Also known as industrial banks, ILCs offer banking services to businesses. Most people may end up confusing them for banks, which shouldn’t be the case. According to their definition in the banking charter of the United States, they aren’t banks. If you look closely at their operations, you will note that they aren’t monitored by the Federal Reserve, as it’s the case with banks.
ILCs are state-chartered financial institutions whose owners are non-financial institutions (commercial firms, also called parent companies). They are not subject to the supervisory oversight that applies to commercial banks.
Your business can access loans, certificates of deposits, savings accounts, and negotiable orders to withdraw funds from ILCs. Except for demand deposit accounts. The net result is that you benefit from bank services customized for you.
Industrial Bank History
The history of industrial banks dates back to the 1900s when they emerged as small lease lenders. They provided uncollateralized loans to low and moderate-income workers. The industrial laborers could not obtain consumer loans from commercial banks.
In 1982 the Federal Deposit Insurance Corporation (FDIC) allowed deposit insurance to ILCs. States henceforth made it mandatory for ILCs to obtain FDIC insurance to keep their charters.
Over the years, ILCs have grown in structure and size, thanks to tech innovations. You can read more here to have a deeper understanding of why it’s essential to keep up with their complex growing structures. Today, roughly 25 ILCs spread across six states with a combined deposit of about $180 billion. The industrial banks are also broadening their scope beyond offering specialized financial services to parent companies. Some are offering a wide variety of loan and investment products to customers.
Industrial Loan Companies Regulation
Industrial banks’ regulation provides the critical difference between them and commercial banks. They operate on a special exception to the Bank Holding Company Act. They are not required to observe the separation of banking and commerce, which Congress has historically mandated for bank holding companies.
The Federal Reserve does not supervise parent companies of ILCs as it concerns allowed activities or investments, reporting, examination, or compulsory capital requirements. Instead, the FDIC and relevant state banking agency will supervise and examine the ILC subsidiary in isolation.
Other ILCs regulations are:
- low corporate tax rates
- non-existent usury caps
- friendly regulatory environment
- Federal Safety Net Protection such as deposit insurance
- access to the Federal Reserve’s discount window and payments system
- ILC charter allows funding loans with customer deposits
Benefits of Industrial Loan Companies
Your business can benefit from the wide variety of products offered at ILCs. From attractive loan and investment products at low rates to special discount offers that result from flexibility in regulation.
Listed below are some of the specific benefits your business will reap from ILCs:
- You may find very specialized services, especially when you require products since it exists for you as the parent company first.
- You can walk in anytime and process your business loan. There is no fear since customer deposits are fund loans.
- If the ILCs suffer any loss, the insurance by FDIC guarantees safety for your deposits and financial investments.
- Improved security on payments since payments are made via the Federal Reserve platform.
- You can optimize your revenues because of the presence of banking systems that support ILC with access to the expertise and experience you need; support team with customer-centric solutions, custom system programming, and increased security.
Industrial Loan Company Loophole
Provided ILCs meet the threshold criteria, they are exempt from the definition of a bank under the Bank Holding Company Act (BHCA). Consequently, parent companies that own the ILCs are not disallowed to operate commercial enterprises.
This exclusion allows for the blending of banking and commerce, which is prohibited for banks. This may create opportunities for irresponsible endorsements, an incorrect extension of government-backed bank safety nets, and increased chances for distortionary market power activities.
Further, this exemption handicaps banks and their holding companies, since the Federal Reserve does not supervise ILCs.
On the other hand, ILCs allow for a mix of banking and commercial that has net benefits. It permits firms to tap economies of scope and information efficiencies, diversify risks, offer client convenience, and rise in credit and financial services availability.
Regulations that the state and FDIC have placed on ILCs are sufficient to mitigate any risks.
Your parent business stands to gain from the business environment the six states have provided for ILCs. The regulations allow for a blend that is good for business. You can also take advantage of banking systems that have embraced ILCs. The sky’s the limit with ILCs.