As our forthcoming in-depth analysis will make clear, the FDIC’s request for information (RFI) on industrial loan company charters is a critical document to which one must respond in order to have any say in the future of banking as it may soon be set. This is easy to miss — RFIs are usually little more than a duck and cover. See for example the recent inter-agency RFI on payment fraud, from which one can deduce little but that the agencies think fraud is bad — questions asked, decisions deferred, discretion preserved. That is definitely not what the FDIC is about when it comes to ILCs – it is asking tough questions it will begin to answer even before RFI comments are submitted later this year. Who gets an ILC charter will determine winners and losers for decades to come, or so history teaches us.
Due to decisions deferred, the ILC charter has been an unresolved question since the 1980s. Congress then enacted the “Competitive Banking Act” which was anything but since all it did was grandfather the banking/commerce mixes achieved through ILCs through 1987 without quashing all those that came thereafter. As the FDIC notes, ILC and similarly chartered assets grew from $4 billion in 1987 to $213 billion by 2006, when more than a few of the most aggressive ILCs were in high-flying nonbanks that were then bailed out during the 2008 crisis.
One might have thought Congress, or the FDIC would then decide what to do with a charter purpose-built for regulatory arbitrage, but ILC applications from Wal-Mart and other massive retailers led only to a series of ILC moratoria that lasted until 2021. The FDIC then acted, opening the ILC window that then closed tight again when the Biden Administration took charge a couple of months later, leaving the problem as unresolved as ever.
The power of the ILC charter is clear not only in the RFI, but also in the marketplace where companies are already clamoring for the charter. Only a few of the new ILC applicants are the usual auto companies looking for a new way to reduce product-financing costs. Even this has long raised problematic questions about the intersection of banking and commerce, but nothing like those now raised by ILC demand from tech-platform companies, stablecoin issuers, fintech giants and large retailers.
Importantly, the FDIC can no longer make decisions on these applications with the abandon afforded during the years in which its status as an independent agency went unquestioned. Now, the FDIC reports to the White House, which is likely to view ILCs very differently than legacy banks would like.
President Trump instructed agencies to remove licensing obstacles to new entrants if doing so reduces competition. Does this mean opening ILCs to nonbank and even nonfinancial companies? The FDIC makes clear it could, especially if the applicant demonstrates that credit costs will go down if it gets its way or that the pricing or availability of “essential” goods and services will improve.
The Administration has also announced antitrust policy similar in many ways to the guidelines released in 2023 by the Department of Justice and Federal Trade Commission. The FDIC knows this too, asking a lot of questions addressing key issues in the guidelines about how best to handle dominant nonfinancial companies looking for an ILC.
Importantly, these questions come in concert with others about the extent to which rules generally covering IDIs would suffice for ILCs affiliated with dominant providers with formidable network-effect advantages. The FDIC for example seeks comment on whether it could approve ILCs for new providers but curtail certain market-power advantages with additional consumer-data rights or privacy standards. What, it asks, about traditional restrictions on inter-affiliate transactions and concentration limits, especially in captive ILCs? Answers to both the core antitrust questions and possible market-power mitigants are among the most strategy-critical in the RFI given the market power an unfettered tech-platform company might wield if granted access to deposit insurance and the payment system.
The President is also a huge crypto fan, delighting in stablecoins and demanding that obstacles to wide adoption disappear as quickly as possible. Thus, see the FDIC’s questions about the alliance between nonbank stablecoin issuers and new ILCs, and then contemplate how this would reshape critical factors such as payment-system access and return on investment.
Acting Chair Hill said last week that the agency will consider the fate of the flood of new applicants even as broader policy is considered. The RFI shows clearly that high-impact ILC policy may finally be at hand, but it remains to be seen if it will be crafted by transparent, consistent policy or on a case-by-case basis setting precedents that then define policy. Anyone with views on the key questions in the RFI might want to express them early — and often.