ILCs rankle banks, but other priorities mute opposition

• Key insight: General Motors and Ford Motor Company received approval for industrial bank charters from the Federal Deposit Insurance Corp. on Thursday.
• Expert quote: “The issue of the industrial bank loophole continues to be a live one, although other, more pressing, concerns have taken precedence.” — Todd Baker, Columbia University/Broadmoor Consulting
• Forward look: The growing pressure on banks, including a new lawsuit from Trump against JPMorganChase, suggests that the industry pushback against ILC approvals will take a back seat to more urgent threats, such as a proposed 10% credit card rate cap, the growth of cryptocurrency and debanking investigations. 

WASHINGTON — The banking industry’s concern over industrial loan company charters reemerged Thursday after the Federal Deposit Insurance Corp. approved applications from automakers General Motors and Ford Motor Company. 

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The banking industry’s opposition to the approvals was relatively muted, however, which observers attribute to an industry that has more urgent issues to contend with. 

“The issue of the industrial bank loophole continues to be a live one, although other, more pressing, concerns have taken precedence,” said Todd Baker, senior fellow at Columbia University and managing principal of Broadmoor Consulting, adding that GM and Ford’s applications are for “plain vanilla” ILCs doing captive auto lending, meaning the ILCs don’t in themselves represent a serious competitive threat to banks. 

“The opposition to those two charters, while real, is muted,” he continued. “There is much greater concern with large consumer and tech platforms — think WalMart or Amazon — using industrial bank charters to do consumer and commercial banking.”

ILCs are regulated and insured at the federal level by the FDIC. Like traditional banks, ILCs offer various loan types and deposit accounts. But unlike traditional bank holding companies, the parent companies of ILCs are exempt from the Bank Holding Company Act, provided they technically abstain from offering nominally demand deposit accounts.

Banking trade groups and consumer advocates have both called that exemption a potential loophole that could be exploited by a large retailer to effectively offer banking services without being subject to the same consolidated supervision regime that banks are subject to. Banks have also argued that the ILC charter unnecessarily blurs the longstanding barrier between banking and commerce.

Following the Ford and General Motors approvals, the Independent Community Bankers of America issued a statement urging the FDIC to reconsider its approach to the applications, citing concerns about the mixture of commerce and banking, which can create conflicts of interest.

“When massive commercial-financial conglomerates exploit the ILC loophole, they inject unnecessary systemic risk into the banking system,” ICBA President and CEO Rebeca Romero Rainey said in the statement. “The FDIC has a statutory duty to reject applications that pose undue risk, and the ILC model is not the innovation proponents claim — it’s a relic of a loophole dating to the 1980s that blurs the line between banking and commerce. If a company wants to own a bank, it must play by the same rules as everyone else, and anything less is regulatory arbitrage at taxpayer risk.” 

The approvals come just ahead of another ILC application, which was filed by buy now/pay later service provider Affirm on Friday morning.  

Cathy O’Callahan, the CEO of Ford Credit framed the approval as simply allowing the company to better serve its customers by financing auto lending in-house, noting that the company already operates two banks in Europe. 

“An industrial bank is a specialized financial institution that allows Ford Credit to offer diverse banking services, most notably the ability to accept insured deposits to fund our operations,” O’Callahan said in a blog post. “Industrial banks are regulated with the same rigor as traditional commercial banks and comply with all federal and state consumer protection laws.

“This is a long-term strategic initiative that will expand our capabilities, enabling us to offer additional savings options to customers, which will over time help lower our cost of funding as well as broaden our financing offerings.”

General Motors declined to comment, but referred American Banker to its press release on the matter. 

“We appreciate the working relationships we have developed … during the application process and are eager to continue making progress in organizing the bank and commencing operations,” said Bill Donnelly, president and CEO of GM Financial Bank, GM’s new ILC. “Our primary focus at GM Financial Bank will be to offer beneficial, auto finance-focused banking products and services, which in turn helps us better serve our customers and dealers as well as support the broader GM enterprise to drive long -term value.” 

Baker said the growing influence of cryptocurrency companies in Washington, as well as heightened scrutiny over past debanking decisions and newly redoubled efforts by the administration to cap credit card interest rates at 10% simply pose more urgent threats to the industry as a whole. 

“The banking industry is under significant pressure from this Administration, which shows no fear about pressuring banks to pursue its policy goals,” Baker said. “The banking industry’s traditional GOP allies in Congress have become much less willing to take action to protect the banks, and in many cases — such as the GENIUS Act — have been swayed by the crypto industry into adopting laws violently opposed by the bank lobby.”