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

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

Order Code RL32767
Industrial Loan Companies/Banks and the
Separation of Banking and Commerce:
Legislative and Regulatory Perspectives
Updated February 11, 2008
N. Eric Weiss
Analyst in Financial Economics
Government and Finance Division

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. Although 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. It would
prevent 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 passed H.R. 3505, a
regulatory relief measure, on March 8, 2006. This bill would restrict ILCs from
opening interstate branches. H.R. 5746 was introduced July 10, 2006. It would give
the FDIC the authority to regulate the owners of ILCs and prohibit some ILCs from
branching into new states. On December 7, 2006, 107 Members of Congress asked
the FDIC to continue a moratorium on deposit insurance applications by ILCs owned
by commercial firms. The Members said this would provide time for the 110th
Congress to act on the policy concerns.
This report analyzes the controversy by (1) providing an 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.

Contents
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Banking and Commerce in American Economic Development . . . . . . . . . . . . . . 2
Nineteenth Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Early 20th Century . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Holding Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Nonbank Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Competitive Equality Banking Act of 1987 . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Savings and Loan Associations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Gramm-Leach-Bliley Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Industrial Loan Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Arguments for ILC Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Arguments Against ILC Expansion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
108th Congress Legislative Debate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
109th Congress Activity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
110th Congress Update . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
List of Tables
Table 1. Summary of ILC Business Models . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9

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. Although 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. In recent years large companies such as
GMAC, Volkswagen, Target and Harley-Davidson have created or acquired ILCs to
provide in-house financial services including financing customers’ accounts. An
additional 14 have applications pending for new ILCs or transfers of ownership.1
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 of banking and commerce, 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 resurfaced in the 109th Congress,
especially after the Government Accountability Office completed its study of these
institutions, and Wal-Mart revived its attempts to control an ILC.
There are two policy issues concerning ILCs. First, if such measures become
law, could ILCs 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?
1 Testimony of Douglas H. Jones, acting general counsel, FDIC, in U.S. Congress, House
Committee on Financial Services, July 12, 2006, p.19.

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Some observers believe that, should ILCs be allowed to expand, a less-regulated
banking system controlled by very large securities firms and nonfinancial businesses
would emerge, contrary to long-standing laws. If so, deep-pocket companies could
operate nationwide ILCs as extensions of their corporate treasuries, in competition
with community banks. A three-thousand-or-more branch “Bank of Wal-Mart” could
be the first of many such ILCs. Others note that existing ILCs are small players on
the field of finance. They 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) an historical overview of the U.S. separation of banking and commerce;
(2) information on ILCs and their regulation; and
(3) analysis of 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,2 patterned itself on the limited New York banks.
Other state banking systems included banks with significant commercial
activities. One notable example of state-level bank/industry combination was The
Bank of California, which owned extensive gold and silver mining properties in
Nevada. Unincorporated private banks, often 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.
2 12 Stat. 665, significantly amended by the National Bank Act of 1864, 13 Stat. 99.

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Early 20th Century
At the start of the 20th 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
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 Act3 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.”4
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).5 This act removed multi-bank
holding companies from commercial ownership and activities and interstate
3 48 Stat. 162, §§20, 21, 26, 32.
4 An analysis of such structures appears in CRS Report RS21680, Affiliates in Banking,
Finance, and Commerce: Development and Regulatory Background, by William D. Jackson.
5 70 Stat. 133.

CRS-4
expansion. The Fed became the supervisor of multi-bank holding companies, and
quickly limited their commercial ties and interstate operations.
Large businesses continued to find 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 emerged. In that year, major amendments to the BHCA6 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 19787 extended 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.
6 84 Stat. 1760.
7 92 Stat. 3683.

