter did so for banks as well. Direct investments came under FDIC veto power
in the 1991 legislation, limiting the ability of states to authorize activities and
stockholdings for their chartered banks and similar depository institutions.
Gramm-Leach-Bliley Act
This legislation (GLBA)15 liberalized the BHCA in 1999 to provide new
corporate forms for owning banks. Such financial holding companies (FHCs), or
securities-based investment bank holding companies, may own commercial banks,
securities houses, insurance companies, and other financial companies. As specially
empowered bank holding companies, FHCs may own more diversified financial
businesses than bank holding companies previously could. The Fed regulates FHCs
under the BHCA, while the Securities and Exchange Commission regulates
investment bank holding companies. Inside both, banks “held” are subject to all
federal and state banking laws, including ownership rules. Commercial firms cannot
be, or own, these holding companies. FHCs cannot have nonfinancial affiliates, with
a few exceptions such as “merchant banking”16 and insurance company investments.
A critical GLBA percentage is 85%, which is the proportion of total revenue of a
company allowed be a FHC and similar that must be financial.17
This law ended the ability of “unitary thrift holding companies” noted above to
engage in bank-like activities while being owned by nonfinancial businesses. GLBA
also ended some of CEBA’s 1987 restrictions on remaining NBBs. GLBA did not
disturb the exemption of ILCs and their owners from Fed supervision.
Industrial Loan Companies
ILCs (known as industrial banks in California and Utah and thrift companies in
Nevada) can engage in most banking activities under specific state law. Under
federal law these institutions cannot now accept demand deposits (i.e., business
checking accounts, whether bearing interest or not). They are vestiges of an early-
20th-century mode of finance, in which state-chartered loan companies served the
borrowing needs of “industrial” workers that banks would not provide. Many later
merged with commercial banks; 12 states still have industrial bank-charter options.
13 103 Stat. 183.
14 105 Stat. 2236.
15 113 Stat. 1338.
16 See CRS Report RS21134, Merchant Banking: Mixing Banking and Commerce Under the
Gramm-Leach-Bliley Act, by William Jackson and Gary Shorter.
17 113 Stat. 1348.

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CRS-7
The FDIC began to insure the deposits of a few ILCs in 1958. After collapses
of state ILC insurance funds in Utah and California, the Garn-St Germain Depository
Institutions Act of 198218 encouraged the FDIC to cover deposits of ILCs operating
safely.19 It insured commercially owned ILCs commencing in 1988.
FDIC-insured ILCs are found predominantly in Utah, California, and Nevada.
The FDIC has insured fifty-eight of these entities in seven states, which thus are
potentially the basis for an alternative banking system. Insured ILCs have about $130
billion in assets:20 less than 1.5%of total assets of all FDIC-insured institutions.21
(Another 900 or more “Industrial Loan Corporations” exist, but are very small,
lacking FDIC insurance22 and sometimes even state banking agency regulation. They
are not part of the current congressional interest in ILCs.)
Under their state charters, ILCs are not greatly limited in the types of business
they may conduct. ILC activities vary from being community-oriented consumer and
small business lenders, to specialty lenders, to auxiliaries of their owners’ corporate
treasuries, to financiers of their parents’ large-dollar products. ILCs and, especially
their parent owners, need not always carry as much capital as banks and their holding
companies. These characteristics have attracted several large owners. ILCs in Utah
include subsidiaries of American Express, BMW, Citigroup, General Electric,
General Motors, Merrill Lynch, Morgan Stanley, Pitney-Bowes, Sears, UBS,
Volkswagen and Volvo. Wal-Mart’s attempt to buy an industrial bank in California
in 2002 set off protests from community banks and labor groups. California soon
enacted legislation to prohibit nonfinancial companies from obtaining an ILC charter.
Colorado has barred nonfinancial firms from owning its ILCs. Utah thus is the
putative location for enhanced ILCs. For example, in 2003, it chartered Medallion
Bank, which received FDIC coverage, to finance taxicabs. It has chartered ILCs
with total assets of $106 billion: 62% of FDIC-insured ILC deposits.23
Insured ILCs are subject to state banking supervision, FDIC oversight as state
banks, and most other major federal banking laws governing consumer compliance,
community reinvestment, and transactions with insiders and related parties.
Nonetheless, their owners do not fall under the definition of a bank holding company
subject to Fed scrutiny. The Fed allows bank holding companies to own, control,
operate, and provide services to ILCs, but, as noted above, may not require ILC
18 96 Stat. 1469, §703.
19 ILCs must meet Federal Deposit Insurance Act insurability criteria: financial condition
and history, capital adequacy, earnings prospects, character of management, community
convenience and needs, and corporate powers consistent with law. 12 U.S.C. §1816.
20 Rob Blackwell, “Wal-Mart After ILC Again,” American Banker Online, Mar. 8, 2005.
21 Office of Inspector General, Federal Deposit Insurance Corporation, The Division of
Supervision and Consumer Protection’s Approach for Supervising Limited-Charter
Depository Institutions, Evaluation Report, Sept. 30, 2004.
22 Conference of State Bank Supervisors, A Profile of State-Chartered Banking.
Washington: 2002, pp. 16-18.
23 Blackwell, “Wal-Mart After ILC Again.”

