Parent Companies of Industrial Banks and Industrial Loan Companies
| Published date | 31 March 2020 |
| Citation | 85 FR 17771 |
| Record Number | 2020-06153 |
| Section | Proposed rules |
| Court | Federal Deposit Insurance Corporation |
Federal Register, Volume 85 Issue 62 (Tuesday, March 31, 2020)
[Federal Register Volume 85, Number 62 (Tuesday, March 31, 2020)]
[Proposed Rules]
[Pages 17771-17786]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2020-06153]
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 354
RIN 3064-AF31
Parent Companies of Industrial Banks and Industrial Loan
Companies
AGENCY: Federal Deposit Insurance Corporation.
ACTION: Notice of proposed rulemaking with request for public comment.
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SUMMARY: The Federal Deposit Insurance Corporation is seeking comment
on a proposed rule that would require certain conditions and
commitments for each deposit insurance application approval, non-
objection to a change in control notice, and merger application
approval that would result in an insured industrial bank or industrial
loan company becoming, after the effective date of any final rule, a
subsidiary of a company that is not subject to consolidated supervision
by the Federal Reserve Board. The proposed rule also would require that
before any industrial bank or industrial loan company may become a
subsidiary of a company that is not subject to consolidated supervision
by the Federal Reserve Board, such company and the industrial bank or
industrial loan company must enter into one or more written agreements
with the Federal Deposit Insurance Corporation.
DATES: Comments will be accepted until June 1, 2020.
ADDRESSES: You may submit comments on the notice of proposed rulemaking
using any of the following methods:
Agency Website: https://www.fdic.gov/regulations/laws/federal. Follow the instructions for submitting comments on the agency
website.
Email: [email protected]. Include RIN 3064-AF31 on the
subject line of the message.
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments, Federal Deposit Insurance Corporation, 550 17th Street NW,
Washington, DC 20429.
Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street Building (located on F
Street) on business days between 7 a.m. and 5 p.m.
Public Inspection: All comments received, including any
personal information provided, will be posted generally without change
to https://www.fdic.gov/regulations/laws/federal.
FOR FURTHER INFORMATION CONTACT: Mark Flanigan, Senior Counsel, (202)
898-7426, [email protected]; Catherine Topping, Counsel, (202) 898-
3975, [email protected]; Gregory Feder, Counsel, (202) 898-8724,
[email protected]; Joyce Raidle, Counsel, (202) 898-6763,
[email protected]; Merritt Pardini, Counsel, (202) 898-6680,
[email protected]; Kayce Seifert, Senior Attorney, (202) 898-3625,
[email protected], Legal Division; Don Hamm, Special Advisor, (202)
898-3528, [email protected]; Scott Leifer, Senior Review Examiner, (508)
698-0361, Extension 8027, [email protected], Division of Risk Management
Supervision.
SUPPLEMENTARY INFORMATION:
I. Policy Objectives
The Federal Deposit Insurance Corporation (FDIC) monitors,
evaluates, and takes necessary action to ensure the safety and
soundness of State nonmember banks,\1\ including industrial banks and
industrial loan companies (together, industrial banks).\2\ In granting
[[Page 17772]]
deposit insurance, issuing a non-objection to a change in control, or
approving a merger, the FDIC must consider the factors listed in
sections 6,\3\ 7(j),\4\ and 18(c),\5\ respectively, of the Federal
Deposit Insurance Act (FDI Act). As deposit insurer and as the
appropriate Federal banking agency for industrial banks, the FDIC
supervises industrial banks. A key part of its supervision is
evaluating and mitigating the risks arising from the activities of the
control parties and owners of insured industrial banks to ensure they
do not threaten the safe and sound operations of those industrial banks
or pose undue risk to the Deposit Insurance Fund (DIF).
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\1\ See 12 U.S.C. 1811, 1818, 1821, 1831o-1, 1831p-1.
\2\ Herein, the term ``industrial bank'' means any insured
State-chartered bank that is an industrial bank, industrial loan
company, or other similar institution that is excluded from the
definition of ``bank'' in the Bank Holding Company Act pursuant to
12 U.S.C. 1841(c)(2)(H). State laws refer to both industrial loan
companies and industrial banks. For purposes of this proposed rule,
the FDIC is treating the two types of institutions as the same.
\3\ 12 U.S.C. 1816.
\4\ 12 U.S.C. 1817(j).
\5\ 12 U.S.C. 1828(c).
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Existing State and Federal laws allows both financial and
commercial companies to own and control industrial banks. Congress
expressly adopted an exception to permit such companies to own and
control industrial banks, without becoming a bank holding company (BHC)
under the Bank Holding Company Act (BHCA), as part of the Competitive
Equality Banking Act of 1987 (CEBA).\6\ The purpose of the proposed
rule is to codify existing practices utilized by the FDIC to supervise
industrial banks and their parent companies, to mitigate undue risk to
the DIF that may otherwise be presented in the absence of Federal
consolidated supervision \7\ of an industrial bank and its parent
company, and to ensure that the parent company that owns or controls an
industrial bank serves as a source of financial strength for the
industrial bank, consistent with section 38A of the FDI Act.\8\
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\6\ Public Law 100-86, 101 Stat. 552 (Aug. 10, 1987).
\7\ In the context of the proposed rule, ``Federal consolidated
supervision'' refers to the supervision of a parent company and its
subsidiaries by the Federal Reserve Board (FRB). Consolidated
supervision of a bank holding company by the FRB encompasses the
parent company and its subsidiaries, and allows the FRB to
understand ``the organization's structure, activities, resources,
and risks, as well as to address financial, managerial, operational,
or other deficiencies before they pose a danger to the BHC's
subsidiary depository institutions.'' See SR Letter 08-9,
``Consolidated Supervision of Bank Holding Companies and the
Combined U.S. Operations of Foreign Banking Organizations'' (Oct.
16, 2008).
\8\ 12 U.S.C. 1831o-1(b).
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In recent years, there has been renewed interest in establishing de
novo institutions, including industrial banks. Proposals regarding
industrial banks have presented unique risk profiles compared to
traditional community bank proposals. These profiles have included
potential owners that would not be subject to Federal consolidated
supervision, affiliations with organizations whose activities are
primarily commercial in nature, and non-community bank business
models.\9\ Some public comments regarding these proposals have argued
that the current use of the charter inappropriately mixes banking and
commerce and raises risk to the DIF as a result of a lack of Federal
consolidated supervision over the parent company. Some commenters have
requested that the FDIC impose a new moratorium on deposit insurance
applications involving industrial banks.\10\ Other commenters have
supported the industrial bank charter citing the benefits of increased
competition and the provision of financial services to underserved
markets. These commenters further argue the charter poses no increased
risk to the DIF.
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\9\ See FDIC Deposit Insurance Applications, Procedures Manual
Supplement, Applications from Non-Bank and Non-Community Bank
Applicants, FIL-8-2020 (Feb. 10, 2020).
\10\ In 2010, the Dodd Frank Wall Street Reform and Consumer
Protection Act (Dodd-Frank Act) imposed a three-year moratorium on
new industrial bank charters that were owned or controlled by a
commercial firm. This moratorium expired in July 2013. Historical
information regarding moratoria on industrial bank filings is
discussed later in this preamble in section II.
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Given the continuing evolution in the use of the industrial bank
charter, the unique nature of applications seeking to establish de novo
industrial banks, and the legitimate considerations raised by
interested parties--both in support of and opposed to the industrial
bank charter--the FDIC believes a rule formalizing and strengthening
the FDIC's existing supervisory processes and policies that apply to
parent companies of industrial banks that are not subject to Federal
consolidated supervision is timely and appropriate. The proposed rule
would also provide interested parties with transparency regarding the
FDIC's practices when making determinations on filings involving
industrial banks.
II. Background: Regulatory Approach and Market Environment
A. History
Industrial banks began as small State-chartered loan companies in
the early 1900s to provide small loans to industrial workers. The
industrial bank charter developed as an alternative to a traditional
commercial bank charter because commercial banks generally were
unwilling to offer uncollateralized loans to factory workers and other
wage earners with moderate incomes. Industrial banks became the leading
providers of consumer credit to this underserved market through the
1920s and 1930s. Over time, commercial banks expanded their consumer
lending business and by the post-World War II period, industrial banks
represented only a small segment of the consumer lending market.
Initially, many industrial banks did not accept any deposits and
funded themselves instead by issuing investment certificates. However,
the Garn-St. Germain Depository Institutions Act of 1982,\11\ among
other effects, made all industrial banks eligible for Federal deposit
insurance. This expanded eligibility for Federal deposit insurance
brought industrial banks under the supervision of both a State
authority and the FDIC.\12\ The chartering States gradually expanded
the powers of their industrial banks so that today industrial banks
generally have the same commercial and consumer lending powers as
commercial banks.
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\11\ Public Law 97-320, 96 Stat. 1469 (Oct. 15, 1982).
\12\ Prior to 1982, the FDIC had allowed some industrial banks
to become Federally insured, but FDIC insurance was typically
limited to those industrial banks chartered by States where the
relevant State's law allowed them to receive ``deposits'' or to use
``bank'' in their name. For additional historical context regarding
industrial bank supervision, see The FDIC's Supervision of
Industrial Loan Companies: A Historical Perspective, Supervisory
Insights (2004).
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Under the FDI Act, industrial banks are ``State banks'' \13\ and
all of the existing FDIC-insured industrial banks are ``State nonmember
banks''.\14\ As a result, their primary Federal regulator is the
FDIC.\15\ Each industrial bank is also regulated by its respective
State chartering authority. The FDIC generally exercises the same
supervisory and regulatory authority over industrial banks as it does
over other State nonmember banks.
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\13\ 12 U.S.C. 1813(a)(2).
\14\ 12 U.S.C. 1813(e)(2).
\15\ 12 U.S.C. 1813(q)(2).
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B. Industrial Bank Exclusion Under the BHCA
In 1987, Congress enacted CEBA, which exempted industrial banks
from the definition of ``bank'' in the BHCA. As a result, parent
companies that control industrial banks are not BHCs under the BHCA and
are not subject to the BHCA's activities restrictions or FRB
supervision and regulation. The industrial bank exemption in the BHCA
therefore provides an avenue for commercial firms to own or control a
bank. By contrast, BHCs and savings and loan holding companies are
subject to Federal consolidated supervision by
[[Page 17773]]
the FRB and are generally prohibited from engaging in commercial
activities.\16\
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\16\ Section 4 of the BHCA generally prohibits a BHC from
acquiring ownership or control of any company which is not a bank or
engaging in any activity other than those of banking or of managing
or controlling banks and other subsidiaries authorized under the
Act. See 12 U.S.C. 1843(a)(1) and (2). The Home Owners' Loan Act
(HOLA) governs the activities of savings and loan holding companies,
as amended by the Dodd-Frank Act, which generally subjects these
companies to the permissible financial holding company activities
under 4(k) of the BHCA (12 U.S.C. 1843(k), activities that are
financial in nature or incidental to a financial activity). See 12
U.S.C. 1467a(c)(2)(H).
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More specifically, CEBA redefined the term ``bank'' in the BHCA to
include: (1) Any FDIC-insured institution, and (2) any other
institution that accepts demand or checkable deposit accounts and is
engaged in the business of making commercial loans.\17\ This change
effectively closed the so-called ``non-bank bank'' exception implicit
in the prior BHCA definition of ``bank''. The CEBA created explicit
exemptions from this definition for certain categories of Federally
insured institutions, including industrial banks, credit card banks,
and limited purpose trust companies. The exclusions from the definition
of the term ``bank'' remain in effect today. To be eligible for the
CEBA exemption from the BHCA definition of ``bank,'' an industrial bank
must have received a charter from one of the limited number of States
eligible to issue industrial bank charters, and the law of the
chartering State must have required Federal deposit insurance as of
March 5, 1987. In addition, an industrial bank must meet one of the
following criteria: (i) Not accept demand deposits; \18\ (ii) have
total assets of less than $100 million; or (iii) have been acquired
prior to August 10, 1987.\19\
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\17\ 12 U.S.C. 1841(c)(1).
