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Summary

Industrial Loan Companies (ILCs) are state-chartered and state-regulated depository institutions. The Federal Deposit Insurance Corporation (FDIC) may insure them. Their owners include nonfinancial companies that cannot own ("hold" stock of) a bank under the Bank Holding Company Act (i.e., to be a bank or financial holding company). Their primary federal regulator is not the Federal Reserve, which regulates bank holding companies, but the FDIC. While prominent large ILCs include subsidiaries of securities firms, their owners also include automotive and retailing companies active in financing automobiles and credit cards. The ILC form reflects a persistent tendency to combine the financing of a business with its operations. These mixtures are standard in many countries, especially Germany and Japan, but have generally fallen into disfavor in America. ILCs, therefore, have developed against a long U.S. tradition of the separation of banking and commerce. Ownership interests that nonfinancial firms may have in banks are generally 25% or less. Banks may generally hold only nominal amounts of corporate stock. ILCs evoke two major policy concerns. First, should Congress grant ILCs powers that would allow them to be nationwide banks while in competition with, community banks? Second, could the combination of state and FDIC regulation provide oversight comparable to that for nationwide banks, especially to bank holding companies? The interest shown by Wal-mart in controlling an ILC with nationwide potential has heightened interest in these issues. The 108th Congress considered these issues in two bills that passed the House. H.R. 758 would have allowed ILCs to provide and pay interest on business checking accounts, while H.R. 1375 would have allowed ILCs to open branches even without permission from the states of the new branches. Taken together, such measures could have transformed ILCs into a parallel banking system regulated primarily by a few states, yet allowing ILCs to grow into large institutions with commercial ownership. In 2005, Wal-Mart announced that it is again applying for an ILC charter, thus affecting any banking "regulatory relief" legislation in the 109th Congress. The current measure H.R. 1224, allowing business checking accounts, passed the House on May 24, 2005, in a way to prevent ILCs owned by nonfinancial businesses from becoming more bank-like via new accounts. This report provides context for the controversy by: (1) providing a historical overview of the separation of banking and commerce; (2) examining the nature of ILCs and their regulation; and (3) identifying and analyzing the relevant legislation in Congress. This report will be updated as events warrant.

Related Legislation:
• H.R.758
• H.R.1375
• H.R.1224

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