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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
exempt institutions, the Federal regulatory system for such institutions, and potential implications of subjecting the holding companies of such institutions to BHCA requirements. The GAO report noted that the industrial bank industry experienced significant asset growth in the 2000s and, during this time, the profile of industrial banks changed: Rather than representing a class of small, limited-purpose institutions, industrial banks became a diverse group of insured institutions with a variety of business lines.55
Ultimately, the GAO found that Federal regulation of the exempt institutions parent companies varied, noting that FDIC officials interviewed in connection with the study indicated that supervision of exempt institutions was adequate, but also noted the added benefit of Federal consolidated supervision. Finally, data examined by the GAO suggested that removing the BHCA exceptions would likely have a limited impact on the overall credit market, chiefly because the overall market share of exempt institutions was, at the time of the study, small.56
III. The Proposed Rule On March 31, 2020, the FDIC
published a notice of proposed rulemaking NPR or proposal to establish a supervisory framework for industrial banks and their parent companies that are not subject to Federal consolidated supervision.57 The proposed rule required certain conditions, commitments, and restrictions for each deposit insurance application approval, non-objection to a change in control notice, and merger application approval that would result in an industrial bank becoming a subsidiary of a company not subject to consolidated supervision by the FRB.
The proposal required such a Covered Company to enter into one or more written agreements with the FDIC and the industrial bank subsidiary. The commitments included:
Furnishing an initial listing, with annual updates, of the Covered Companys subsidiaries.
Consenting to FDIC examination of the Covered Company and its subsidiaries.
Submitting an annual report on the Covered Company and its subsidiaries, and such other reports as requested.
Maintaining such records as the FDIC deemed necessary.
55 Id.

at 13.
GAO did not recommend repeal of the exemption.
57 85 FR 17771 Mar. 31, 2020.
56 The
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Causing an independent annual audit of each industrial bank.
Limiting the Covered Companys representation on the industrial banks board of directors or managers board, as the case may be, to 25 percent.
Maintaining the industrial banks capital and liquidity at such levels as deemed appropriate and take other action necessary to provide the industrial bank with a resource for additional capital or liquidity.
Entering into a tax allocation agreement.58
The proposal also set forth the FDICs authority to require, as an additional commitment, a contingency plan that, among other items, provides a strategy for the orderly disposition of the industrial bank without the need for the appointment of a receiver or conservator.
Recently, a number of companies have considered options for providing financial products and services by establishing an industrial bank subsidiary. Many companies have publicly noted the benefits of deposit insurance and establishing a deposittaking institution. Although many interested parties operate business models focused on traditional community bank products and services, others operate unique business models, some of which are focused on innovative technologies and strategies, including newer business models employed by fintech firms that utilize novel or unproven products or processes.
Some of the companies recently exploring an industrial bank charter engage in commercial activities or have diversified business operations and activities that would not otherwise be permissible for BHCs under the BHCA
and applicable regulations. Given the continuing interest in the establishment of industrial banks, particularly with regard to proposed institutions that plan to implement specialty or limited purpose business models, including those focused on innovative technologies, the FDIC believes a rule is appropriate to provide necessary transparency for market participants.
Through this final rule, the FDIC is formalizing its framework to supervise industrial banks and mitigate risk to the DIF that may otherwise be presented in the absence of Federal consolidated supervision of an industrial bank and its parent company.
The FDIC has the authority to issue rules to carry out the provisions of the 58 See
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FDI Act,59 including rules to ensure the safety and soundness of industrial banks and to protect the DIF. Moreover, as the only agency with the power to grant or terminate deposit insurance, the FDIC
has a unique responsibility for the safety and soundness of all insured institutions.60 In granting deposit insurance, the FDIC must consider the factors in section 6 of the FDI Act; 61
these factors generally focus on the safety and soundness of the proposed institution and any risk it may pose to the DIF. The FDIC is also authorized to permit or deny various transactions by State nonmember banks, including merger and change in bank control transactions, based to a large extent on safety and soundness considerations and on its assessment of the risk to the DIF.62
The FDIC has the responsibility to consider filings based on statutory criteria and make decisions. Following the publication of the proposed rule, the FDIC approved two deposit insurance applications, by Square Financial and Nelnet, to create de novo industrial banks, the first such approvals since 2008. The FDIC determined that the applications satisfied the seven statutory factors under section 6 of the FDI Act, and the FDICs approval of deposit insurance for these industrial banks fulfilled the Agencys statutory responsibility. As part of both approvals, the FDIC required the industrial banks and their parent companies to enter into CALMAs and Parent Company Agreements to protect the industrial bank and address potential risks to the DIF.
The FDIC invited comment on all aspects of the March 2020 proposal, including questions posed by the Agency. The comment period for the proposed rule ended on July 1, 2020.63
59 The Corporation . . . shall have power . . .
to prescribe by its Board of Directors such rules and regulations as it may deem necessary to carry out the provisions of this chapter or of any other law which it has the responsibility of administering or enforcing except to the extent that authority to issue such rules and regulations has been expressly and exclusively granted to any other regulatory agency. 12 U.S.C. 1819aTenth.
60 See 12 U.S.C. 1815, 1818a.
61 Such factors are the financial history and condition of the depository institution, the adequacy of the depository institutions capital structure, the future earnings prospects of the depository institution, the general character and fitness of the management of the depository institution, the risk presented by such depository institution to the DIF, the convenience and needs of the community to be served by such depository institution, and whether the depository institutions corporate powers are consistent with the purposes of the FDI Act. See 12 U.S.C. 1816.
62 See 12 U.S.C. 1817j, 1828c, and 1828d.
63 Given the disruptions caused by the COVID19
global pandemic, the FDIC announced on May 27,
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