The Federal Deposit Insurance Corp. should provide more transparency as to how it assesses industrial bank applications instead of leaving applicants waiting in a prolonged review, agency board members said.
Since 2017, most of the applications seeking FDIC insurance for a proposed industrial bank were withdrawn by the applicant if they were not approved, instead of being formally denied by the FDIC. Most recently, automaker General Motors Co. withdrew its application in June after waiting for three and a half years.
Bank regulators' seeming reluctance to explicitly deny applications, even if they have clear deficiencies, is problematic, said Rohit Chopra, an FDIC board director and the director of the Consumer Financial Protection Bureau, during an FDIC board meeting July 30.
"I have huge concerns, and I know that is shared by others on this, about really the banking agencies' reluctance to deny facially deficient applications," Chopra said during the meeting. "And one of the reasons some of these applications sit for so long is because they cannot get approved, but we do not necessarily deny them in a timely fashion."
Chopra said industrial bank applications filed by wealth manager Edward Jones and General Motors had "serious facial deficiencies." They could have been denied promptly, and the FDIC should be able to clearly communicate why they were denied, which would help future applicants to navigate, Chopra said during the meeting.
The bank charter for industry loan companies (ILCs) has attracted interest from such nonfinancial companies as automakers, retailers and fintech companies, since its deposits are insured by the FDIC but the parent company is not subject to the supervision of federal bank regulators. The banking industry has long expressed concerns about the scheme leading to unfair competition and blurring the boundary between banking and commerce.
During the board meeting, the FDIC voted 3-2 to approve proposed amendments regarding how it will determine if an industrial bank is overly reliant on its parent company under a so-called captive structure. I ndustrial banks using a captive structure are typically set up to serve the interest of a parent company rather than function independently. Such a business model poses higher risks to the deposit insurance fund and may not serve the community broadly, given the limited scope of catering to the parent company.
As proposed, the FDIC will review each application to determine whether the industrial bank will have its own board and management team; a viable, stand-alone business model; and franchise value that is independent of the parent company.
While the amendments focus on the risks of captive structures, FDIC Vice Chairman Travis Hill described it as "an odd place" to begin with and said it would make sense for the FDIC to take a step back and engage in "a thoughtful, deliberative policymaking process" to provide transparency.
"I think our ultimate objective should be a policy statement or similar document that provides more clarity to the public on how we interpret the statutory factors in the ILC specific context and how that might apply with respect to certain types of applications rather than a rule focusing narrowly on one specific model," Hill said.