Remember when the U.S. Postal Service floated the idea of getting into the banking business? Now it’s auto manufacturers, and others, looking to get into the financial services business. Fortunately, the Independent Community Bankers of America (ICBA) isn’t staying quiet about it.
What’s the Industrial Loan Company (ILC) Loophole?
Put as simply as possible, under current law, if you’re a company that owns a bank, you’re typically required to be supervised by the Federal Reserve under the Bank Holding Company Act (BHCA). That oversight helps ensure responsible risk management and keeps a healthy separation between commerce and banking.
But there’s a way around the BHCA. Thanks to a legislative exception created in 1987, certain states (Utah and Nevada) can charter ILCs—banks that can accept deposits and make loans—without requiring the parent company to be a financial institution. That means commercial companies like Amazon, Block (formerly Square), and Nelnet, and even international firms like Rakuten, can own banks without the same level of federal supervision. Now auto giants like GM, Ford, and as recently as just last week, Nissan, are lining up with their own applications.
Why It’s a Problem: Commerce meets Banking
Here’s where it gets to be of concern. These ILCs may function like regular banks, but their parent companies don’t have to follow the same rules as traditional bank holding companies. That means regulators often don’t get a full view of the financial health or risks posed by the parent company.
Why does that matter? If the commercial company that owns the ILC starts making bad business bets or runs into financial trouble, it might start pulling resources from the bank to stay afloat. That could put customer deposits and financial stability at risk. And since ILCs are FDIC-insured, the government (and ultimately taxpayers) could be left holding the proverbial bag if and when that happens.
In a May 9 American Banker op-ed (subscription required), author Arthur Wilmarth, Jr. says: “the separation of banking and commerce has been a cornerstone of U.S. financial regulation.” Then this, from the ICBA: “maintaining the separation between banking and commerce is a crucial safeguard that policymakers should strengthen by repealing the ILC loophole.” Congress needs to act fast to close it.
The Issue of Consumer Privacy
Now, data privacy is already a hot-button issue. Imagine if a tech giant, such as Amazon, Meta, or Google, that already knows what you buy, watch, and search online also has access to your banking information. That kind of data access could lead to price manipulation (charging you more because it knows you can afford it), biased credit decisions based on your browsing habits, or even discrimination based on things like political views or religious affiliation. This isn’t theoretical; it’s well within the power of AI-powered technology. All that’s missing is access to the kind of personal financial data that comes with owning a bank.
The ICBA’s Message to Congress: Act Now
The ICBA isn’t just sounding the alarm. It’s offering clear solutions. Here’s what they’re urging Congress to do:
- Close the loophole by amending the BHCA to permanently prohibit commercial ownership of ILCs.
- Reaffirm the separation of banking and commerce, a cornerstone of the U.S. financial system.
- Require full regulatory oversight for any company that owns an FDIC-insured depository institution.
- Pause new ILC applications by imposing a moratorium on FDIC approvals until stronger safeguards are in place.
Protecting Main St. and the American Economy
Community banks play a unique and vital role in the U.S. communities and economies. They make more than 60% of all small business loans and over 80% of agricultural loans. They are the only physical banking presence in one-third of U.S. counties. As the ICBA points out, to keep doing what they do best, they need fair rules and a stable environment. Allowing tech giants and massive corporations to bypass traditional oversight while enjoying the benefits of FDIC insurance creates an uneven playing field, putting banks and consumers at risk.
Final Thoughts
Community banks operate on trust. They build long-term relationships with the people and small businesses they serve. The ICBA is standing up for Main Street banks and the communities they serve. Now it’s time for Congress to do the same; by closing the ILC loophole, once and for all. By doing so, Congress can help protect community banks and preserve the independence and integrity of the U.S. banking system.
Bank Marketing Center
We’re Bank Marketing Center, the leading, subscription-based provider of automated marketing services to community banks. Our goal is to help bank marketers with topical, compelling communication with customers that builds trust, relationships, and revenue. And we do this through automating critical bank marketing functions, such as content creation, social media management and digital asset management, as well as regulatory and brand compliance.
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Want to learn more about what we can do for your community bank and your marketing efforts? You can start by visiting bankmarketingcenter.com. Then, feel free to contact me directly by phone at 678-528-6688 or via email at nreynolds@bankmarketingcenter.com. As always, I welcome your thoughts.