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CRS-8
owners to become bank holding companies.24 Opponents of ILCs view the Fed’s
holding company regulation, reaching to ownership, as “safer” than the FDIC’s
governance of institutions but not their owners. Yet owners of ILCs face similar
restrictions against irregular self-dealings.
From 1985 through early 2004, 21 ILCs failed. Collapsed ILCs were mainly
small finance-company-mode companies taking on risky customers. Pacific Thrift
and Loan and Southern Pacific Bank were the largest, and most recent, failed ILCs.
Collectively, failed ILCs were less than 1% of insured banking firms that collapsed.
The riskiest ILCs could not obtain FDIC insurance in the early 1980s, so that the
agency expended no federal funds on their liquidations, in contrast to the savings and
loan experience. 25 In the other direction, the collapse in 2002 of a prominent owner
of an ILC, Conseco, for other business reasons did not adversely affect its insured
ILC. GE Capital bought the ILC at its book value, so that no losses resulted.26
Today, federal and state regulators expect ILCs to be run in a safe and well-
capitalized manner, with defined business plans and relationships to their parent
owner firms. As primary federal regulator, the FDIC has authority to examine the
affairs of any affiliate of any depository institution, including its parent company, to
decide the effect of the relationship between the institution and affiliates.27 Table 1
presents the business models and some examples of owners of insured ILCs.
108th Congress Legislative Debate
H.R. 758 (Representative Sue Kelly) would have permitted banks to pay interest
on business checking accounts, which is the essence of their relationship with
commercial customers, particularly small businesses. The measure would have also
allowed ILCs to offer checking accounts to corporate customers and pay interest on
them. Industry observers know the latter provision as the Royce Amendment (after
its sponsor, Representative Edward Royce), adopted in a markup, March 13, 2003.
The committee defeated two amendments of opposite, restrictive, intent. The House
passed the result by voice vote on April 1, 2003. The Senate did not take it up.
H.R. 1375 ( Representative Shelley Capito) would have relieved banks and other
depository institutions, including credit unions and ILCs, from some perceived
burdens of their regulation. This measure would, among many other things, have
given banks, and ILCs, authority to use start-up (“de novo”) branches to cross state
24 12 C.F.R. §225.28.
25 Mindy West, “The FDIC’s Supervision of Industrial Loan Companies: A Historical
Perspective,” FDIC Supervisory Insights, vol. 1, summer 2004, p. 5-13.
26 Christine Blair, “The Mixing of Banking and Commerce: Current Policy Issues,” FDIC
Banking Review, vol. 16, no. 4, 2004, p. 114.
27 Federal Deposit Insurance Act §10(b)(4), 12 U.S.C. §1820.

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CRS-9
Table 1. Summary of ILC Business Models
Total
Business Model
Assets,
Number
Example ILCs
Description
$Billion
(percent)
Community-focused, stand-
6
$0.8
Golden Security Bank;
alone.
(1%)
Tustin Community Bank.
In businesses with activities
Finance Factors, LTD;
predominantly:
Merrill Lynch Bank USA;
(a) financial, ILC has
American Express Centurion
(a)15
community focus;
$127.7
Bank; USAA Savings Bank
(b)16
(b) financial, ILC supports a
(94%)
(United States Automobile
(c) 3
specialty function within the
Association); Associates
firm; (c) within the financial
Capital Bank (Citigroup);
services sector.
Trust Industrial Bank.
In businesses not
7
$4.2
GE Capital Financial;
necessarily financial in
(3%)
GMAC Commercial
nature.
Mortgage Bank; Exante Bank
(United Health).
Directly support parent
9
$2.6
BMW Bank of North
business commercial
(2%)
America; Volkswagen Bank
activities.
USA; Pitney Bowes Bank.
Totals
56
$135.4
—
Source: Adapted by CRS from Office of Inspector General, Federal Deposit Insurance Corporation.
The Division of Supervision and Consumer Protection’s Approach for Supervising Limited-Charter
Depository Institutions, Evaluation Report, Sept. 30, 2004, pp. 34, 37.
lines by opening newly created branches through its amending the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994.28 In its Financial Services
Committee markup on May 20,2003, an amendment seeking to disallow ILCs from
branching across state lines without permission of the states entered was defeated.
The committee approved H.R. 1375 on May 20, 2003. A compromise (by
Representatives Barney Frank and Paul Gillmor) was incorporated into the
manager’s amendment, which the House passed on March 18, 2004. It would have
limited ILCs’ crossing a state line without acquiring an existing bank, unless the ILCs
were more than 85% financial in nature, or had FDIC insurance before October 2003.
The Senate did not take that measure up either.
109th Congress Viewpoints and Activity
28 108 Stat. 2238 §102.