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Competitive Equality Banking Act of 1987
With strong Fed backing, the Competitive Equality Banking Act of 1987
(CEBA)8 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
banking and commerce across state lines. (A decade later, the Economic Growth and
Regulatory Paperwork Act of 19969 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 2006, 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 1987.10 CEBA affected about 50 ILCs,
and now governs a handful more.
Savings and Loan Associations
Created as housing finance lenders when banks could not 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 1968,11 eventually came to govern them, too. The Change in Savings
and Loan Control Act of 197812 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 suffered large losses. Their mortgage
revenues, 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
8 101 Stat. 552.
9 110 Stat. 3009, Title II, §2304.
10 12 U.S.C. §1841(c)(2)(H).
11 82 Stat. 5.
12 92 Stat. 3687.

CRS-6
Garn-St Germain Depository Institutions Act of 1982,13 and in states having
permissive laws such as California, Florida, and Texas. Thrifts owned casinos, fast-
food franchises, ski resorts, and windmill farms, among other direct investments.
Although 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
Enforcement Act of 1989,14 followed by the Federal Deposit Insurance Corporation
Improvement Act of 1991.15 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)16 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”17 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.18
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.
13 96 Stat. 1469.
14 103 Stat. 183.
15 105 Stat. 2236.
16 113 Stat. 1338.
17 See CRS Report RS21134, Merchant Banking: Mixing Banking and Commerce Under the
Gramm-Leach-Bliley Act, by Gary Shorter.
18 113 Stat. 1348.

CRS-7
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.
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 198219 encouraged the FDIC to cover deposits of ILCs operating
safely.20 It insured commercially owned ILCs commencing in 1988.
FDIC-insured ILCs are found mostly in Utah, California, and Nevada. The FDIC
has insured 58 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:21
less than 1.5%of total assets of all FDIC-insured institutions.22 (Another 900 or more
“Industrial Loan Corporations” exist, but are very small, lacking FDIC insurance23
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
favored location for enhanced ILCs. For example, in 2003, it chartered Medallion
19 96 Stat. 1469, §703.
20 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.
21 Rob Blackwell, “Wal-Mart After ILC Again,” American Banker Online, Mar. 8, 2005.
22 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.
23 Conference of State Bank Supervisors, A Profile of State-Chartered Banking
(Washington: 2002), pp. 16-18.

CRS-8
Bank, which received FDIC coverage, to finance taxicabs. It has chartered ILCs with
total assets of $106 billion: 62% of FDIC-insured ILC deposits.24
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
owners to become bank holding companies.25 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.26 In the other direction, the collapse in 2002 of a prominent owner
of an ILC, Conseco, for business reasons unrelated to the ILC, did not adversely
affect its insured ILC. GE Capital bought the ILC at its book value, so that no losses
resulted.27
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.28 Table 1
presents the business models and some examples of owners of insured ILCs.
Debate over measures granting ILCs banking powers, without requiring that
their owners be bank holding companies, involves interrelated questions. They
involve competitive balance, 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.
24 Blackwell, “Wal-Mart After ILC Again.”
25 12 C.F.R. §225.28.
26 Mindy West, “The FDIC’s Supervision of Industrial Loan Companies: A Historical
Perspective,” FDIC Supervisory Insights, vol. 1, summer 2004, p. 5-13.
27 Christine Blair, “The Mixing of Banking and Commerce: Current Policy Issues,” FDIC
Banking Review, vol. 16, no. 4, 2004, p. 114.
28 Federal Deposit Insurance Act §10(b)(4), 12 U.S.C. §1820.