\18\ Regulation D implements the reserve requirements of section
19 of the Federal Reserve Act and defines a demand deposit as a
deposit that is payable on demand, or issued with an original
maturity or required notice period of less than seven days, or a
deposit representing funds for which the depository institution does
not reserve the right to require at least seven days' written notice
of an intended withdrawal. Demand deposits may be in the form of (i)
checking accounts; (ii) certified, cashier's, teller's, and
officer's checks; and (iii) traveler's checks and money orders that
are primary obligations of the issuing institution. Other forms of
accounts may also meet the definition of ``demand deposit''. See 12
CFR 204.2(b)(1).
\19\ 12 U.S.C. 1841(c)(2)(H).
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Industrial banks are currently chartered in California, Hawaii,
Minnesota, Nevada, and Utah. Under CEBA, these States were permitted to
grandfather existing industrial banks and continue to charter new
industrial banks.\20\ Generally, industrial banks offer limited deposit
products, a full range of commercial and consumer loans, and other
banking services. Most industrial banks do not offer demand deposits.
Negotiable order of withdrawal (NOW) accounts \21\ may be offered by
industrial banks.\22\ Industrial banks have branching rights, subject
to certain State law constraints.
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\20\ Colorado was also grandfathered but it has no active
industrial banks and has since repealed its industrial bank statute.
\21\ A NOW account is an interest-earning bank account whereby
the owner may write drafts against the money held on deposit. NOW
accounts were developed when certain financial institutions were
prohibited from paying interest on demand deposits. The prohibition
on paying interest on demand deposits was lifted when the FRB
repealed its Regulation Q, effective July 21, 2011. See 76 FR 42015
(July 18, 2011). Many provisions of the repealed Regulation Q were
transferred to the FRB's Regulation D. See 12 CFR part 204.
\22\ 12 U.S.C. 1832(a). Only certain types of customers may
maintain deposits in a NOW account. 12 U.S.C. 1832(a)(2).
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C. Industry Profile
The industrial bank industry has evolved since the enactment of
CEBA. The industry experienced significant asset growth between 1987
and 2006 when total assets held by industrial banks grew from $4.2
billion to $213 billion.\23\ From 2000 to 2006, 24 industrial banks
became insured.\24\ As of January 30, 2007, there were 58 insured
industrial banks with $177 billion in aggregate total assets.\25\ The
ownership structure and business models of industrial banks evolved as
industrial banks were acquired or formed by a variety of commercial
firms, including, among others, BMW, Target, Pitney Bowes, and Harley
Davidson. For instance, certain companies established industrial banks,
in part, to support the sale of the manufactured products (e.g.
automobiles) or other services, whereas certain retailers established
industrial banks to issue general purpose credit cards. In addition,
certain financial companies also formed or acquired industrial banks to
provide access to Federal deposit insurance for brokerage customers'
cash management account balances. The cash balances their customers
maintain with the securities affiliate are swept into insured,
interest-bearing accounts at the industrial bank subsidiary, thereby
providing the brokerage customers with FDIC-insured deposits.
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\23\ Most of the growth during this period is attributable to
financial services firms that controlled industrial banks offering
sweep deposit programs to provide Federal deposit insurance for
customers' free cash balances and to American Express moving its
credit card operations from its Delaware-chartered credit card bank
to its Utah-chartered industrial bank.
\24\ During this time period, the FDIC received 57 applications
for Federal deposit insurance for industrial banks, 53 of which were
acted on. Also during this time period, 21 industrial banks ceased
to operate due to mergers, conversions, voluntary liquidations, and
one failure.
\25\ Of the 58 industrial banks existing at this time, 45 were
chartered in Utah and California. The remaining industrial banks
were chartered in Colorado, Hawaii, Minnesota, and Nevada.
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Since 2007, the industrial bank industry has experienced
contraction both in terms of the number of institutions and aggregate
total assets. As of December 31, 2019, there were 23 industrial banks
\26\ with $141 billion in aggregate total assets. Four industrial banks
reported total assets of $10 billion or more; eight industrial banks
reported total assets of $1 billion or more but less than $10 billion.
The industrial bank industry today includes a diverse group of insured
financial institutions operating a variety of business models. A
significant number of the 23 existing industrial banks support the
commercial or specialty finance operations of their parent company and
are funded through non-core sources.
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\26\ Of the 23 industrial banks, 14 were chartered in Utah, four
in Nevada, three in California, one in Hawaii, and one in Minnesota.
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The reduction in the number of industrial banks from 2007 to 2019
was due to a variety of factors, including mergers, conversions,
voluntary liquidations, and the failure of two small institutions.\27\
For business, marketplace, or strategic reasons, several existing
industrial banks converted to commercial banks and thus became
``banks'' under the BHCA. Four industrial banks were approved in 2007
and 2008; however, none of those institutions exist today.\28\ No other
industrial banks have been established since 2008, largely due to
moratoria imposed by the FDIC and Congress (as discussed below).
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\27\ Security Savings Bank, Henderson, Nevada failed in February
2009 and Advanta Bank Corporation, Draper, Utah failed in March
2010.
\28\ In each case, the institution pursued a voluntary
transaction that led to termination of the respective institution's
industrial bank charter. One institution converted to a commercial
bank charter and continues to operate, one merged and the resultant
bank continues to operate, and two terminated deposit insurance
following voluntary liquidations. Such transactions generally result
from proprietary strategic determinations by the institutions and
their parent companies or investors.
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Since the beginning of 2017, the FDIC has received nine Federal
deposit insurance applications related to proposed industrial banks. Of
those, four have been withdrawn and five are pending.\29\ None of the
potential parent
[[Page 17774]]
companies of the pending industrial bank applicants would be subject to
Federal consolidated supervision. The FDIC anticipates potential
continued interest in the establishment of industrial banks,
particularly with regard to proposed institutions that plan to pursue a
specialty or limited purpose business model.
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\29\ Decisions to withdraw an application are made at the
discretion of the organizers and can be attributed to a variety of
reasons. In some cases, an application is withdrawn and then refiled
after changes are incorporated into the proposal. In such cases, the
new application is reviewed by the FDIC without prejudice. In other
cases, the applicant may, for strategic reasons, determine that
pursuing an insured industrial bank charter is not in the
organizers' best interests.
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D. Supervision
Because industrial banks are insured State nonmember banks, they
are subject to the FDIC's Rules and Regulations, as well as other
provisions of law, including restrictions under the Federal Reserve Act
governing transactions with affiliates,\30\ anti-tying provisions of
the BHCA,\31\ insider lending regulations, consumer protection laws and
regulations, and the Community Reinvestment Act. Industrial banks are
also subject to regular examination, including examinations focused on
safety and soundness, Bank Secrecy Act and Anti-Money Laundering
compliance, consumer protection, information technology (IT), and trust
services, as appropriate. Pursuant to section 10(b)(4) of the FDI Act,
the FDIC has the authority to examine the affairs of any industrial
bank affiliate, including the parent company, as may be necessary to
determine the relationship between the institution and the affiliate,
and the effect of such relationship on the depository institution.\32\
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\30\ See 12 U.S.C. 1828(j)(1)(A).
\31\ For purposes of section 106 of the BHCA, an industrial bank
is treated as a ``bank'' and is subject to the anti-tying
restrictions therein. See 12 U.S.C. 1843(f)(1).
\32\ 12 U.S.C. 1820(b)(4).
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As part of the Dodd-Frank Act,\33\ Congress adopted section 38A of
the FDI Act, which imposes a ``source of financial strength''
requirement on any company that directly or indirectly controls an
insured depository institution and is otherwise exempt from the BHCA or
the HOLA.\34\ Consistent with section 38A and other authorities under
the FDI Act, the FDIC has historically required capital and liquidity
maintenance agreements and other written agreements between the FDIC
and controlling parties of industrial banks as well as the imposition
of prudential conditions when granting deposit insurance to an
industrial bank or issuing a nonobjection to a change in control notice
involving an industrial bank. Such written agreements provide required
commitments for the parent company to provide financial resources and a
means for the FDIC to pursue formal enforcement action under sections 8
and 50 of the FDI Act \35\ should a party fail to comply with the
agreements.
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\33\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\34\ 12 U.S.C. 1831o-1(b).
\35\ See 12 U.S.C. 1818 and 1831aa.
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E. GAO and OIG Reports
Beginning in 2004, the FDIC Office of Inspector General (OIG)
conducted two evaluations and the Government Accountability Office
(GAO) conducted a statutorily mandated study regarding the FDIC's
supervision of industrial banks, including its use of prudential
conditions.\36\ An OIG evaluation published in 2004 focused on whether
industrial banks posed greater risk to the DIF than other financial
institutions, and reviewed the FDIC's supervisory approach in
identifying and mitigating material risks posed to those institutions
by their parent companies. A July 2006 OIG evaluation reviewed the
FDIC's process for reviewing and approving industrial bank applications
for deposit insurance and monitoring conditions imposed with respect to
industrial bank business plans. A September 2005 GAO study cited
several risks posed to banks operating in a holding company structure,
including adverse intercompany transactions, operations risk, and
reputation risk. The GAO study also discussed concerns about the FDIC's
ability to protect an industrial bank from those risks as effectively
as the Federal consolidated supervisory approach under the BHCA.\37\
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\36\ See OIG Evaluation 04-048, The Division of Supervision and
Consumer Protection's Approach for Supervising Limited-Charter
Depository Institutions (2004), https://www.fdicig.gov/reports04/04-048.pdf; OIG Evaluation 06-014, The FDIC's Industrial Loan Company
Deposit Insurance Application Process (2006), https://www.fdicig.gov/reports06/06-014.pdf; U.S. Gov't Accountability
Office, GAO-05-621, Industrial Loan Corporations: Recent Asset
Growth and Commercial Interest Highlight Differences in Regulatory
Authority (Sept. 2005).
\37\ U.S. Gov't Accountability Office, GAO-05-621, Industrial
Loan Corporations: Recent Asset Growth and Commercial Interest
Highlight Differences in Regulatory Authority (Sept. 2005).
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These reports acknowledged the FDIC's supervisory actions to ensure
the independence and safety and soundness of commercially owned
industrial banks. The reports further acknowledged the FDIC's
authorities to protect an industrial bank from the risks posed by its
parent company and affiliates. These authorities include the FDIC's
authority to conduct examinations, impose conditions on and enter into
agreements with an industrial bank parent company, terminate an
industrial bank's deposit insurance, enter into agreements during the
acquisition of an insured depository institution, and pursue
enforcement actions.
F. FDIC Moratorium and Other Agency Actions
In 2005, Wal-Mart Bank's application for Federal deposit insurance
generated considerable debate. The FDIC received more than 13,800
comment letters regarding Wal-Mart's proposal. Most of the commenters
were opposed to the application. Commenters also raised broader
concerns about industrial banks, including the risk posed to the DIF by
industrial banks owned by holding companies that are not subject to
Federal consolidated supervision. Similar concerns were expressed by
witnesses during three days of public hearings held by the FDIC in the
spring of 2006 concerning the Wal-Mart application. Also in 2006, The
Home Depot filed a change in control notice in connection with its
proposed acquisition of EnerBank, a Utah-chartered industrial bank. The
FDIC received approximately 830 comment letters regarding this notice,
almost all of which expressed opposition to the proposed acquisition.
