Four and one-half years ago, we wondered if the three-year moratorium on FDIC insurance applications for new industrial loan companies (ILCs) and other restrictions placed upon ILCs by Franken-Dodd would spell the death knell for the ILC charter. While that moratorium expired a couple of years ago, no new ILC charter applications have been filed since then, and those few charter applications that were pending before the Care Bair put her Bairly legal 2006 moratorium on new ILC insurance-of-account applications have still not been approved by the FDIC. Therefore, a disinterested observer might be forgiven for assuming that the moribund charter might remain, as Fredo Corleone was to his brother, The Godfather, "dead to me."
However, American Banker reporter Ian McKendry thinks that for ILCs, perhaps there's a ray of sunshine peaking through the clouds (paid subscription required).
With optimism growing that de novo bank activity might rebound, some observers say attention could soon shift once again to the embattled industrial loan company charter.
[N]o federal law banning commercial or financial parents from pursuing ILCs has ever been enacted. And as the industry's continued recovery increases the likelihood of more new-bank applications overall, some observers believe interest in the ILC charter may ultimately pick up as well.
"You are going to see movement because there is pent-up demand," said Frank Pignanelli, who represents industrial banks as a partner at the Utah government relations firm Foxley & Pignanelli. "There is pent-up demand for capital to be used either through ILCs or other state-chartered institutions and I just don't think the FDIC can stop that any longer."
Other commentators think that just because a couple of de novo commercial bank applications have survived the FDIC gauntlet in the last five years, that is no reason to think that ILC de novo applications will fare as well, especially when the owner will be a commercial (as opposed to financial) business. They point to the fact that the two successful de novo bank charter applications involved unique situations, and clearly involved banks focused on serving specific communities where the need for a traditional community bank was clearly demonstrated (after considerable time and expense). The traditional attraction of the ILC charter has been to serve specific commercial businesses in financing their operations, including providing financing to customers who buy their products. The reason for Oh-My-Little-Sheila's original renegade moratorium, and the outcry that prompted and continues to "dog" the ILC charter, involved the efforts of retail giants like Home Depot and Wal-mart to enter the "banking" business, which scarred the living ca-ca out of the commercial banking business (which lives in mortal fear of the low-cost competitive advantage possessed by entities like Wal-mart as much as it does the tax-exempt status of credit unions). Critics see those concerns as still being the insurmountable roadblock to a resurgence of new ILCs that are FDIC-insured.
It's true, however, that there is no impediment built into federal laws for new ILC charters.
"We are pretty close to the possibility where you could see one of these applications fairly soon," said V. Gerard Comizio, a partner at Paul Hastings LLP. "It is now legal again for a nonfinancial company to get an industrial loan bank charter and deposit insurance for it."
Jerry's perfectly correct regarding legality. However, it was legal in 2006 for the FDIC to approve insurance of accounts applications for ILCs whose owners were engaged in commerce, and the FDIC punted, and has continued to punt, the ball down the field. Then again, Jerry's a guy whose opinion I respect, so I may have to turn my ILC frown upside down.
Or not. "Pretty close to the possibility where you could see" is, for me, a sight that is far beyond the visible horizon.