The Federal Deposit Insurance Corporation (FDIC) board of directors approved deposit insurance applications submitted by two of the major U.S. automakers to be industrial loan company (ILC) banks.
Specifically, the board gave the Ford Motor Company permission to establish Ford Credit Bank and it granted the General Motors Company approval to establish GM Financial Bank. Both Ford Credit Bank and GM Financial Bank will be Utah-chartered industrial banks.
Applications for deposit insurance are evaluated under a statutory framework that examines seven factors. Those factors include: the financial history and condition of the institution; the adequacy of the institution’s capital structure; the future earnings prospects of the institution; the general character and fitness of the management of the institution; the risk presented by the institution to the Deposit Insurance Fund; the convenience and needs of the community to be served by the institution; and whether the institution’s corporate powers are consistent with the purposes of the Federal Deposit Insurance Act.
Ford Credit Bank’s proposed business model will focus on providing automotive financing products nationwide, primarily through the purchase of retail installment sales contracts from independent Ford dealers. Funding will primarily consist of retail savings accounts and time deposits obtained through the bank’s website and mobile application.
FDIC staff said Ford Credit Bank satisfied the statutory factors for approval, with certain conditions. Among the conditions, Ford Credit Bank will be required to maintain a minimum 15 percent tier 1 leverage ratio, while the Ford Motor Company will be required to support the bank’s capital and liquidity positions.
Likewise. GM Financial Bank’s proposed business model will focus on providing automotive financing products nationwide, primarily through the purchase of retail installment sales contracts from GMF. Funding will mainly consist of savings accounts and time deposits via the bank’s website and a mobile application.
FDIC staff determined that GM Financial Bank satisfied the statutory factors for approval, with similar conditions as Ford.
The FDIC approval orders expire if Ford Credit Bank and GM Financial Bank are not established within 12 months, unless extended by the FDIC.
The Independent Community Bankers of America (ICBA) voiced their concern with these approvals, citing the systemic risk the ILC regulatory loophole poses to the banking system. They say it allows financial institutions to receive federal deposit insurance while avoiding full regulatory oversight.
“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. “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.”
In a recent white paper, ICBA argued that Congress should close the ILC loophole and said the FDIC should delay final decisions on pending ILC deposit insurance applications until all stakeholder feedback is fully incorporated.
The white paper stated that the loophole in the Bank Holding Company Act allows commercial and fintech companies to own or acquire ILCs chartered in a handful of states without being subject to federal consolidated supervision. The ICBA paper contends that this leaves a dangerous gap in safety and soundness oversight and introduces unnecessary systemic risk into the banking system.
With several ILC applications for deposit insurance pending before the FDIC, ICBA recently called on the agency to reject applications of ILCs that pose undue risks to the Deposit Insurance Fund and don’t serve the needs of their communities.