Ultimately, the Wal-Mart application and The Home Depot's notice were
withdrawn.
To evaluate the concerns and issues raised with respect to the Wal-
Mart and The Home Depot filings and industrial banks generally, on July
28, 2006, the FDIC imposed a six-month moratorium on FDIC action with
respect to deposit insurance applications and change in control notices
involving industrial banks.\38\ The FDIC suspended agency action in
order to further evaluate (i) industry developments; (ii) the various
issues, facts, and arguments raised with respect to the industrial bank
industry; (iii) whether there were emerging safety and soundness issues
or policy issues involving industrial banks or other risks to the DIF;
and (iv) whether statutory, regulatory, or policy changes should be
made in the FDIC's oversight of industrial banks in order to protect
the DIF or important Congressional objectives.\39\
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\38\ See Moratorium on Certain Industrial Loan Company
Applications and Notices, 71 FR 43482 (Aug. 1, 2006).
\39\ Id. at 43483.
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In connection with this moratorium, on August 23, 2006, the FDIC
published a Notice and Request for Comment on
[[Page 17775]]
a wide range of issues concerning industrial banks.\40\ The FDIC
received over 12,600 comment letters in response to this Notice.\41\
The substantive comments related to the risk profile of the industrial
bank industry, concerns over the mixing of banking and commerce, the
FDIC's practices when making determinations in industrial bank
applications and notices, whether commercial ownership of industrial
banks should be allowed, and perceived needs for supervisory change.
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\40\ See Industrial Loan Companies and Industrial Banks, 71 FR
49456 (Aug. 23, 2006). The Notice included questions concerning the
current risk profile of the industrial bank industry, safety and
soundness issues uniquely associated with ownership of such
institutions, the FDIC's practice with respect to evaluating and
making determinations on industrial bank applications and notices,
whether a distinction should be made when the industrial bank is
owned by an entity that is commercial in nature, and the adequacy of
the FDIC's supervisory approach with respect to industrial banks.
\41\ Approximately 12,485 comments were generated either
supporting or opposing the proposed industrial bank to be owned by
Wal-Mart or the proposed acquisition of Enerbank, also an industrial
bank, by The Home Depot. The remaining comment letters were sent by
individuals, law firms, community banks, financial services trade
associations, existing and proposed industrial banks or their parent
companies, the Conference of State Bank Supervisors, and two members
of Congress.
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The moratorium was effective through January 31, 2007, at which
time the FDIC extended the moratorium one additional year for deposit
insurance applications and change in control notices for industrial
banks that would be owned by commercial companies.\42\ This moratorium
was not applicable to industrial banks to be owned by financial
companies.
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\42\ See Moratorium on Certain Industrial Bank Applications and
Notices, 72 FR 5290 (Feb. 5, 2007).
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G. 2007 Notice of Proposed Rulemaking--Part 354
In addition to extending the moratorium for one year with respect
to commercial parent companies, the FDIC published for comment a
proposed rule designed to strengthen the FDIC's consideration of
applications and notices for industrial banks to be controlled by
financial companies not subject to Federal consolidated bank
supervision, identified as Part 354 (2007 NPR).\43\ The 2007 NPR would
have imposed requirements on applications for deposit insurance, merger
applications, and notices for change in control that would result in an
industrial bank becoming a subsidiary of a company engaged solely in
financial activities that is not subject to Federal consolidated bank
supervision by either the FRB or the then-existing Office of Thrift
Supervision (OTS). The rule would have established safeguards to assess
the parent company's continuing ability to serve as a source of
strength for the insured industrial bank, and identify and respond to
problems or risks that may develop in the company or its subsidiaries.
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\43\ See Industrial Bank Subsidiaries of Financial Companies 72
FR 5217 (Feb. 5, 2007); see also https://www.fdic.gov/news/news/press/2007/pr07007.html.
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In response to the 2007 NPR, the FDIC received 18 comment letters.
The majority of commenters argued that the 2007 NPR should have also
excluded parent companies supervised by other Federal regulators that
provide similar oversight as the FRB and OTS, such as the Securities
and Exchange Commission, to reduce the amount of duplicative regulation
over these parent companies. Similarly, the commenters uniformly
suggested that, to reduce the regulatory burden, the FDIC should defer
to a parent company's primary regulator, which the commenters argued
would be better suited to regulate the entity and better positioned to
obtain relevant information. The majority of commenters also voiced
opposition to limiting parent company representation on the industrial
bank subsidiary's board of directors to 25 percent, and instead
advocated for codifying the FDIC's informal standard of requiring a
majority of directors to be independent.
Though the 2007 NPR did not affect industrial banks that would be
controlled by companies engaged in commercial activities, several
commenters addressed the distinction between industrial banks owned by
financial and nonfinancial companies. Two commenters contended that the
FDIC lacked authority to draw a distinction between financial and
nonfinancial industrial bank owners absent a change in law. Several
commenters argued that drawing such a distinction would essentially
repeal the exemption of industrial banks from the definition of
``bank'' in the BHCA. There was little consensus among commenters as to
whether commercially owned industrial banks pose unique safety and
soundness issues.
Similar to this proposed rule, the 2007 NPR would have required a
parent company to enter into a written agreement with the FDIC
containing required commitments related to the examination of, and
reporting and recordkeeping by, the industrial bank, the parent
company, and its affiliates. The majority of commenters did not oppose
these requirements, noting the FDIC already has authority to collect
such information under section 10(b)(4) of the FDI Act.\44\ The
majority of commenters stated that the FDIC should not impose capital
requirement commitments as contemplated in the 2007 NPR on commercial
parents of industrial banks because of the idiosyncratic business
models and operations of such companies.
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\44\ See 12 U.S.C. 1820(b)(4).
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H. Dodd-Frank Act and Industrial Banks
As discussed above, the Dodd-Frank Act amended the FDI Act by
adding section 38A.\45\ Under section 38A, for any insured depository
institution that is not a subsidiary of a BHC or savings and loan
holding company, the appropriate Federal banking agency for the insured
depository institution must require any company that directly or
indirectly controls such institution to serve as a source of financial
strength for the institution.\46\ As a result, the FDIC is required to
impose a requirement on companies that directly or indirectly own or
control an industrial bank to serve as a source of financial strength
for that institution. In addition, subsection (d) of section 38A of the
FDI Act provides explicit statutory authority for the appropriate
Federal banking agency to require reports from a controlling company to
assess the ability of the company to comply with the source of strength
requirement, and to enforce compliance by such company.\47\
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\45\ See 12 U.S.C. 1831o-1.
\46\ 12 U.S.C. 1831o-1(b). This amendment also requires the
appropriate Federal banking agency for a BHC or savings and loan
holding company to require the BHC or savings and loan holding
company to serve as a source of financial strength for any
subsidiary of the BHC or savings and loan holding company that is a
depository institution. 12 U.S.C. 1831o-1(a).
\47\ See 12 U.S.C. 1831o-1(d).
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Through the Dodd-Frank Act, Congress also imposed a three-year
moratorium on the FDIC's approval of deposit insurance applications for
industrial banks that were owned or controlled by a commercial
firm.\48\ The Dodd-Frank Act moratorium also applied to the FDIC's
approval of any change in control of an industrial bank that would
place the institution under the control of a commercial firm.\49\ The
[[Page 17776]]
moratorium expired in July 2013, without any action by Congress.
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\48\ Public Law 111-203, title VI Sec. 603(a), 124 Stat. 1597
(2010). Section 603(a) also imposed a moratorium on FDIC action on
deposit insurance applications by credit card banks and trust banks
owned or controlled by a commercial firm. The Dodd-Frank Act defined
a ``commercial firm'' for this purpose as a company that derives
less than 15 percent of its annual gross revenues from activities
that are financial in nature, as defined in section 4(k) of the BHCA
(12 U.S.C. 1843(k)), or from ownership or control of depository
institutions.
\49\ Id.
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In addition, the Dodd-Frank Act directed the GAO to conduct a study
of the implications of removing all exemptions from the definition of
``bank'' under the BHCA. The GAO report was published in January of
2012.\50\ This report examined the number and general characteristics
of exempt institutions, the Federal regulatory system for such
institutions, and potential implications of subjecting the holding
companies of such institutions to BHCA requirements. The GAO report
noted that the industrial bank industry experienced significant asset
growth in the 2000s and, during this time, the profile of industrial
banks changed: Rather than representing a class of small, limited-
purpose institutions, industrial banks became a diverse group of
insured institutions with a variety of business lines.\51\ Ultimately,
the GAO found that Federal regulation of the exempt institutions'
parent companies varied, noting that FDIC officials interviewed in
connection with the study indicated that supervision of exempt
institutions was adequate, but also noted the added benefit of Federal
consolidated supervision. Finally, data examined by the GAO suggested
that removing the BHCA exemptions would likely have a limited impact on
the overall credit market, chiefly because the overall market share of
exempt institutions was, at the time of the study, small.
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\50\ See U.S. Government Accountability Office, GAO-12-160,
Characteristics and Regulation of Exempt Institutions and the
Implications of Removing the Exemptions (Jan. 2012).
\51\ Id. at 13.
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III. Need for Rulemaking and Rulemaking Authority
As discussed above, the 2007 NPR would have imposed certain
conditions and requirements for approval of certain deposit insurance
applications and nonobjections to change in control notices involving
industrial banks. However, the FDIC did not finalize the 2007 NPR.
Although multiple factors contributed to the FDIC's decision to not
advance a final rule, the most significant factor was the onset of the
financial crisis. With the advent of the crisis, applications to form
de novo insured institutions, or to acquire existing institutions,
declined significantly, including with respect to industrial banks.
Further, provisions included in the 2007 NPR, which reflected the
FDIC's practices beginning in 2005 with respect to proposed de novo
industrial banks, were being tested in an adverse economic environment
for the first time. As such, embodying the provisions in a final rule
would have been premature without knowledge of the consequences of the
rule's requirements and restrictions.
The crisis demonstrated that the FDIC's supervisory approach with
respect to industrial banks was effective. Only two industrial banks
failed during the crisis, and both failures were of small industrial
banks that did not present circumstances raising concern with respect
to industrial banks proposed prior to the crisis. Several industrial
banks and their parent companies pursued conversions to commercial
banks and BHC structures for financial and strategic reasons.
Recently, a number of companies have considered options for
providing financial products and services through establishing an
industrial bank subsidiary. Many companies have publicly noted the
benefits of deposit insurance and establishing a deposit-taking
institution. Although many interested parties operate business models
focused on traditional community bank products and services, others
operate unique business models, some of which are focused on innovative
technologies and strategies.
Some of the companies recently exploring an industrial bank charter
engage in commercial activities or have diversified business operations
and activities that would not otherwise be permissible for BHCs under
the BHCA and applicable regulations. Given the continuing evolution of
the industrial bank charter, the utility of codifying certain
supervisory requirements for industrial banks, the nature of entities
interested in de novo industrial banks, the statutory changes enacted
in the Dodd-Frank Act that clearly address the source of financial
strength obligations of any company that controls an industrial bank,
as well as the legitimate considerations raised by interested parties,
the FDIC believes a rule is appropriate to provide necessary
transparency for market participants. Through the proposed rule, the
FDIC would formalize its framework to supervise industrial banks and
mitigate risk to the DIF that may otherwise be presented in the absence
of Federal consolidated supervision of an industrial bank and its
parent company.
