Industrial Bank

Industrial Banks (Industrial Loan Companies): Overview and Criticism

Key takeaways
* An industrial bank (industrial loan company, ILC) is a state-chartered depository institution that accepts deposits and makes consumer and small-business loans.
* Industrial banks are typically owned by commercial firms and are insured by the FDIC, but they are not supervised by the Federal Reserve and are exempt from the Bank Holding Company Act.
* A small number of states charter industrial banks; Utah issues the majority of charters in the U.S.
* Critics argue industrial banks blur the line between banking and commerce, creating regulatory gaps and potential risks to the deposit insurance fund.

What is an industrial bank?
Industrial banks are state-chartered financial institutions that function much like commercial banks: they take deposits, originate loans, and may offer many other banking services. Because of their charter structure, industrial banks can be owned by nonfinancial, commercial firms. They are regulated by state banking authorities and the Federal Deposit Insurance Corporation (FDIC), which often provides deposit insurance.

How industrial banks are regulated
* State charter: Only a few states authorize industrial bank charters; Utah is the most prominent issuer.
* FDIC oversight: Industrial banks typically have FDIC insurance and are subject to FDIC regulation related to deposit insurance and safety-and-soundness.
* Federal Reserve: Industrial banks are generally not supervised by the Federal Reserve and are not required to comply with the Bank Holding Company Act, which subjects bank-holding companies to consolidated supervision.

Historical purpose
Industrial banks originated in the early 20th century to provide credit access to workers and consumers who could not get loans from traditional banks. Over time, their corporate flexibility attracted commercial firms and, more recently, financial-technology companies seeking a banking foothold.

Controversies and criticism
The unique regulatory position of industrial banks—bank-like powers with limited federal oversight—has generated significant debate:
* Separation of banking and commerce: Opponents contend permitting commercial firms to own FDIC-insured banks undermines long-standing policy separating banking and commerce, potentially creating conflicts of interest and systemic risks.
* Regulatory gap concerns: Because industrial banks are not overseen by the Federal Reserve and can engage in nonbank commercial activities, critics argue they can obtain the benefits of a bank charter without equivalent consolidated supervision or disclosure requirements.
* Notable cases: Walmart applied for an industrial bank charter in the mid-2000s to reduce card-transaction costs, prompting widespread opposition. The FDIC imposed a temporary moratorium on new applications in 2006; Walmart withdrew its application in 2007. More recently, fintech firms (for example, companies like Square) have sought bank charters, renewing calls for tighter rules.
* Legislative and industry responses: Community banking groups and some lawmakers have pushed to close perceived loopholes. In 2019, legislation was introduced to restrict nonfinancial firms from forming industrial banks, reflecting ongoing concerns about “corporate shadow banking.”

Implications and what to watch
Industrial banks remain a niche but politically charged segment of the U.S. banking system. Key issues to watch:
* Regulatory change: Any shifts in federal law or FDIC/Fed policy could alter which firms can hold industrial banks and the level of consolidated oversight they face.
* Fintech adoption: Continued fintech interest in bank charters will keep the debate alive about how to balance innovation, consumer protection, and systemic safety.
* State charter activity: States that issue industrial bank charters, especially Utah, will play an important role in determining how prevalent these institutions become.

Conclusion
Industrial banks offer a means for nonbank firms to participate in deposit-taking and lending, but their limited federal supervision raises long-standing policy and safety concerns. Ongoing regulatory scrutiny, legislative proposals, and fintech interest ensure industrial banks will remain a topic of debate in discussions about the boundaries between banking and commerce.