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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations business of making commercial loans.18
This change effectively closed the socalled nonbank bank exception implicit in the prior BHCA definition of bank. The CEBA created explicit exceptions from this definition for certain categories of federally insured institutions, including industrial banks, credit card banks, and limited purpose trust companies. The exclusions from the definition of the term bank created in 1987 by the CEBA remain in effect today. To be eligible for the CEBA
exception from the BHCA definition of bank, an industrial bank must have received a charter from one of the limited number of States eligible to issue industrial bank charters, and the law of the chartering State must have required Federal deposit insurance as of March 5, 1987. In addition, an industrial bank must meet one of the following criteria: i Not accept demand deposits,19 ii have total assets of less than $100 million, or iii have been acquired prior to August 10, 1987.20
Industrial banks are currently chartered in California, Hawaii, Minnesota, Nevada, and Utah. Under the CEBA, these States were permitted to grandfather existing industrial banks and continue to charter new industrial banks.21 Generally, industrial banks offer limited deposit products, a full range of commercial and consumer loans, and other banking services.
Although some industrial banks that have total assets of less than $100
million accept demand deposits, most industrial banks do not offer demand deposits. Negotiable order of withdrawal NOW accounts 22 may be 18 12

U.S.C. 1841c1.
D, 12 CFR part 204, implements the reserve requirements of section 19 of the Federal Reserve Act and defines a demand deposit as a deposit that is payable on demand, or issued with an original maturity or required notice period of less than seven days, or a deposit representing funds for which the depository institution does not reserve the right to require at least seven days written notice of an intended withdrawal. Demand deposits may be in the form of i checking accounts; ii certified, cashiers, tellers, and officers checks; and iii travelers checks and money orders that are primary obligations of the issuing institution. Other forms of accounts may also meet the definition of demand deposit. See 12 CFR 204.2b1.
20 12 U.S.C. 1841c2H.
21 Colorado was also grandfathered but it has no active industrial banks and has since repealed its industrial bank statute.
22 A NOW account is an interest-earning bank account whereby the owner may write drafts against the money held on deposit. NOW accounts were developed when certain financial institutions were prohibited from paying interest on demand deposits. The prohibition on paying interest on demand deposits was lifted when the FRB repealed its Regulation Q, effective July 21, 2011. See 76 FR
42015 July 18, 2011. Many provisions of the repealed Regulation Q were transferred to the FRBs Regulation D.
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offered by industrial banks.23 Industrial banks have branching rights, subject to certain State law constraints.
C. Industry Profile The industrial bank industry has evolved since the enactment of the CEBA. The industry experienced significant asset growth between 1987
and 2006 when total assets held by industrial banks grew from $4.2 billion to $213 billion.24 From 2000 to 2006, 24
industrial banks became insured.25 As of January 30, 2007, there were 58
insured industrial banks with $177
billion in aggregate total assets.26 The ownership structure and business models of industrial banks evolved as industrial banks were acquired or formed by a variety of commercial firms, including, among others, BMW, Target, Pitney Bowes, and Harley Davidson. For instance, certain companies established industrial banks, in part, to support the sale of the manufactured products e.g.
automobiles or other services, whereas certain retailers established industrial banks to issue general purpose credit cards. In addition, certain financial companies also formed or acquired industrial banks to provide access to Federal deposit insurance for brokerage customers cash management account balances. The cash balances their customers maintain with the securities affiliate are swept into insured, interestbearing accounts at the industrial bank subsidiary, thereby providing the brokerage customers with FDIC-insured deposits during the period of time that cash is held for future investment.
Since 2007, the industrial bank industry has experienced contraction both in terms of the number of institutions and aggregate total assets.
As of September 30, 2020, there were 23
industrial banks 27 with $173 billion in 23 12 U.S.C. 1832a. Only certain types of customers may maintain deposits in a NOW
account. 12 U.S.C. 1832a2.
24 Most of the growth during this period is attributable to financial services firms that controlled industrial banks offering sweep deposit programs to provide Federal deposit insurance for customers free cash balances and to American Express moving its credit card operations from its Delaware-chartered credit card bank to its Utahchartered industrial bank.
25 During this time period, the FDIC received 57
applications for Federal deposit insurance for industrial banks, 53 of which were acted on. Also during this time period, 21 industrial banks ceased to operate due to mergers, conversions, voluntary liquidations, and one failure Southern Pacific Bank, Torrance, CA, failed in 2003.
26 Of the 58 industrial banks existing at this time, 45 were chartered in Utah and California. The remaining industrial banks were chartered in Colorado, Hawaii, Minnesota, and Nevada.
27 Of the 23 industrial banks existing as of June 30, 2020, 14 were chartered in Utah, four in Nevada, three in California, one in Hawaii, and one
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aggregate total assets. Four industrial banks reported total assets of $10 billion or more; ten industrial banks reported total assets of $1 billion or more but less than $10 billion. The industrial bank sector today includes a diverse group of insured financial institutions operating a variety of business models. A
significant number of the existing industrial banks support the commercial or specialty finance operations of their parent company and are funded through non-core sources.
The reduction in the number of industrial banks from 2007 to 2020 was due to a variety of factors, including mergers, conversions, voluntary liquidations, and the failure of two small institutions.28 For business, marketplace, or strategic reasons, several industrial banks converted to commercial banks and thus became banks under the BHCA. Four industrial banks were approved in 2007
and 2008; however, none of those institutions exist today.29 Moratoria imposed by the FDIC and Congress as discussed below were also a factor.
Since the beginning of 2017, the FDIC
has received 12 Federal deposit insurance applications related to proposed industrial banks. Of those, two have been approved,30 eight have been withdrawn, and two are pending.31 The FDIC anticipates potential continued interest in the establishment of industrial banks, particularly with regard to proposed institutions that plan to pursue a specialty or limited purpose business model.
in Minnesota. An additional industrial bank, Nelnet Bank, began operations in November of 2020.
Square Financial was approved in March and has not opened for business.
28 Security Savings Bank, Henderson, Nevada, failed in February 2009, and Advanta Bank Corporation, Draper, Utah, failed in March 2010.
29 In each case, the institution pursued a voluntary transaction that led to termination of the respective institutions industrial bank charter. One institution converted to a commercial bank charter and continues to operate, one merged and the resultant bank continues to operate, and two terminated deposit insurance following voluntary liquidations. Such transactions generally result from proprietary strategic determinations by the institutions and their parent companies or investors.
30 In March of 2020, the FDIC approved the deposit insurance applications of Nelnet Bank and Square Financial. Square Financial has not yet commenced operations.
31 Decisions to withdraw an application are made at the discretion of the organizers and can be attributed to a variety of reasons. In some cases, an application is withdrawn and then refiled after changes are incorporated into the proposal. In such cases, the new application is reviewed by the FDIC
without prejudice. In other cases, the applicant may, for strategic reasons, determine that pursuing an insured industrial bank charter is not in the organizers best interests.

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