The FDIC has the authority to issue rules to carry out the
provisions of the FDI Act,\52\ including rules to ensure the safety and
soundness of industrial banks and to protect the DIF. Moreover, as the
only agency with the power to grant or terminate deposit insurance, the
FDIC has a unique responsibility for the safety and soundness of all
insured institutions.\53\ In granting deposit insurance, the FDIC must
consider the factors in section 6 of the FDI Act; \54\ these factors
generally focus on the safety and soundness of the proposed institution
and any risk it may pose to the DIF. The FDIC is also authorized to
permit or deny various transactions by State nonmember banks, including
merger and change in bank control transactions, based to a large extent
on safety and soundness considerations and on its assessment of the
risk to the DIF.\55\
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\52\ ``[T]he Corporation . . . shall have power . . . [t]o
prescribe by its Board of Directors such rules and regulations as it
may deem necessary to carry out the provisions of this chapter or of
any other law which it has the responsibility of administering or
enforcing (except to the extent that authority to issue such rules
and regulations has been expressly and exclusively granted to any
other regulatory agency).'' 12 U.S.C. 1819(a)(Tenth).
\53\ See 12 U.S.C. 1815, 1818(a).
\54\ Such factors are the financial history and condition of the
depository institution, the adequacy of the depository institution's
capital structure, the future earnings prospects of the depository
institution, the general character and fitness of the management of
the depository institution, the risk presented by such depository
institution to the DIF, the convenience and needs of the community
to be served by such depository institution, and whether the
depository institution's corporate powers are consistent with the
purposes of the FDI Act. See 12 U.S.C. 1816.
\55\ See 12 U.S.C. 1817(j), 1828(c), and 1828(d).
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The FDIC has the responsibility to consider filings based on
statutory criteria and make decisions. The proposed rule generally
would codify the FDIC's current supervisory processes and policies with
respect to industrial banks that would not be subject to Federal
consolidated supervision. The proposed rule also includes additional
safeguards the FDIC believes are appropriate based on its experience,
such as requiring a tax allocation agreement.
IV. Description of the Proposed Rule
A. Section 354.1--Scope
This section describes the industrial banks and parent companies
that would be subject to the proposed rule. The proposed rule would
apply to industrial banks that, as of the effective date, become
subsidiaries of companies that are Covered Companies, as such term is
defined in Sec. 354.2. Industrial bank subsidiaries of companies that
are subject to Federal consolidated supervision by the FRB would not be
covered by the proposed rule. An industrial bank that, on or before the
effective date, is a subsidiary of a company that is not subject to
Federal consolidated supervision by the FRB (a grandfathered industrial
bank) generally
[[Page 17777]]
would not be covered by the proposed rule.\56\ A grandfathered
industrial bank could become subject to the proposed rule following a
change in control, merger, or grant of deposit insurance occurring
after the effective date in which the resulting institution is an
industrial bank that is a subsidiary of a Covered Company. Thus, a
grandfathered industrial bank would be subject to the proposed rule, as
would its parent company that is not subject to Federal consolidated
supervision, if such a parent company acquired control of the
grandfathered industrial bank pursuant to a change in bank control
transaction that closes after the effective date, or if the
grandfathered industrial bank is the surviving institution in a merger
transaction that closes after the effective date. Industrial banks that
are not subsidiaries of a company, for example, those wholly owned by
one or more individuals, would not be subject to the proposed rule.
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\56\ Although generally not subject to the proposed rule,
grandfathered industrial banks and their parent companies that are
not subject to Federal consolidated supervision by the FRB will
remain subject to FDIC supervision, including but not limited to
examinations and capital requirements. See also the discussion of
the reservation of authority in section IV.F, of this SUPPLEMENTARY
INFORMATION, infra.
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Question 1: Should the proposed rule apply only prospectively, that
is, to industrial banks that become a subsidiary of a parent company
that is a Covered Company? Or should the proposed rule also apply to
all industrial banks that, as of the effective date, are a subsidiary
of a parent that is not subject to Federal consolidated supervision by
the FRB? What are the concerns with each approach?
Question 2: Should the proposed rule apply to industrial banks that
do not have a parent company? How should the rule be applied in such a
case?
Question 3: Should the proposed rule apply to industrial banks that
are controlled by an individual rather than a company?
Question 4: If an individual controls the parent company of an
industrial bank, should the individual be responsible for the
maintenance of the industrial bank's capital and liquidity at or above
FDIC-specified levels? Should an individual who controls a parent
company be responsible for causing the parent company to comply with
the written agreements, commitments, and restrictions imposed on the
industrial bank? How should the rule be applied in such a case?
B. Section 354.2--Definitions
This section lists the definitions that would apply to part 354.
Terms that are not defined in the proposed rule that are defined in
section 3 of the FDI Act have the meanings given in section 3 of the
FDI Act.\57\
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\57\ 12 U.S.C. 1813.
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The term ``control'' would be defined to mean the power, directly
or indirectly, to direct the management or policies of a company or to
vote 25 percent or more of any class of voting securities of a company
and specifically would include the rebuttable presumption of control at
12 CFR 303.82(b)(1) and the presumptions of acting in concert at 12 CFR
303.82(b)(2) in the same manner and to the same extent as if they
applied to an acquisition of securities of a company instead of a
``covered institution''. These definitions are nearly the same as the
definitions of ``control'' in the Change in Bank Control Act (CBCA)
\58\ and the FDIC's regulations implementing the CBCA except that they
broaden the term to apply to control of a company and not solely
insured depository institutions so that the definition can accurately
describe the relationship between the parent company of an industrial
bank and any of its nonbank subsidiaries, which also would be
affiliates of the industrial bank.
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\58\ 12 U.S.C. 1817(j)(8)(B).
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The term ``Covered Company'' means any company that is not subject
to Federal consolidated supervision by the FRB and that, directly or
indirectly, controls an industrial bank (i) as a result of a change in
bank control under section 7(j) of the FDI Act,\59\ (ii) as a result of
a merger transaction pursuant to section 18(c) of the FDI Act,\60\ or
(iii) that is granted deposit insurance under section 6 of the FDI
Act,\61\ in each case after the effective date of the rule.
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\59\ 12 U.S.C. 1817(j).
\60\ 12 U.S.C. 1828(c).
\61\ 12 U.S.C. 1816.
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Under these provisions, a company would control an industrial bank
if the company would have the power, directly or indirectly, (i) to
vote 25 percent or more of any class of voting shares of any industrial
bank or any company that controls the industrial bank (i.e., a parent
company), or (ii) to direct the management or policies of any
industrial bank or any parent company. In addition, the FDIC presumes
that a company would have the power to direct the management or
policies of any industrial bank or any parent company if the company
will, directly or indirectly, own, control, or hold with power to vote
at least 10 percent of any class of voting securities of any industrial
bank or any parent company, and either the industrial bank's shares or
the parent company's shares are registered under section 12 of the
Securities Exchange Act of 1934, or no other person (including a
company) will own, control, or hold with power to vote a greater
percentage of any class of voting securities. If two or more companies,
not acting in concert, will each have the same percentage, each such
company will have control. As noted above, control of an industrial
bank can be indirect. For example, company A may control company B
which in turn may control company C which may control an industrial
bank. Company A and company B would each have indirect control of the
industrial bank, and company C would have direct control. As a result,
the industrial bank would be a subsidiary of companies A, B, and C.
Question 5: Would there be any benefit in having or requiring a
Covered Company that conducts activities other than financial
activities to conduct some or all of its financial activities
(including ownership and control of an industrial bank) through an
intermediate holding company similar to what a grandfathered unitary
savings and loan holding company may be required to do pursuant to
section 626 of the Dodd-Frank Act? What other approaches may be
appropriate?
The term ``FDI Act'' would be defined to mean the Federal Deposit
Insurance Act, 12.U.S.C. 1811 et seq.
The term ``filing'' would mean an application, notice, or request
submitted to the FDIC. This is the definition used in the FDIC's rules
of procedure and practice \62\ and allows the use of one term to
describe the different documents submitted to the FDIC.
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\62\ See 12 CFR 303.2(s).
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The term ``FRB'' would be defined to mean the Board of Governors of
the Federal Reserve System and each Federal Reserve Bank.
The term ``industrial bank'' would be defined to mean any insured
State bank that is an industrial bank, industrial loan company or other
similar institution that is excluded from the BHCA definition of
``bank'' pursuant to section 2(c)(2)(H) of the BHCA.\63\ The effect of
section 2(c)(2)(H) is that the parent company of an industrial bank
need not be a BHC.\64\
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\63\ See 12 U.S.C. 1841(c)(2)(H).
\64\ Section 2(a)(1) of the BHCA provides that ``bank holding
company'' means any company which has control over any bank or over
any company that is or becomes a BHC by virtue of the BHCA. 12
U.S.C. 1841(a)(1).
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Question 6: Should the proposed rule also apply to other
institutions that are excluded from the BHCA definition of ``bank''
pursuant to section 2(c)(2), such
[[Page 17778]]
as credit card banks and trust banks? For example, the CEBA amended the
BHCA to exempt certain other institutions from the requirement that the
parent company of a bank must be a BHC,\65\ meaning that the parent
companies of such institutions are not subject to Federal consolidated
supervision. Explain what types of institutions should be addressed by
the proposed rule and why.
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\65\ Public Law 100-86, 101 Stat. 552 (Aug. 10, 1987). See also
12 CFR 225.145 (limitations established by the CEBA on the
activities and growth of nonbank banks).
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The term ``senior executive officer'' would have the meaning given
to it in the FDIC's regulations on changes in senior executive officer
at 12 CFR 303.101(b). Thus, the term ``senior executive officer'' would
mean a person who holds the title of president, chief executive
officer, chief operating officer, chief managing official (in an
insured State branch of a foreign bank), chief financial officer, chief
lending officer, or chief investment officer, or, without regard to
title, salary, or compensation, performs the function of one or more of
these positions. ``Senior executive officer'' also would include any
other person identified by the FDIC, whether or not hired as an
employee, with significant influence over, or who participates in,
major policymaking decisions of the industrial bank.
Question 7: Are the definitions clear in their meaning and
application? Should any other terms used in the proposed rule be
defined?
C. Section 354.3--Written Agreement
This section would prohibit any industrial bank from becoming a
subsidiary of a Covered Company unless the Covered Company enters into
one or more written agreements with the FDIC and its subsidiary
industrial bank. In such agreements, the Covered Company would make
certain required commitments to the FDIC and the industrial bank,
including those listed in paragraphs (a)(1) through (8) of Sec. 354.4,
the restrictions in Sec. 354.5, and such other provisions as the FDIC
may deem appropriate in the particular circumstances. When two or more
Covered Companies will control (as the term ``control'' is defined in
Sec. 354.2), directly or indirectly, the industrial bank, each such
Covered Company would be required to execute such written agreement(s).
This circumstance could occur, for example, (i) when two or more
Covered Companies will each have the power to vote 10 percent or more
of the voting stock of an industrial bank or of a company that controls
an industrial bank, the stock of which is registered under section 12
of the Securities Exchange Act of 1934, or (ii) when one Covered
Company will control another Covered Company that directly controls an
industrial bank.
In certain instances, the FDIC may, in its sole discretion,
require, as a condition to the approval of or nonobjection to a filing,
that a controlling shareholder of a Covered Company join as a party to
any written agreement required in Sec. 354.3. In such cases, the
controlling shareholder would be required to cause the Covered Company
to fulfill its obligations under the written agreement, through voting
his or her shares, or otherwise.