CRS-9
Arguments for ILC Expansion
The FDIC notes that ILCs are subject to its examinations, compliance with
banking laws, and supervisory restrictions. In this view, there are no safety and
soundness reasons for 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.
The Utah ILC regulator has testified that it has the experience and capacity to
regulate the ILCs. G. Edward Leary, Utah’s commissioner of financial institutions,
testified that the industrial banks are “well capitalized, safe and sound institutions.”29
Merrill Lynch, Morgan Stanley, Goldman Sachs, UBS Warburg, and Wal-Mart
have publicly supported the ILC expansion effort. (Merrill’s ILC already controls
about half of ILC assets.)
Table 1. Summary of ILC Business Models
Total
Assets,
Business Model Description
Number
Example ILCs
$Billion
(percent)
Community-focused, stand-
$0.8
Golden Security Bank;
6
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 Capital
firm; (c) within the financial
Bank (Citigroup); Trust
services sector.
Industrial Bank.
In businesses not necessarily
GE Capital Financial; GMAC
$4.2
financial in nature.
7
Commercial Mortgage Bank;
(3%)
Exante Bank (United Health).
Directly support parent
BMW Bank of North America;
$2.6
business commercial activities.
9
Volkswagen Bank USA; Pitney
(2%)
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.
29 Testimony of G. Edward Leary, Utah commissioner of financial institutions, in U.S.
Congress, House Committee on Financial Services, July 12, 2006, p.19.

CRS-10
Arguments Against ILC Expansion
Fed officials opposing ILC expansion argue that ILCs and, especially, their
owners are not subject to the same level 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.30
108th Congress Legislative Debate
H.R. 758 (Representative 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), 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 Capito) would have relieved depository institutions,
including 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 lines by opening newly created branches through
its amending of the Riegle-Neal Interstate Banking and Branching Efficiency Act of
1994.31 In its Financial Services Committee markup, 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 Frank and 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.
30 Ibid.
31 108 Stat. 2238 §102.

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109th Congress Activity
Wal-Mart’s latest strategy to own an ILC envisioned its opening in Utah in
2006, while pledging to limit its operations to credit and debit card activities and not
opening branches in stores.32 DaimlerChrysler, the world’s fifth-largest car maker,
announced in November 2005 that it is seeking to open a new Utah ILC subsidiary
by early in 2006.33 The FDIC held two days of hearings in Arlington, Virginia, on
April 10 and 11, 2006, concerning the Wal-Mart ILC application. Hearings were,
also, held on April 25, 2006, in Overland, Kansas.34 Home Depot requested
permission to acquire an existing ILC, EnerBank USA, on May 12, 2006. The FDIC
has not announced a decision on either application. Other pending applications
include those from Blue Cross/Blue Shield and Berkshire Hathaway.
H.R. 1224 (Representative Kelly), the Business Checking Freedom Act, passed
the House on May 24, 2005, by 424-1. Many ILCs would have been excluded from
its provisions that would have allowed banks to pay interest on corporate accounts.
The ILC provision repeats a compromise struck by Representatives Frank and
Gillmor in the 108th Congress. This legislation would have disqualified ILCs from
the new power to pay interest on the accounts if a firm that controlled them derived
at least 15% of its annual gross revenues from activities that were not “financial in
nature or incidental to a financial activity” in at least three of the last four calendar
quarters. Some ILCs would have qualified, including those that became an insured
depository institution before October 1, 2003, or those that had approved applications
by that date. The 85% test originated with the Gramm-Leach-Bliley Act noted above.
In September 2005, the Government Accountability Office released a report on
ILCs.35 This document seemingly questioned whether ILCs are a proper vehicle for
mixing banking and commerce and thus, the desirability of their current regulatory
climate. Representative Leach, citing this study, introduced a freestanding measure
to change ILC regulation.36 H.R. 3882, the Financial Safety and Equity Act of 2005,
provides that any company that controls an industrial loan company, industrial bank,
or similar institution shall become a financial holding company (as defined above).
The House Financial Services Committee unanimously approved H.R. 3505, the
Financial Services Regulatory Relief Act of 2005 (Representative Hensarling), on
November 16, 2005. The bill would have placed new restrictions against subsidiaries
32 Blackwell, “Wal-Mart After ILC Again.”
33 Chris Noon, “Schrempp’s DaimlerChrysler Sees Money In A Bank,” at website
[http://www.forbes.com/2005/11/16/daimlerchrysler-bank-finance-cx_cn_1116autofaces
can11.html?partner=msn].
34 Transcripts and written statements are available at [http://www.fdic.gov/regulations/laws/
walmart/publichearings/hearings_transcripts.html].
35 Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight
Differences in Regulatory Authority, GAO-05-621, Sept. 15, 2005, at [http://www.gao.gov/
htext/d05621.html].
36 R. Christian Bruce, “GAO Urges Congressional Review of ILCs; Bill by Rep. Leach
Would Close Loophole,” Daily Report for Executives, Sept. 23, 2005 , p. A-1.

