Industrial Bank
An industrial bank is a state financial organization generally in possession of a commercial company and not regulated by a federal banking agency. The functions of industrial banks include accepting deposits from clients, as well as issuing loans to individuals and small enterprises. Industrial loan companies (ILC) is the second name of industrial banks.
What is an Industrial Bank
In the early 1900s, it was not possible for industrial workers to obtain loans from conventional credit institutions due to their moderate and low income. That is why at that time industrial banks began to appear.
Industrial banks are not subject to a number of certain provisions applicable to the ordinary credit institutions’ activity. Moreover, compliance with the Bank Holding Company Act is not mandatory for this type of financial institution. Oversight by the Federal Reserve also does not apply to the activities of industrial banks. The regulation of industrial banks is carried out by regulatory authorities and the Federal Deposit Insurance Corporation (FDIC).
Due to more lenient regulations, many companies interested in financial technologies, as well as various investment companies, are applying to register as an industrial financial institution. Industrial banks may be property of companies due to well-organized and clearly defined corporate structure.
If the national scale is taken into account, the powers of industrial banks are limited. However, despite that fact, this type of financial institution retains the same powers and privileges as usual commercial banks.
A group of people who believe that banks and commercial companies should be clearly separated oppose industrial banks. Some industrial banks’ opponents consider unfair the fact of allowing commercial companies without financial status to offer banking services and have a number of privileges of a bank charter without the Fed’s supervision, which is necessary for this type of bank activity.
Industrial Banks limitations
To reduce credit and debit card fees, Walmart Inc. was applying for creating a new industrial bank in 2005. This fact caused a wave of indignation among commercial financial institutions and regulators. As a result, in 2006 the Federal Deposit Insurance Corporation imposed a temporary moratorium on this type of application.
Around the same time period, a law was passed prohibiting industrial banks from opening branches in different jurisdictions. Withdrawal of Walmart’s application occurred in 2007 before the FDIC's decision on its status. The opposition members of Walmart's application expressed the view that the banking system, and in particular the FDIC, would be under threat due to the company's involvement in banking.
In early 2019, the lobbying group from the Independent Community Bankers of America (ICBA) circulated a policy document calling for a ban on provision of federal deposit insurance to industrial banks. Those actions were the result of a new wave of financial technology companies, such as Square Inc., that have submitted applications for bank charters. The bank's charter could have allowed Square Inc. to provide loans and other financial services directly to their vendors. In addition to the benefit of being exempt from the control of the Federal Reserve, the disclosure of non-banking commercial activities by fintech companies with bank charters was also optional. According to the ICBA, the regulatory gap in the charters of industrial banks should have been filled by Congress.
In November 2019, the "Eliminating Corporate Shadow Banking Act of 2019" was presented by Senator John F. Kennedy of Louisiana. This regulation prevented the creation of industrial banks by non-financial firms. The bill was praised by the ICBA as it helped to create a more secure financial environment with maintaining the separation between trade and banking, and, at the same time, to eliminate a loophole in the legislation of industrial banks.