In addition to the written agreements, commitments, and
restrictions of the proposed rule, the FDIC may, and likely will,
condition an approval of an application or a nonobjection to a notice
on one or more actions or inactions of the applicant or notificant.\66\
The FDIC may enforce conditions imposed in writing in connection with
any action on any application, notice, or other request by an
industrial bank or a company that controls an industrial bank,\67\ so
it is not necessary to include provisions regarding conditions in the
proposed rule.
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\66\ See 12 CFR 303.11(a) (``The FDIC may approve, conditionally
approve, deny, or not object to a filing after appropriate review
and consideration of the record.''). See 12 CFR 303.2(dd) for a list
of standard conditions.
\67\ 12 U.S.C. 1818(b); 1831aa(a).
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D. Section 354.4--Required Commitments and Provisions of Written
Agreement
The FDIC historically has included conditions in deposit insurance
approval orders for industrial banks that are intended to create a
sufficient supervisory structure with respect to a Covered Company. The
commitments that the FDIC has required industrial banks and their
parent companies to undertake in written agreements have varied on a
case-by-case basis, depending on the facts and circumstances and the
particular concerns the FDIC has identified during the review of the
application materials.
This section would require each party to a written agreement to
comply with subsections (a)(1) through (8) of Sec. 354.4. These
required commitments are intended to provide the safeguards and
protections that the FDIC believes are prudent to impose to maintain
the safety and soundness of industrial banks that are controlled by
Covered Companies. These required commitments and other provisions are
intended to establish a level of information reporting and parent
company obligations similar to that which would be in place if the
Covered Company were subject to Federal consolidated supervision. The
requirements reflect commitments and additional provisions that, for
the most part, the FDIC has previously required as a condition of
granting deposit insurance to industrial banks. The FDIC is proposing
to include these required commitments in the rule to provide
transparency to current and potential industrial banks, the companies
that control them, and the general public.
In order to provide the FDIC with more timely and more complete
information about the activities, financial performance and condition,
operations, prospects, and risk profile of each Covered Company and its
subsidiaries and affiliates, the proposed rule would require that each
Covered Company must furnish to the FDIC an initial listing, with
annual updates, of all of the Covered Company's subsidiaries
(commitment (1)); consent to the FDIC's examination of the Covered
Company and each of its subsidiaries to monitor compliance with any
written agreements, commitments, conditions, and certain provisions of
law (commitment (2)); submit to the FDIC an annual report on the
Covered Company and its subsidiaries, and such other reports as the
FDIC may request (commitment (3)); maintain such records as the FDIC
deems necessary to assess the risks to the industrial bank and to the
DIF (commitment (4)); and cause an independent audit of each subsidiary
industrial bank to be performed annually (commitment (5)).
Question 8: For purposes of transparency and identifying any
potential risks to the industrial bank, we have included commitments
requiring examination and reporting. Is this approach the best way to
gain that transparency, or is there a better way? To what extent, if
any, is the FDIC's supervision enhanced by requiring a Covered Company
to consent to examination of the Covered Company and each of its
subsidiaries as proposed? Is there another way to identify any
potential risks?
Question 9: The Gramm-Leach-Bliley Act of 1999 imposed certain
restrictions on the extent to which a Federal banking agency may
regulate and supervise a functionally regulated affiliate of an insured
depository institution.\68\ Conversely, the Federal banking agencies,
including the FRB, impose various periodic reporting requirements on
depository institutions and their parent companies. In view of
[[Page 17779]]
these restrictions and requirements, are the commitments and
requirements appropriately tailored to adequately carry out the purpose
and intent of the proposed rule?
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\68\ See section 45 of the FDI Act, 12 U.S.C. 1831v.
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Question 10: The proposed rule would require a Covered Company to
disclose to the FDIC the subsidiaries of the Covered Company. Should
the proposed rule also require disclosure to the FDIC of certain
additional affiliates or portfolio companies of the Covered Company,
given that such entities could engage in transactions with, or
otherwise impact, the subsidiary industrial bank?
In order to limit the extent of each Covered Company's influence
over a subsidiary industrial bank, each Covered Company would commit to
limit its representation on the industrial bank's board of directors to
25 percent of the members of the board, or if the bank is organized as
a limited liability company and is managed by a board of managers, to
25 percent of the members of the board of managers, or if the bank is
organized as a limited liability company and is managed by its members,
to 25 percent of managing member interests (commitment (6)). For
example, if company A, which has 15 percent representation on the
subsidiary industrial bank's board, controls company B, then the
companies' representation would be aggregated and limited to no more
than 25 percent. Thus, company B's representation would be limited to
no more than 10 percent.
Question 11: The proposed rule would limit board of directors (or
similar body) representation to 25 percent of the members of the board
of directors (or similar entity). The FDIC has chosen this threshold
with the idea that 25 percent is a key threshold for control purposes.
Is another threshold more appropriate? If so, what and why?
Additionally, in order to ensure that a subsidiary industrial bank
has available to it the resources necessary to maintain sufficient
capital and liquidity, each party to a written agreement would commit
to maintain each subsidiary industrial bank's capital and liquidity at
such levels as the FDIC deems necessary for the safe and sound
operation of the industrial bank, and to take such other actions as the
FDIC finds appropriate to provide each subsidiary industrial bank with
the resources for additional capital or liquidity (commitment (7)).
Question 12: If there is an individual who is the dominant
shareholder of a Covered Company, should that individual be required to
commit to the maintenance of appropriate capital and liquidity levels?
Lastly, the proposed rule includes a requirement that each Covered
Company and its subsidiary industrial bank(s) enter into a tax
allocation agreement that expressly recognizes an agency relationship
between the Covered Company and the subsidiary industrial bank with
respect to tax assets generated by such industrial bank, and that all
such tax assets are held in trust by the Covered Company for the
benefit of the subsidiary industrial bank and promptly remitted to such
industrial bank (commitment (8)). Companies and their subsidiaries,
including insured depository institutions and their holding companies,
will often file a consolidated income tax return. A 1998 interagency
policy statement issued by the Federal banking agencies and the U.S.
Department of the Treasury, and an addendum thereto \69\ (collectively,
Policy Statement), acknowledges such practices, noting that a
consolidated group may prepare and file Federal and State income tax
returns as a group so long as the interests of any insured depository
institution subsidiaries are not prejudiced. Given the potential harm
to insured subsidiary institutions, the Policy Statement encourages
holding companies and their insured depository institution subsidiaries
to enter into written, comprehensive tax allocation agreements, and
notes that inconsistent practices regarding tax obligations may be
viewed as an unsafe and unsound practice prompting either informal or
formal corrective action. The proposed rule similarly seeks to avoid
potential harm to the insured subsidiary institution by requiring such
a written tax allocation agreement.
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\69\ See Interagency Policy Statement on Income Tax Allocation
in a Holding Company Structure, 63 FR 64757 (Nov. 23, 1998);
Addendum to the Interagency Policy Statement on Income Tax
Allocation in a Holding Company Structure, 79 FR 35228 (June 19,
2014).
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In addition to the eight commitments discussed above, pursuant to
proposed Sec. 354.4(b), the FDIC may condition the approval of an
application or nonobjection to a notice on the Covered Company and
industrial bank committing to adopt, maintain, and implement an FDIC-
approved contingency plan that presents one or more actions to address
potential significant financial or operational stress that could
threaten the safe and sound operation of the insured industrial bank.
The plan also would reflect strategies for the orderly disposition of
the industrial bank without the need for the appointment of a receiver
or conservator. Such disposition could include, for example, sale of
the industrial bank to, or merger with, a third party. The proposed
rule describes this contingency plan commitment in general terms,
thereby preserving the FDIC's supervisory discretion to tailor the
contents of any contingency plan to a given Covered Company and its
insured industrial bank subsidiary. The FDIC's ability to tailor the
contents of a contingency plan for a given Covered Company and its
industrial bank minimizes the burden of developing and implementing the
plan. In the case where a contingency plan commitment is included as a
condition to approval of an application or nonobjection to a notice,
the FDIC may take into account the size, complexity, interdependencies,
and other factors relevant to the industrial bank and Covered Company.
The FDIC is of the view that requiring a contingency plan would lead
the FDIC, as well as the Covered Company and its subsidiary industrial
bank, to a better understanding of the interdependencies, operational
risks, and other circumstances or events that could create safety and
soundness concerns for the insured industrial bank and attendant risk
to the DIF. The contingency plan would not be a resolution plan, but
rather, an explanation of the steps the industrial bank and Covered
Company could take to mitigate the impacts of financial and operational
stress outside of the receivership process.
While the contingency plan is one type of commitment that the FDIC
would be able to require of Covered Companies and their industrial bank
subsidiaries, there may be other commitments that the FDIC may
determine to be appropriate given the business plan, capital levels, or
organizational structure of a Covered Company or its subsidiary
industrial bank. Section 354.4(c) would provide, then, that the FDIC
may require such additional commitments in addition to those described
in Sec. 354.4(a) or (b) in order to ensure the safety and soundness of
the industrial bank and reduce potential risk to the DIF.
Question 13: Some of the provisions include continuing commitments,
such as to maintain capital. Should the proposed rule include a cure
period in the event that the industrial bank or its parent company
initially comply with these commitments, but later fall out of
compliance? If so, should such a cure period be provided for all
commitments or certain commitments (please specify)? Alternatively,
should the FDIC rely on its enforcement authorities under sections 8
and 50 of the FDI Act to take action as appropriate?
[[Page 17780]]
Question 14: In order to ensure that each Covered Company can serve
as a source of financial strength to its industrial bank subsidiary and
fulfill its obligations under a capital maintenance agreement, should
the FDIC include a commitment that the parent company will maintain its
own capital at some defined level on a consolidated basis in all
circumstances? How should the FDIC determine the level?
E. Section 354.5--Restrictions on Industrial Bank Subsidiaries of
Covered Companies
Section 354.5 would require the FDIC's prior written approval
before an industrial bank that is a subsidiary of a Covered Company may
take certain actions. These restrictions, like the required commitments
discussed above, are generally intended to provide the safeguards and
protections that the FDIC believes would be prudent to impose with
respect to maintaining the safety and soundness of industrial banks
that become controlled by companies that are not subject to Federal
consolidated supervision. Accordingly, the proposed rule would require
prior FDIC approval if the subsidiary industrial bank wanted to take
any of five actions set forth in Sec. 354.5(a).
In order to ensure that the industrial bank does not immediately
after becoming a subsidiary of a Covered Company engage in high-risk or
other inappropriate activities, the subsidiary industrial bank would be
required to obtain the FDIC's prior approval to make a material change
in its business plan after becoming a subsidiary of a Covered Company
(paragraph (1)). In order to limit the influence of the parent Covered
Company, the subsidiary industrial bank would have to obtain the FDIC's
prior approval to add or replace a member of the board of directors or
board of managers or a managing member, as the case may be (paragraph
(2)); add or replace a senior executive officer (paragraph (3)); employ
a senior executive officer who is associated in any manner with an
affiliate of the industrial bank, such as a director, officer,
employee, agent, owner, partner, or consultant of the Covered Company
or a subsidiary thereof (paragraph (4)); or enter into any contract for
material services with the Covered Company or a subsidiary thereof
(paragraph (5)). Pursuant to proposed Sec. 354.5(b), the FDIC could,
on a case-by-case basis, impose additional restrictions on the Covered
Company or its controlling shareholder if circumstances warrant.
Question 15: Should the FDIC further define ``services material to
the operations of the industrial bank'' as that phrase is used in the
proposed Sec. 354.5(e)? If so, how should the term be defined?
Question 16: Should any of the restrictions in Sec. 354.5 be
temporally limited, for example, to the first three years after
becoming a subsidiary of such Covered Company?
