FDIC Approves ILC Rule, Clearing Way for Corporations to Become Lenders

Earlier this month, the Federal Deposit Insurance Corp. (FDIC) approved a final rule allowing major non-bank businesses to seek banking charters and begin lending to consumers as so-called industrial loan companies. As they get into lending, the rule will allow corporations like Amazon, Facebook, and Walmart to avoid the liquidity and capital demands that financial firms face.

According to Jelena McWilliams, FDIC Chairman, the rule will “provide transparency to market participants regarding the FDIC’s minimum expectations for parent companies of industrial banks.”

The proposal released earlier this year caused apprehension in the banking industry over the possibility of having to compete against corporate giants offering financial services to consumers with less regulation. Bankers have called for a pause in approving new charters until Congress fixes a loophole that permits what banks see as an unfair advantage.

Industrial loan companies (ILCs) were initially used to provide credit for financially underserved workers, but expanded as financing arms for industrial giants like General Electric Co. and Target Corp. The FDIC approved two ILCs earlier this year by granting conditional deposit-insurance approval for Square Inc. and Nelnet Inc., according to Bloomberg.

The Bank Policy Institute wrote in a blog that FDIC approval of ILCs could “set a precedent for every other Big Tech company (Amazon, Facebook, Google, etc.) to enter banking through an ILC charter without consolidated supervision.”

ILCs face similar capital demands as banks, but their parent companies are only required to provide support if the bank needs help. Senator Sherrod Brown (D-Ohio) invoked the 2008 financial crisis and stated that “regulators gutted financial rules and even considered letting mega-corporations like Walmart own banks—and here we go again.”

Alternatively, supporters of the rule note that approving ILCs allows for greater financial accessibility for the underbanked. However, opponents continue to try to get Congress to shut down the ILC process.

“Whether commercial firms should continue to be able to own industrial banks is a policy decision for Congress to make,” said the FDIC.