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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
D. Supervision Because industrial banks are insured State nonmember banks, they are subject to the FDICs Rules and Regulations, as well as other provisions of law, including restrictions under the Federal Reserve Act governing transactions with affiliates,32 anti-tying provisions of the BHCA,33 and insider lending regulations. Industrial banks are also subject to regular examination, including examinations focused on safety and soundness, Bank Secrecy Act and Anti-Money Laundering compliance, consumer protection including Community Reinvestment Act CRA compliance, information technology IT, and trust services, as appropriate. Pursuant to section 10b4
of the FDI Act, the FDIC has the authority to examine the affairs of any industrial bank affiliate, including the parent company, as may be necessary to determine the relationship between the institution and the affiliate, and the effect of such relationship on the depository institution.34
In addition, under section 38A of the FDI Act, as amended by the Dodd Frank Wall Street Reform and Consumer Protection Act Dodd-Frank Act,35 the FDIC is required to impose a requirement on companies that directly or indirectly own or control an industrial bank to serve as a source of financial strength for that institution.36
In addition, subsection d of section 38A of the FDI Act provides explicit statutory authority for the appropriate Federal banking agency to require reports from a controlling company to assess the ability of the company to comply with the source of strength requirement, and to enforce compliance by such company.37
Consistent with section 38A and other authorities under the FDI Act, the FDIC
has historically required capital and liquidity maintenance agreements CALMAs 38 and other written agreements between the FDIC and controlling parties of industrial banks as well as the imposition of prudential conditions when approving or nonobjecting to certain filings involving an 32 See
12 U.S.C. 1828j1A.
purposes of section 106 of the BHCA, an industrial bank is treated as a bank and is subject to the anti-tying restrictions therein. See 12 U.S.C.
1843f1.
34 12 U.S.C. 1820b4.
35 Public Law 111203, 124 Stat. 1376 July 21, 2010.
36 12 U.S.C. 1831o1b.
37 See 12 U.S.C. 1831o1d.
38 When the FDIC has required a CALMA, the capital levels required generally have exceeded the average thresholds required of community banks, due to the risks involved in the business plans of many industrial banks.
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industrial bank. Such written agreements provide required commitments for the parent company to provide financial resources and a means for the FDIC to pursue formal enforcement action under sections 8 and 50 of the FDI Act 39 should a party fail to comply with the agreements.
E. GAO and OIG Reports Beginning in 2004, the FDIC Office of Inspector General OIG conducted two evaluations and the Government Accountability Office GAO conducted a statutorily mandated study regarding the FDICs supervision of industrial banks, including its use of prudential conditions.40 An OIG evaluation published in 2004 focused on whether industrial banks posed greater risk to the DIF than other financial institutions, and reviewed the FDICs supervisory approach in identifying and mitigating material risks posed to those institutions by their parent companies. A July 2006
OIG evaluation reviewed the FDICs process for reviewing and approving industrial bank applications for deposit insurance and monitoring conditions imposed with respect to industrial bank business plans. A September 2005 GAO
study cited several risks posed to banks operating in a holding company structure, including adverse intercompany transactions, operations risk, and reputation risk. The GAO
study also discussed concerns about the FDICs ability to protect an industrial bank from those risks as effectively as the Federal consolidated supervisory approach under the BHCA.41
These reports acknowledged the FDICs supervisory actions to ensure the independence and safety and soundness of commercially owned industrial banks. The reports further acknowledged the FDICs authorities to protect an industrial bank from the risks posed by its parent company and affiliates. These authorities include the FDICs authority to conduct examinations, impose conditions on and enter into written agreements with an industrial bank parent company, terminate an industrial banks deposit 39 See
12 U.S.C. 1818 and 1831aa.
OIG Evaluation 04048, The Division of Supervision and Consumer Protections Approach for Supervising Limited-Charter Depository Institutions 2004, available at https
www.fdicig.gov/reports04/04-048.pdf; OIG
Evaluation 06014, The FDICs Industrial Loan Company Deposit Insurance Application Process 2006, available at https www.fdicig.gov/
reports06/06-014.pdf; U.S. Govt Accountability Office, GAO05621, Industrial Loan Corporations:
Recent Asset Growth and Commercial Interest Highlight Differences in Regulatory Authority Sept.
2005, available at https www.gao.gov/products/
GAO-05-621GAO-05-621.
41 GAO05621.
40 See
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insurance, enter into written agreements during the acquisition of an insured depository institution, and to pursue enforcement actions.
F. FDIC Moratorium and Other Agency Actions In 2005, Wal-Mart Banks application for Federal deposit insurance drew extensive public attention to the industrial bank charter. The FDIC
received more than 13,800 comment letters regarding Wal-Marts proposal.
Most of the commenters were opposed to the application. Commenters also raised broader concerns about industrial banks, including the risk posed to the DIF by industrial banks owned by parent companies that are not subject to Federal consolidated supervision.
Similar concerns were expressed by witnesses during three days of public hearings held by the FDIC in the spring of 2006 concerning the Wal-Mart application. Also in 2006, The Home Depot filed a change in control notice in connection with its proposed acquisition of EnerBank, a Utahchartered industrial bank. The FDIC
received approximately 830 comment letters regarding the notice, almost all of which expressed opposition to the proposed acquisition. Ultimately, the Wal-Mart application and The Home Depots notice were withdrawn.
To evaluate the concerns and issues raised with respect to the Wal-Mart and The Home Depot filings and industrial banks generally, on July 28, 2006, the FDIC imposed a six-month moratorium on FDIC action with respect to deposit insurance applications and change in control notices involving industrial banks.42 The FDIC suspended agency action in order to further evaluate i industry developments; ii the various issues, facts, and arguments raised with respect to the industrial bank industry;
iii whether there were emerging safety and soundness issues or policy issues involving industrial banks or other risks to the DIF; and iv whether statutory, regulatory, or policy changes should be made in the FDICs oversight of industrial banks in order to protect the DIF or important Congressional objectives.43
In connection with this moratorium, on August 23, 2006, the FDIC published a notice and request for comment on a wide range of issues concerning industrial banks.44 The FDIC received 42 See Moratorium on Certain Industrial Loan Company Applications and Notices, 71 FR 43482
Aug. 1, 2006.
43 Id. at 43483.
44 See Industrial Loan Companies and Industrial Banks, 71 FR 49456 Aug. 23, 2006. The Notice included questions concerning the current risk
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