F. Section 354.6--Reservation of Authority
The FDIC proposes to clarify that it retains the authority to take
supervisory or enforcement actions, including actions to address unsafe
or unsound practices, or violations of law.
Thus, the FDIC could require grandfathered industrial banks and
their parent companies that are not subject to Federal consolidated
supervision by the FRB to enter into written agreements, provide
commitments, or abide by restrictions if necessary to maintain the
safety and soundness of the industrial bank. Similarly, the FDIC
retains the authority to require additional commitments from a Covered
Company and its subsidiary industrial bank to enter into written
agreements, provide commitments, or abide by restrictions if necessary
to maintain the safety and soundness of the industrial bank, even if
not in the context of a filing.
Question 17: Should the FDIC retain the authority to require
additional written agreements, commitments, or conditions on or by an
industrial bank or Covered Company after the nonobjection to a change
in bank control, approval of a merger transaction, or a grant of
deposit insurance by the FDIC? Should the FDIC retain the power to
require additional written agreements, commitments, or conditions on or
by an industrial bank or parent company of an industrial bank that
became a subsidiary of a parent company that is not subject to Federal
consolidated supervision by the FRB prior to the effective date?
V. Expected Effects
As previously discussed, the proposed rule would require or impose
certain commitments, restrictions, and conditions for each deposit
insurance application approval, nonobjection to a change in control
notice, and merger application approval that would result in an
industrial bank becoming, pursuant to the proposed rule, a subsidiary
of a Covered Company. The proposal would require such Covered Company
to enter into one or more written agreements with the FDIC and the
industrial bank subsidiary.
A. Overview of Industrial Banks
As of December 31, 2019, the FDIC supervised 3,344 insured
depository institutions, with combined assets of $3.4 trillion. Of
these, 23 institutions were industrial banks, comprising 0.7 percent of
all FDIC-supervised institutions. The industrial banks hold combined
assets of $150.3 billion, comprising 4.4 percent of the combined assets
of FDIC-supervised institutions.\70\ The majority of industrial banks
are headquartered in Utah and Nevada, and hold nearly all of the
combined assets of industrial banks. As of December 31, 2019, 14
industrial banks were headquartered in Utah, four in Nevada, three in
California, one in Hawaii, and one in Minnesota.
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\70\ December 31, 2019, Call Report data.
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The proposed rule would apply prospectively to deposit insurance,
change in control, and merger transactions involving an industrial bank
as the resultant institution that is controlled by a Covered Company.
It is difficult to estimate the number of potential Covered Companies
that will seek to establish or acquire an industrial bank, as such an
estimate depends on considerations that affect Covered Companies'
decisions. These considerations, and how they affect decision making,
are difficult for the FDIC to forecast, estimate, or model, as the
considerations include external parties' evaluations of potential
business strategies for the industrial bank as well as future financial
conditions, rates of return on capital, and innovations in the
provision of financial services, among others. However, during the
period of 2017 through 2019, the FDIC received nine industrial bank
deposit insurance applications and one change in control
application.\71\ Consistent with the Paperwork Reduction Act (PRA)
estimates presented elsewhere in this notice of proposed rulemaking,
for this analysis the FDIC is estimating that the proposed rule, if
implemented, would apply to four filings per year seeking to establish
or acquire an industrial bank.
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\71\ During the same period, the FDIC did not receive any merger
applications involving industrial banks.
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The proposed rule could indirectly affect subsidiaries of Covered
Companies. Such Covered Companies operate through a variety of
structures that include a range of subsidiaries and affiliates.
Further, the proposal includes the FDIC's reservation of authority to
require any industrial bank and its parent company, if not otherwise
subject to part 354, to enter into written agreements, provide
commitments, or
[[Page 17781]]
abide by restrictions, as appropriate. Therefore, it is difficult to
estimate the number of subsidiaries and affiliates of prospective
Covered Companies, based on information currently available to the
FDIC. However, based on the FDIC's experience as the primary Federal
regulator of industrial banks,\72\ the FDIC believes that the number of
subsidiaries of the prospective Covered Companies affected by the
proposed rule is likely to be small.
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\72\ Historically, industrial banks have elected not to become
members of the Federal Reserve System. The FDIC is the primary
Federal regulator for State nonmember banks and the insurer for all
insured depository institutions.
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B. Analysis of the Commitments
Under the proposal, prospective Covered Companies would be required
to agree to the eight commitments, and may be required to agree to
additional commitments under certain circumstances, which in summary
include commitments by the Covered Company to:
Furnish an initial listing, with annual updates, of the
Covered Company's subsidiaries.
Consent to the examination of the Covered Company and its
subsidiaries.
Submit an annual report on the Covered Company and its
subsidiaries, and such other reports as requested.
Maintain such records as deemed necessary.
Cause an independent annual audit of each industrial bank.
Limit the Covered Company's representation on the
industrial bank's board of directors or managers (board), as the case
may be, to 25 percent.
Maintain the industrial bank's capital and liquidity at
such levels as deemed appropriate and take such other action to provide
the industrial bank with a resource for additional capital or
liquidity.
Enter into a tax allocation agreement.
Depending on the facts and circumstances, provide, adopt,
and implement a contingency plan that sets forth strategies for
recovery actions and the orderly disposition of the industrial bank
without the need for a receiver or conservator.
The FDIC historically has imposed prudential conditions similar to
the commitments listed above in connection with approving or not
objecting to certain industrial bank filings. These conditions
generally relate to the board and senior management, the business plan,
operating policies, financial records, affiliate relationships, and
other conditions on a case-by-case basis, depending on the facts and
circumstances identified during the review of the respective
filings.\73\
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\73\ See FDIC Deposit Insurance Application Procedures Manual
Supplement, Applications from Non-Bank and Non-Community Bank
Applicants, FIL-8-2020 (Feb. 10, 2020).
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The table below presents the FDIC's analysis of the estimated costs
to institutions that would be affected by the proposed rule of each
required commitment included in the proposal. In each case, the FDIC
used a total hourly compensation estimate of $94.15 per hour.\74\
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\74\ Subject matter experts in the FDIC's Division of Risk
Management Supervision estimated that time devoted to complying with
the commitments is broken down as follows: 25 percent (Executives
and Managers), 15 percent (Legal), 15 percent (Compliance Officers),
15 percent (Financial Analysts), 15 percent (IT Specialists), and 15
percent (Clerical). The Standard Occupational Classification System
occupations and codes used by the FDIC are: Executives and Managers
(Management Occupations, 110000), Lawyers (Lawyers, Judges, and
Related Workers, 231000), Compliance Officers (Compliance Officers,
131041), Financial Analysts (Financial Analysts, 132051), IT
Specialists (Computer and Mathematical Occupations, 150000), and
Clerical (Office and Administrative Support Occupations, 430000). To
estimate the weighted average hourly compensation cost of these
employees, the 75th percentile hourly wages reported by the Bureau
of Labor Statistics (BLS) National Industry-Specific Occupational
Employment and Wage Estimates as used for the relevant occupations
in the Depository Credit Intermediation sector, as of May 2018. The
75th-percentile wage for lawyers is not reported, as it exceeds $100
per hour, so $100 per hour is used. The hourly wage rates reported
do not include non-monetary compensation. According to the September
2019 Employer Cost of Employee Compensation data, compensation rates
for health and other benefits are 33.8 percent of total
compensation. To account for non-monetary compensation, the hourly
wage rates reported by BLS are adjusted by that percentage. The
hourly wage is adjusted by 2.28 percent based on changes in the
Consumer Price Index for Urban Consumers from May 2018 to September
2019 to account for inflation and ensure that the wage information
is contemporaneous with the non-monetary compensation statistic.
Finally, the benefit-and-inflation-adjusted wages for each
occupation are weighted by the percentages listed above to arrive at
a weighted hourly compensation rate of $94.15.
------------------------------------------------------------------------
Estimated annual Estimated annual
Proposed commitment compliance hours compliance costs
------------------------------------------------------------------------
Lists of Subsidiaries............. 4 $376.60
Consent to the FDIC Examination... 100 9,415.00
Annual and Such Other Reports as 10 941.50
the FDIC may Request.............
Maintain Such Records as the FDIC 10 941.50
Deems Necessary..................
Independent Audit Note 1.......... 100 9,415.00
Limit Membership on Board Note 2.. 0 0.00
Maintain Capital and Liquidity.... 12 1,129.80
Tax Allocation Agreement Note 3... 0 0.00
-------------------------------------
Total......................... 236 22,219.40
------------------------------------------------------------------------
Note 1 The disclosure requirement and time to fulfill it are due to
satisfying regulatory inquiries about the audit, and do not include
the cost of the audit itself because Covered Companies already conduct
audits for other purposes.
Note 2 Determinations regarding board membership are considered in the
normal course of business.
Note 3 Tax allocation agreements are normal and customary among
affiliated corporate entities.
The proposed rule also authorizes the FDIC to require additional
commitments, including a contingency plan that sets forth strategies
for recovery actions and the orderly disposition of the industrial bank
without the appointment of a receiver or conservator. The additional
contingency plan commitment would be required only in certain
circumstances, based on the facts and circumstances presented and
taking into consideration the size, complexity, interdependencies, and
other factors relevant to the industrial bank and Covered Company.
Because this commitment is an enhancement to the FDIC's historical
approach, and because the commitment is not expected to be required in
all cases, the FDIC analyzed the estimated burden in greater detail.
It is difficult to estimate the recordkeeping, reporting, and
disclosure costs associated with the contingency plan aspect of the
proposed rule because it depends on the organizational structure and
activities of potential future Covered Companies. The FDIC currently
lacks such detailed
[[Page 17782]]
information on potential future Covered Companies. While the
contingency plan commitment is meaningfully different from resolution
plan requirements for large banks, and while industrial banks that
might need to develop such contingency plans are meaningfully different
from large banks subject to resolution planning requirements, the FDIC
considered prior analyses regarding resolution planning requirements
imposed on certain institutions to instruct its analysis.
Based in part on the FDIC's experience implementing and managing
the resolution planning requirements of 12 CFR 360.10, the FDIC
estimates that Covered Companies and their industrial banks subject to
the contingency plan commitment could incur $326,000 in recordkeeping,
reporting, and disclosure compliance costs annually. To put the
estimated cost of this commitment into context, the pre-tax net income
of the median industrial bank in 2019 was $64,515,000.\75\ But, because
the FDIC would have the supervisory discretion to tailor the contents
of any contingency plan to a given Covered Company and its industrial
bank, and because of the unique circumstances of the respective Covered
Companies and industrial banks, the compliance costs incurred by
Covered Companies would vary on a case-by-case basis, and could be
lower.
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\75\ December 31, 2019, Call Report data.
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As illustrated by the preceding analysis, the proposed rule could
pose as much as $348,000 in additional recordkeeping, reporting, and
disclosure compliance costs for each Covered Company that seeks to
establish or acquire an industrial bank.\76\ Covered Companies would
also be likely to incur some regulatory costs associated with making
the necessary changes to internal systems and processes. For context,
the estimated $348,000 recordkeeping, reporting, and disclosure costs
only comprise 0.8 percent of the median non-interest expense for the 23
existing industrial banks.\77\
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\76\ $22,219.40 for all Covered Companies that seek to establish
or acquire an industrial bank, and an additional $326,000 for those
institutions required to adopt, implement, and adhere to a
contingency plan.
\77\ December 31, 2019, Call Report data.
