What are industrial banks or loan companies?
Industrial banks or loan companies are state-licensed banks not regulated by a federal banking body. A business usually owns it. Industrial banks take customer deposits and lend money to people and small companies.
ILCs are another name for industrial banks. Industrial banks can only get charters from a few states. In the U.S., most industrial bank licenses come from Utah.
How to Understand Industrial Banks
In the early 1900s, industrial banks were created to help low- to moderate-income factory workers who couldn’t get loans from traditional banks access cash.
The Federal Deposit Insurance Corp. (FDIC) and state officials keep an eye on industrial banks. Companies can own industrial banks because they have unique business operations. The Bank Holding Company Act does not apply to them, and they do not have to follow some rules that apply to traditional banks. Also, the Federal Reserve does not keep an eye on industry banks. Many financial technology and business firms have started to apply for industrial bank charters because there aren’t many rules that stop them.
Industrial banks don’t have as much power as standard commercial banks across the country but have the same rights and powers. Some people don’t like industrial banks; they think that banks and business firms should be more clearly separated. People who don’t like industrial banks say that they give companies the rights of a bank charter without the oversight of one.
Industrial banks or loan companies are being criticized.
Wal-Mart Inc. applied to start a new corporate bank in 2005 so that credit and debit card transaction fees could be lowered. Many business banks and financial regulators spoke out against this and protested. 4 In the end, the FDIC put a brief hold on applications from industrial banks in 2006. At the same time, laws were passed at the state level to stop future industrial banks from starting branches in other states.
When Walmart Inc. pulled its application in 2007, the FDIC had not yet decided on its application. The company is becoming involved in banking waterfilling for the banking system and the FDIC Deposit Insurance Fund, according to people who were against Walmart’s application.
Lobbyists sent out a policy paper from the Independent Community Bankers of America (ICBA) at the beginning of 2019, calling for a stop to government deposit insurance for industrial banks.
A new group of fintech companies, including payment processor Square Inc., have applied to become state banks, which is what made them act. If Square Inc. had a bank charter, it could offer its merchants loans and other financial services. ICBA, on the other hand, says that industrial bank charters are a flaw that Congress needs to fix. If fintech companies get bank charters, the Federal Reserve wouldn’t have to watch over them. And they wouldn’t have to tell the Fed about any business actions unrelated to banking.
Senator John Kennedy of Louisiana introduced the “Eliminating Corporate Shadow Banking Act of 2019” bill in November 2019. It would make it illegal for non-financial businesses to set up industrial banks. The ICBA has said that it supports Sen. Kennedy’s plan. And it will close the loophole for industrial banks. To make the financial system safer. And help keep banking and business separate.
Conclusion
- An industrial bank called an industrial loan company (ILC) is a state-licensed bank. The business owns it, and the federal government does not regulate it.
- Industrial banks can only get charters from a few states. In the U.S., most industrial bank licenses come from Utah.
- Some people don’t like industrial banks because they let businesses that aren’t banks provide banking services. You can avoid federal regulation.
