I have argued the FDIC should be more transparent in how it considers applications by, among other things, industrial banks and industrial loan companies (each such bank or company, an “industrial bank”). 1 As everyone’s favorite commentator wrote on the Bank Reg Blog in 2023, “[i]n a post last year I wrote that ‘at some point the time-honored FDIC tradition of simply ignoring industrial bank applications in the hope that they will go away is going to prove untenable,’ but I may have underestimated the FDIC’s power of will.” 2 In particular, I have been concerned that the FDIC has not been clear as to why it has withheld approval of applications by industrial banks that depend on an affiliate to generate business (each, a “captive industrial bank”).
So this proposal is overdue. For better or worse, the FDIC should have made clear long ago that, at least under this Chairman, it does indeed harbor a presumption against deposit insurance and other applications by captive industrial banks.
While perhaps a step toward some transparency, I am unable to support the proposal. The proposal provides that the FDIC will “presume” that the “shell or captive nature” of an industrial bank involved in an application “weighs heavily against favorably resolving one or more applicable statutory factors.” 3 But which factors? And why?
The proposal also does not explain how a captive industrial bank can rebut this presumption with respect to each relevant statutory factor. The preamble and my discussions with staff suggest a concern that the absence of franchise value at a captive industrial bank could pose additional risk to the Deposit Insurance Fund should it fail. If that indeed is one of the concerns, the proposal should clarify whether and how enhanced capital commitments, contingency planning, or other risk management steps could mitigate that incremental risk to the Deposit Insurance Fund.
The preamble and my discussions with staff suggest another concern is whether a captive industrial bank that supports an affiliate’s commercial business would meet the convenience and needs of its community. If that indeed is one of the concerns, the proposal should clarify whether and how diversifying the contemplated lending, deposit, or other services, or extending those services to customers beyond its affiliate’s customers, can address these concerns.
Finally, this proposal amounts to a significant change in policy. In addition to comments on the proposed presumption against applications by captive industrial banks, I will be eager to consider comments on whether that change in policy is consistent with applicable law and otherwise good policy.
- 1
Remarks by Jonathan McKernan, Director, FDIC Board of Directors, at the Session on Financial Regulation at the Annual Meeting of the Association of American Law Schools (Jan. 5, 2024) (“Perhaps related to this, our statements of policy on applications for deposit insurance and bank merger transactions are 25 years old. The FDIC’s views have evolved during that time to incorporate lessons learned from the 2007-2008 financial crisis and last year’s failures of SVB, Signature, and First Republic. For example, the FDIC may be more concerned now that certain business models or operational interdependencies with a parent organization could result in the destruction of significant franchise value in resolution, potentially exposing the Deposit Insurance Fund to loss. If so, we owe it to the public to articulate a revised policy framework for these applications and timely consider applications against that policy.”).
- 2
Catching Up, Bank Reg Blog (June 10, 2023).
- 3
NPR, proposed 12 C.F.R. § 354.6(c)(2).