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The FDIC believes that the proposed rule would benefit the public
by providing transparency for market participants and other interested
parties. Additionally, the FDIC believes that the proposed rule would
benefit the public by formalizing a framework by which the FDIC would
supervise industrial banks and mitigate risk to the DIF that may
otherwise be presented.
It is difficult to estimate whether the proposed rule would serve
as an incentive or disincentive for affected parties. Decisions to
establish or acquire an industrial bank depend on many considerations
that the FDIC cannot accurately forecast, estimate, or model, such as
future financial conditions, rates of return on capital, and
innovations in the provision of financial services. The proposed rule
would enhance transparency in the FDIC's evaluation of filings, which
could increase the number of applications received. However, such
transparency could also serve to limit the number of applications
received.
The FDIC analyzed historical trends in filings that would be
subject to the proposal. Based on that analysis, and consistent with
the FDIC's PRA analysis, the FDIC assumes four applications: Three
deposit insurance applications, and one change in bank control notice
per year, on average. Between 2000 and 2009, the FDIC received as many
as 12 and as few as two deposit insurance applications from entities
seeking to organize an industrial bank; between 2017 and 2019, the FDIC
received as many as four and as few as two such applications.
Therefore, the FDIC believes it is reasonable to assume an annual
deposit insurance application volume of three for the purpose of this
analysis. In addition, the FDIC has received three change in bank
control notices relating to industrial banks since 2010; therefore, the
FDIC believes it is reasonable to assume an annual volume of one for
the purpose of this analysis.
C. Safety and Soundness of Affected Banks
The FDIC believes the proposed rule is consistent with supervisory
approaches the FDIC has used to insulate industrial banks from risks
posed by their parent companies, and that these supervisory approaches
have been effective. For example, as previously noted, only two small
industrial banks failed during the crisis. The FDIC believes the
proposed rule would provide a prudentially sound framework for reaching
decisions on industrial bank filings that the FDIC receives from time
to time.
D. Broad Effects on the Banking Industry
To the extent that the proposed rule results in higher numbers of
industrial banks, the increase could lead to increased competition for
depositors and borrowers. The increased competition could result in one
or more of: Higher yields on deposit products, lower interest rates on
loan products, reduced fees, less restrictive underwriting standards,
greater account opening bonuses for new customers, and other benefits.
To the extent that the proposed rule does not result in a higher number
of industrial banks, this would not be expected to lead to increased
competition for depositors and borrowers.
E. Expected Effects on Consumers
To the degree the proposal, once adopted, results in an increase in
the number of industrial banks, consumers could benefit from increased
competition within the banking industry. These benefits could take the
form of higher rates on deposit accounts, improved access to credit
with better terms or lower rates, and lower fees for banking services.
To the extent that the proposed rule does not result in a higher number
of industrial banks, this would not be expected to lead to potential
benefits from increased competition within the banking industry.
F. Expected Effects on the Economy
The proposal's effects on the economy are likely to be modest, in
line with its potential effects on the banking industry and consumers.
If the proposal results in a modest increase in the number of
industrial banks or improvement in the provision of banking products
and services, the effects on the economy are likely to be modest.
VI. Request for Comment
The FDIC is inviting comment on all aspects of the proposed rule.
In addition to the questions above, the FDIC seeks responses to the
following additional questions:
Question 18: In evaluating the statutory factors under section 6 of
the FDI Act for deposit insurance applications, should the FDIC
consider an evaluation of the competitive effects of the parent
company's or the parent company's affiliates' provision of consumer
products aggregated with the activities of the industrial bank?
Question 19: The current Interagency Charter and Federal Deposit
Insurance Application \78\ requests information related to two broad
categories, Market Characteristics and Community Reinvestment Act Plan,
to assist the FDIC in determining whether the convenience and needs of
the community to be served by an industrial bank will be met with the
overall purpose of maintaining a sound and effective banking system.
Are there any
[[Page 17783]]
other categories of information that the FDIC should consider in
evaluating an industrial bank's ability to meet the convenience and
needs of the community to be served by such industrial bank where the
industrial bank will have a limited physical presence or will rely
heavily on technology to deliver products and services?
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\78\ See https://www.fdic.gov/formsdocuments/interagencycharter-insuranceapplication.pdf.
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Question 20: The FDIC has typically required, as conditions for
approval, a number of additional commitments when considering
applications involving foreign ownership of a proposed insured
depository institution. These conditions address matters regarding
service of process and access to information on the operations and
activities of the parent company and its subsidiaries. Are there
additional safeguards, commitments, or restrictions the FDIC should
consider for a foreign Covered Company? Should additional capital or
liquidity levels be considered?
VII. Regulatory Analysis
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of a proposed rule on small entities.\79\ However,
an initial regulatory flexibility analysis is not required if the
agency certifies that the rule will not have a significant economic
impact on a substantial number of small entities.\80\ The Small
Business Administration (SBA) has defined ``small entities'' to include
banking organizations with total assets of less than or equal to $600
million.\81\
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\79\ 5 U.S.C. 601 et seq.
\80\ 5 U.S.C. 605(b).
\81\ The SBA defines a small banking organization as having $600
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended, effective Aug. 19, 2019). In its determination, the SBA
``counts the receipts, employees, or other measure of size of the
concern whose size is at issue and all of its domestic and foreign
affiliates, regardless of whether the affiliates are organized for
profit.'' 13 CFR 121.103. Following these regulations, the FDIC uses
a covered entity's affiliated and acquired assets, averaged over the
preceding four quarters, to determine whether the covered entity is
``small'' for the purposes of RFA.
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Generally, the FDIC considers a significant effect to be a
quantified effect in excess of 5 percent of total annual salaries and
benefits per institution, or 2.5 percent of total non-interest
expenses. The FDIC has considered the potential impact of the proposed
rule on small entities in accordance with the RFA. Based on its
analysis and for the reasons stated below, the FDIC believes that this
proposed rule will not have a significant economic impact on a
substantial number of small entities.
As of September 30, 2019, the FDIC supervises 3,390 institutions,
of which 2,662 are defined as small institutions by the terms of the
RFA.\82\ Of these 3,390 institutions, 23 are industrial banks.
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\82\ September 30, 2019, Call Report data. In order to determine
whether an entity is ``small'' for purposes of the Regulatory
Flexibility Act, the FDIC uses its ``affiliated and acquired
assets'' as described in the immediately preceding footnote. The
latest available bank and thrift holding company reports, which the
FDIC uses to determine an entity's ``affiliated and acquired
assets,'' are as of September 30, 2019.
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As previously discussed, a currently chartered industrial bank
would be subject to the proposed rule, as would its parent company that
is not subject to Federal consolidated supervision, if such a parent
company acquired control of the grandfathered industrial bank pursuant
to a change in bank control transaction that closes after the effective
date of the proposed rule, or if the grandfathered industrial bank is
the surviving institution in a merger transaction that closes after the
effective date of the proposed rule.
Of the 23 existing industrial banks, eight reported total assets
less than $600 million, indicating that they could be small entities.
However, to determine whether an institution is ``small'' for the
purposes of the RFA, the SBA requires consideration of the receipts,
employees, or other measure of size of the concern whose size is at
issue and all of its domestic and foreign affiliates.\83\ The FDIC
conducted an analysis to determine whether each industrial bank's
parent company was ``small'', according to the SBA size standards
applicable to each particular parent company.\84\ Of the eight
industrial banks that reported total assets less than $600 million, the
FDIC was able to determine that three of these potentially small
industrial banks were owned by holding companies which were not small
for purposes of the RFA. However, the FDIC currently lacks information
necessary to determine whether the remaining five industrial banks are
small. Therefore, of the 23 existing industrial banks, 18 are not small
entities for purposes of the RFA, but no more than five, or about 22
percent, may be small entities.
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\83\ 12 CFR 121.103.
\84\ For example, if a particular industrial bank's parent
company was a motorcycle manufacturer, then the size standards
applicable to motorcycle manufacturers were used.
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Additionally, the FDIC has received three change in control notices
relating to industrial banks since 2010. Of those three, only one was
from an industrial bank that could possibly be small for purposes of
the RFA.
Therefore, given that no more than five of the 23 existing
industrial banks are small entities for the purposes of the RFA, and
that no more than one change in control notice received by the FDIC
since 2010 may be from a small entity, the FDIC believes the aspects of
the proposal relating to change in control notices or merger
applications involving industrial banks is not likely to affect a
substantial number of small entities among existing industrial banks.
As previously discussed, the proposed rule would apply to
industrial banks that, as of the effective date, become subsidiaries of
companies that are Covered Companies, as such term is defined in Sec.
354.2. It is difficult for the FDIC to estimate the volume of future
applications from entities who seek to own and operate an insured
industrial bank, or whether those entities would be considered
``small'' according to the terms of RFA, with the information currently
available to the FDIC. Such estimates would require detailed
information on the particular business models of institutions,
prevailing economic and financial conditions, the decisions of senior
management, and the demand for financial services, among other things.
However, the FDIC reviewed the firms with industrial bank applications
pending before the FDIC as of December 31, 2019. Each publically traded
applicant had a market capitalization of at least $1 billion as of
March 6, 2020. Each applicant operates either nationally within the
United States, or operates worldwide, and none appear likely to be
small for purposes of the RFA. Therefore, the FDIC believes that the
aspects of the proposal relating to entities who seek to own and
operate an insured industrial bank is not likely to affect a
substantial number of small entities among existing industrial banks.
Therefore, based on the preceding information, the FDIC certifies
that the proposed rule does not significantly affect a substantial
number of small entities.
The FDIC invites comments on all aspects of the supporting
information provided in this section, and in particular, whether the
proposed rule would have any significant effects on small entities that
the FDIC has not identified.
[[Page 17784]]
B. Paperwork Reduction Act
In accordance with the requirements of the PRA,\85\ the FDIC may
not conduct or sponsor, and the respondent is not required to respond
to, an information collection unless it displays a currently valid
Office of Management and Budget (OMB) control number.
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\85\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------
As discussed above, the proposed rule imposes PRA reporting and
recordkeeping requirements for each industrial bank subject to the rule
and its Covered Company. In particular, each industrial bank, and each
Covered Company that directly or indirectly controls the industrial
bank, must (i) agree to furnish the FDIC an initial listing, with
annual updates, of all of the Covered Company's subsidiaries; (ii)
submit to the FDIC an annual report on the Covered Company and its
subsidiaries, and such other reports as the FDIC may request; (iii)
maintain such records as the FDIC deems necessary to assess the risks
to the industrial bank and to the DIF; and (iv) in the event that the
FDIC has concerns about a complex organizational structure or based on
other circumstances presented by a particular filing, the FDIC may
condition the approval of an application or the nonobjection to a
notice--in each case that would result in an industrial bank being
controlled, directly or indirectly, by a Covered Company--on the
Covered Company and industrial bank committing to providing to the
FDIC, and thereafter adopting and implementing, a contingency plan that
sets forth, at a minimum, one or more strategies for recovery actions
and the orderly disposition of such industrial bank, without the need
for the appointment of a receiver or conservator.
The FDIC will request approval from the OMB for this proposed
information collection and the PRA reporting and recordkeeping
requirements. OMB will assign an OMB control number. The information
collection requirements contained in this proposed rulemaking will be
submitted by the FDIC to OMB for review and approval under section
3507(d) of the PRA \86\ and section 1320.11 of the OMB's implementing
regulations.\87\ Comments are invited on:
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\86\ 44 U.S.C. 3507(d).
\87\ 5 CFR 1320.11.