CRS-12
of commercial firms, such as ILCs, opening branches on an interstate basis. Under
the language of Representatives Frank and Gillmor noted above, commercial firms
are defined as deriving at least 15% of revenues from activities that were not
financial in nature. It was designed to discourage companies such as Wal-Mart from
offering retail banking services. The bill passed the House on March 8, 2006, by a
vote of 415-2.
H.R. 5746 (Representatives Gillmor and Frank), the Industrial Bank Holding
Company Act of 2006, was introduced on July 10, 2006, and referred to the House
Committee on Financial Services. It would have required corporations owning ILCs
to register with the FDIC and be subject to FDIC regulation. It would also have
limited the ability of certain ILCs to branch into certain states, which would have
lessened the attraction to a retailer such as Target or Home Depot of owning an ILC.
The House Committee on Financial Services held oversight hearings on July 12,
2006, to review charter, ownership, and supervision issues concerning ILCs. At that
time, there were 14 applications before the FDIC for new ILC charters or for transfers
of ILC charters. Of these 14, 11 had been filed after the Wal-Mart application.
110th Congress Update
H.R. 698, the Industrial Bank Holding Company Act of 2007, which would
prevent nonfinancial companies (called commercial companies in the bill) from
creating or acquiring new ILCs, was introduced on January 29, 2007, and referred to
the House Committee on Financial Services. The bill would create a new type of
entity, industrial bank holding companies, similar to bank holding companies. The
bill would prohibit commercial companies from becoming industrial bank holding
companies. The bill would exempt ILCs that became insured depositories before
October 1, 2003, and that have not had a change of control since September 31, 2003.
It would, also, exempt commercial firms that became industrial bank holding
companies by acquiring an ILC before January 29, 2007, and on or after October 1,
2003, as long as industrial bank holding company did not acquire control of any other
depository institution or have a change in control after January 28, 2007.
The House Financial Services Committee favorably reported the bill on May 16,
2007, and the House approved the bill on May 21, 2007. The Senate referred the bill
to the Committee on Banking, Housing, and Urban Affairs.
A companion bill, S. 1356, was introduced in the Senate by Senator Sherrod
Brown on May 10, 2007. It was referred to the Committee on Banking, Housing, and
Urban Affairs.
The FDIC continued its moratorium on applications from commercial
companies for one year on January 31, 2007. The FDIC later announced that it
would seek authority over industrial bank holding companies similar to the Fed’s

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authority over bank holding companies.37 The FDIC has continued to approve
applications from financial companies that wish to own an ILC.
Wal-Mart withdrew its application to operate an ILC, on March 17, 2007.38 On
January 24, 2008, Home Depot announced that it would withdraw its application to
purchase an ILC. Other applications by commercial companies remain on hold. The
FDIC moratorium was not extended and expired on January 31, 2008. Shortly
afterwards, Ford Motor Company applied for a charter on an ILC.
37 Joe Adler, “FDIC Asking For Fed-Like ILC Authority,” American Banker, Mar. 23, 2007,
p. 1.
38 Sheila C. Bair, “Statement of FDIC Chairman Sheila C. Bair on the Decision of Wal-Mart
to Withdraw Bank Application,” available at [http://www.fdic.gov/news/news/press/2007/
pr07023.html].