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Release of an anticipated Government Accountability Office paper on ILCs
may renew interest in these institutions. Wal-Mart’s latest strategy to own an ILC
envisions opening it in Utah in 2005, while pledging to limit its operations to credit
and debit card activities and not to open branches of it in stores.29 In California,
overturning a state law to bar nonfinancial companies from buying an ILC, a
measure to allow such purchases by nonfinancial companies with less than $1 billion
in shareholder equity has cleared the Assembly and Senate Banking Committee of
the legislature.30 (Wal-Mart would be barred, as would companies larger than about
of Wal-Mart’s shareholder equity, from ILC ownership given the specific cutoff.31)
Legislatively, H.R. 1224 (Representative Sue Kelly), the Business Checking
Freedom Act, passed the House on May 24, 2005, by 424-1. Its provisions for banks
to pay interest on corporate accounts would disqualify many ILCs. The ILC provision
repeats a compromise struck by Representatives Barney Frank and Paul Gillmor in
the last Congress. This legislation disqualifies ILCs from the new power to pay
interest on the accounts if a firm that controls them derives at least 15% of its annual
gross revenues from in activities that are not "financial in nature or incidental to a
financial activity" in at least three of the last four calendar quarters.
Some ILCs qualify, including those that became an insured depository institution
before Oct. 1, 2003, or those that had approved applications by that date. The 85%
test originated with the Gramm-Leach-Bliley Act noted above.
Debate over measures granting ILCs banking powers, without requiring that
their owners be bank holding companies, involves interrelated questions. They
involve competitive equality, the nature and effectiveness of regulation, and safety
and soundness issues. Comparisons of ILCs and banks involve value judgments as
to the safety and competitiveness of banking institutions, federalism, and relations
between ownership and behavior. The following summarizes the contending
positions over ILC authorities.
Arguments For ILC Expansion
The FDIC notes that ILCs are subject to its examinations, compliance with
banking laws, and supervisory restrictions. In this view, no safety and soundness
reasons exist requiring constraints on this charter type beyond those imposed on other
FDIC-insured charter types. The Conference of State Bank Supervisors and the
Financial Services Roundtable believe in the potential for competitive flexibility of
ILCs, with their state charters forming just another part of the “dual banking system”
of federal and state banking charters. Merrill Lynch, Morgan Stanley, Goldman
Sachs, UBS Warburg, and Wal-Mart are publicly known supporters of the current
ILC expansion effort.32 (Merrill’s ILC already controls about half of ILC assets.)
29 Blackwell, “Wal-Mart After ILC Again.”
30 Blackwell, “ILC Bill Clears Calif. Senate Panel,” American Banker Online, June 17, 2005.
31 Computation by CRS based on Wal-Mart’s balance sheet for January 2005.
32 Kathleen Day, “Firms’ Push to Enter Banking Wins Hill Support.” Washington Post, May
23, 2003, p. E01; Bureau of National Affairs, BNA’s Banking Report, various issues; The
(continued...)

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CRS-11
Arguments Against ILC Expansion
Fed officials opposing ILC expansion argue that ILCs and, especially, their
owners are not subject to the same supervision as commercial banks and their
holding companies, and, in this line of thought, would pose a risk to the financial
system if they became prominent. The Fed notes that owners of ILCs, especially
large commercial firms, avoid regulations that apply to holding company owners of
full service insured banks. Community banks feel threatened by potential competition
from Wal-Mart and other deep-pocket owners of in-house ILCs with nationwide
banking powers, just as small merchants and labor groups feel threatened by entry of
Wal-Mart into their communities. The Independent Community Bankers of America
opposes ILC expansion, as does the United Food and Commercial Workers union.
Some consumer groups feel that ILCs threaten the FDIC insurance fund, and,
therefore taxpayers, by mixing banking with commerce.33
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33 Ibid.

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CRS-12
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CRS-13
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