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(a) Whether the collection of information is necessary for the
proper performance of the FDIC's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on the
collection of information should be sent to the address listed in the
ADDRESSES section of this document. A copy of the comments may also be
submitted to the OMB desk officer: By mail to U.S. Office of Management
and Budget, 725 17th Street NW, #10235, Washington, DC 20503; or by
facsimile to 202-395-6974; or email to [email protected],
Attention, Federal Banking Agency Desk Officer.
Proposed Information Collection
Title: Industrial Banks and Industrial Loan Companies.
OMB Number: 3064-NEW.
Affected Public: Prospective parent companies of industrial banks
and industrial loan companies.
Summary of Annual Burden and Internal Cost
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimated Estimated Total annual
Type of burden Obligation to number of frequency of Estimated time Frequency of estimated
respond respondents responses per response response burden (hours)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Initial listing of all of the Reporting........ Mandatory........ 4 1.00 4 One Time......... 16
Covered Company's subsidiaries.
Annual update of listing of all Reporting........ Mandatory........ 4 1.00 4 Annual........... 16
of the Covered Company's
subsidiaries.
Annual report on the Covered Reporting........ Mandatory........ 4 1.00 10 Annual........... 40
Company and its subsidiaries,
and such other reports as the
FDIC may request.
Maintain records to assess the Recordkeeping.... Mandatory........ 4 1.00 10 Annual........... 40
risks to the industrial bank
and to the DIF.
Contingency Plan............... Reporting........ Mandatory........ 1 1.00 345 On Occasion...... 345
---------------
Total Hourly Burden........ ................. ................. .............. .............. .............. ................. 457
--------------------------------------------------------------------------------------------------------------------------------------------------------
C. Plain Language
Section 722 of the Gramm-Leach-Bliley Act \88\ requires each
Federal banking agency to use plain language in all of its proposed and
final rules published after January 1, 2000. As a Federal banking
agency subject to the provisions of this section, the FDIC has sought
to present the proposed rule in a simple and straightforward manner.
---------------------------------------------------------------------------
\88\ 12 U.S.C. 4809.
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The FDIC invites comments on whether the proposal is clearly stated
and effectively organized, and how the FDIC might make the proposal
easier to understand. For example:
Has the FDIC organized the material to suit your needs? If
not, how could it present the rule more clearly?
Has the FDIC clearly stated the requirements of the rule?
If not, how could the rule be more clearly stated?
Does the rule contain technical jargon that is not clear?
If so, which language requires clarification?
Would a different format (grouping and order of sections,
use of headings, paragraphing) make the regulation easier to
understand? If so, what changes would make the regulation easier to
understand?
What else could the FDIC do to make the regulation easier
to understand?
[[Page 17785]]
D. Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act (RCDRIA),\89\ in determining the effective
date and administrative compliance requirements for new regulations
that impose additional reporting, disclosure, or other requirements on
insured depository institutions, each Federal banking agency must
consider, consistent with principles of safety and soundness and the
public interest, any administrative burdens that such regulations would
place on depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on insured
depository institutions generally to take effect on the first day of a
calendar quarter that begins on or after the date on which the
regulations are published in final form.\90\ The FDIC invites comments
that further will inform its consideration of RCDRIA.
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\89\ 12 U.S.C. 4802(a).
\90\ 12 U.S.C. 4802(b).
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PART 354--INDUSTRIAL BANKS
Sec.
354.1 Scope.
354.2 Definitions.
354.3 Written agreement.
354.4 Required commitments and provisions of written agreement.
354.5 Restrictions on industrial bank subsidiaries of Covered
Companies.
354.6 Reservation of authority.
Authority: 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a)
(Seventh) and (Tenth), 1820(g), 1831o-1, 3108, 3207.
Sec. 354.1 Scope.
(a) In addition to the applicable filing procedures of part 303 of
this chapter, this part establishes certain requirements for filings
involving an industrial bank or a Covered Company.
(b) The requirements of this part do not apply to an industrial
bank that is organized as a subsidiary of a company that is not subject
to Federal consolidated supervision by the FRB on or before [EFFECTIVE
DATE OF THE RULE]. In addition, this part does not apply to:
(1) Any industrial bank that is or becomes controlled by a company
that is subject to Federal consolidated supervision by the FRB; and
(2) Any industrial bank that is not or will not become a subsidiary
of a company.
Sec. 354.2 Definitions.
Unless defined in this part, terms shall have the meaning given to
them in section 3 of the FDI Act.
``Control'' means the power, directly or indirectly, to direct the
management or policies of a company or to vote 25 percent or more of
any class of voting securities of a company, and includes the
rebuttable presumptions of control at 12 CFR 303.82(b)(1) and of acting
in concert at 12 CFR 303.82(b)(2). For purposes of this part, the
presumptions set forth in 12 CFR 303.83(b)(1) and (2) shall apply with
respect to any company in the same manner and to the same extent as if
they applied to an acquisition of securities of the company.
``Covered Company'' means any company that is not subject to
Federal consolidated supervision by the FRB and that controls an
industrial bank (i) as a result of a change in bank control pursuant to
section 7(j) of the FDI Act; (ii) as a result of a merger transaction
pursuant to section 18(c) of the FDI Act; or (iii) that is granted
deposit insurance by the FDIC pursuant to section 6 of the FDI Act, in
each case after [EFFECTIVE DATE OF THE RULE].
``FDI Act'' means the Federal Deposit Insurance Act, 12 U.S.C.
1811, et seq.
``Filing'' has the meaning given to it in 12 CFR 303.2(s).
``FRB'' means the Board of Governors of the Federal Reserve System
and each Federal Reserve Bank.
``Industrial bank'' means any insured State bank that is an
industrial bank, industrial loan company, or other similar institution
that is excluded from the definition of the term ``bank'' in section
2(c)(2)(H) of the Bank Holding Company Act, 12 U.S.C. 1841(c)(2)(H).
``Senior executive officer'' has the meaning given it in 12 CFR
303.101(b).
Sec. 354.3 Written agreement.
(a) No industrial bank may become a subsidiary of a Covered Company
unless the Covered Company enters into one or more written agreements
with both the FDIC and the subsidiary industrial bank, which contain
commitments by the Covered Company to comply with each of paragraphs
(a)(1) through (8) in Sec. 354.4 of this part and such other written
agreements, commitments, or restrictions as the FDIC deems appropriate,
including, but not limited to, the provisions of Sec. Sec. 354.4 and
354.5.
(b) The FDIC may, at its sole discretion, condition a grant of
deposit insurance, issuance of a nonobjection to a change in control,
or approval of a merger on an individual who is a controlling
shareholder of a Covered Company joining as a party to any written
agreement required by paragraph (a) of this section.
Sec. 354.4 Required commitments and provisions of written agreement.
(a) The commitments required to be made in the written agreements
referenced in Sec. 354.3 are set forth in paragraphs (1) through (8)
of this section. In addition, with respect to an industrial bank
subject to this part, the FDIC will condition each grant of deposit
insurance, each issuance of a nonobjection to a change in control, and
each approval of a merger on compliance with paragraphs (1) through (8)
of this section by the parties to the written agreement. As required,
each Covered Company must:
(1) Submit to the FDIC an initial listing of all of the Covered
Company's subsidiaries and update such list annually;
(2) Consent to the examination by the FDIC of the Covered Company
and each of its subsidiaries to permit the FDIC to assess compliance
with the provisions of any written agreement, commitment, or condition
imposed; the FDI Act; or any other Federal law for which the FDIC has
specific enforcement jurisdiction against such Covered Company or
subsidiary; and all relevant laws and regulations;
(3) Submit to the FDIC an annual report describing the Covered
Company's operations and activities, in the form and manner prescribed
by the FDIC, and such other reports as may be requested by the FDIC to
inform the FDIC as to the Covered Company's:
(i) Financial condition;
(ii) systems for identifying, measuring, monitoring, and
controlling financial and operational risks;
(iii) transactions with depository institution subsidiaries of the
Covered Company; and
(iv) compliance with applicable provisions of the FDI Act and any
other law or regulation.
(4) Maintain such records as the FDIC may deem necessary to assess
the risks to the subsidiary industrial bank or to the Deposit Insurance
Fund;
(5) Cause an independent audit of each subsidiary industrial bank
to be performed annually;
(6) Limit the Covered Company's direct or indirect representation
on the board of directors or board of managers, as the case may be, of
each subsidiary industrial bank to no more than 25% of the members of
such board of directors or board of managers, in the aggregate, and, in
the case of a subsidiary
[[Page 17786]]
industrial bank that is organized as a member-managed limited liability
company, limit the Covered Company's representation as a managing
member to no more than 25% of the managing member interests of the
subsidiary industrial bank, in the aggregate;
(7) Maintain the capital and liquidity of the subsidiary industrial
bank at such levels as the FDIC deems appropriate, and take such other
actions as the FDIC deems appropriate to provide the subsidiary
industrial bank with a resource for additional capital and liquidity
including, for example, pledging assets, obtaining and maintaining a
letter of credit from a third-party institution acceptable to the FDIC,
and providing indemnification of the subsidiary industrial bank; and
(8) Execute a tax allocation agreement with its subsidiary
industrial bank that expressly states that an agency relationship
exists between the Covered Company and the subsidiary industrial bank
with respect to tax assets generated by such industrial bank, and that
further states that all such tax assets are held in trust by the
Covered Company for the benefit of the subsidiary industrial bank and
will be promptly remitted to such industrial bank. The tax allocation
agreement also must provide that the amount and timing of any payments
or refunds to the subsidiary industrial bank by the Covered Company
should be no less favorable than if the subsidiary industrial bank were
a separate taxpayer.
(b) The FDIC may require such Covered Company and industrial bank
to commit to provide to the FDIC, and, thereafter, implement and adhere
to, a contingency plan subject to the FDIC's approval that sets forth,
at a minimum, recovery actions to address significant financial or
operational stress that could threaten the safe and sound operation of
the industrial bank and one or more strategies for the orderly
disposition of such industrial bank without the need for the
appointment of a receiver or conservator.
(c) The FDIC may, at its sole discretion, require additional
commitments by a Covered Company or by an individual who is a
controlling shareholder of a Covered Company. Such commitments may be
in addition to those set forth in paragraphs (a) and (b) of this
section.
Sec. 354.5 Restrictions on industrial bank subsidiaries of Covered
Companies.
(a) Without the FDIC's prior written approval, an industrial bank
that is controlled by a Covered Company shall not:
(1) Make a material change in its business plan after becoming a
subsidiary of such Covered Company;
(2) Add or replace a member of the board of directors, board of
managers, or a managing member, as the case may be, of the subsidiary
industrial bank after becoming a subsidiary of such Covered Company;
(3) Add or replace a senior executive officer after becoming a
subsidiary of such Covered Company;
(4) Employ a senior executive officer who is associated in any
manner (e.g., as a director, officer, employee, agent, owner, partner,
or consultant) with an affiliate of the industrial bank; or
(5) Enter into any contract for services material to the operations
of the industrial bank (for example, loan servicing function) with such
Covered Company or any subsidiary thereof.
(b) The FDIC may, at its sole discretion, impose restrictions on
the activities or operations of an industrial bank that is controlled
by a Covered Company. Such restrictions may be in addition to those
required pursuant to paragraph (a) of this section.
Sec. 354.6 Reservation of authority.
Nothing in this part limits the authority of the FDIC under any
other provision of law or regulation to take supervisory or enforcement
actions, including actions to address unsafe or unsound practices or
conditions, or violations of law.
Federal Deposit Insurance Corporation.
By order of the Board of Directors.
Dated at Washington, DC, on March 17, 2020.
Robert E. Feldman,
Executive Secretary.
[FR Doc. 2020-06153 Filed 3-30-20; 8:45 am]
BILLING CODE 6714-01-P
