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Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations
banking services remains competitive and safe and sound.70 Moreover, the FDIC must consider the anticompetitive effects of a transaction when it is evaluating a notice under the Change in Bank Control Act CBCA or an application under the Bank Merger Act.71 Recognizing that the business models proposed by industrial banks are evolving e.g., the increasing interplay of services between the bank and its nonfinancial affiliates, the FDIC is issuing this rule in order to help ensure the safety and soundness of industrial banks that become subsidiaries of Covered Companies.
2. Lack of Federal Consolidated Supervision Many commenters that were critical of the proposed rule also argued that the potential future expansion of banks operating under the CEBA exception threatens the Federal safety net because the FDIC lacks the statutory tools to adequately examine and supervise industrial banks and their parents and affiliates. These commenters noted for instance the many ecommerce affiliate relationships of a large, overseas parent company. The FDIC sought comment on whether the commitments requiring examination and reporting included in the proposed rule were the best approach to gain transparency and identify any potential risk to the industrial banks. A number of commenters argued that the eight commitments in the FDICs proposed rule fail to achieve parity with the regime of consolidated supervision required for BHCs. Elements they viewed as lacking included consolidated capital and liquidity standards for the Covered Company, including both the industrial bank and all affiliated entities under common ownership, examination for compliance with the Volcker Rule requirements, sections 23A and 23B, and provisions in the Gramm-Leach-Bliley Act GLBA 72
on data safeguards and privacy of customer information. Such commenters also argued that the FDIC
does not have the authority to conduct full-scope examinations across any and all affiliates, including the parent company, in their own right. Several commenters suggested that the FDIC ask Congress to transfer the supervision of parent companies of industrial banks to the FRB to conduct consolidated supervision.
70 As part of its considerations, the FDIC may also seek the views of other Federal agencies.
71 See 12 U.S.C. 1817j7A, B; 1828c5.
72 Financial Services Modernization Act of 1999, Public Law 106102, 113 Stat. 1338 1999.

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As discussed in the proposed rule, the FDIC has both the authority and the capacity to effectively regulate industrial banks and their parent companies, and this rule strengthens the FDICs supervision. The FDIC uses its supervisory authorities to mitigate the risks posed to insured depository institutions whose parent companies are not subject to consolidated supervision.
In considering applications for deposit insurance and mergers, as well as change in control notices, the FDIC uses prudential conditions, as needed, to ensure sufficient autonomy and insulation of the insured depository institution from its parent and affiliates.
The FDIC also requires CALMAs, which generally exceed the minimum capital requirements for traditional community banks, and other written agreements between the FDIC and controlling parties of industrial banks. These agreements are enforceable under sections 8 and 50 of the FDI Act. In addition, under section 38A of the FDI
Act, 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.73
Subsection d of section 38A of the FDI
Act also 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.74 These prudential conditions and requirements will be embodied in written agreements consistent with the framework established by this final rule.
In addition, an important focus of the FDICs examination and supervision program is evaluating and mitigating risk to insured depository institutions from affiliates. This includes examining the insured depository institution for compliance with laws and regulations, including affiliate transaction limits and capital maintenance.75 The examination reviews envisioned under this final rule provide the basis and opportunity to more fully evaluate the institutions affiliate relationships. As noted above, most conflict situations affecting banks and their affiliates can be mitigated through the supervisory process and application of the restrictions in sections 23A and 23B of the Federal 73 12

U.S.C. 1831o1b.
12 U.S.C. 1831o1d.
75 See Report to the Congress and the Financial Stability Oversight Council Pursuant to Section 620
of the Dodd-Frank Act Sept. 2016. The 2016 joint report evaluated the risks of bank activities and affiliations, as required by section 620 of the DoddFrank Act.
74 See
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Reserve Act and need not pose excessive risk to the bank or the banking system.
The rule also strengthens the FDIC
supervisory framework in the area of contingency planning. This rule allows the FDIC to impose a contingency plan requirement, as needed, which will lead the FDIC, as well as the Covered Company and its subsidiary industrial bank, to a better understanding of the interdependencies, operational risks, and other circumstances or events that could create safety and soundness concerns for the insured industrial bank and attendant risk to the DIF. When imposed, this additional commitment will provide for recovery actions that address any financial or operational stress that may threaten the industrial bank.
Finally, the FDICs oversight and enforcement power extends to the parent or affiliates of any industrial bank whose activities affect that bank, further protecting the industrial bank from risky activities of affiliates.76
The FDIC has not found that industrial banks pose unique safety and soundness concerns based on the activities of the parent organization.
Industrial banks are subject to all of the same restrictions and requirements, regulatory oversight, and safety and soundness exams as any other kind of insured depository institution. As such, the risks posed are substantially similar to those of all other charter types. A
number of commenters noted that two industrial banks failed during the recent financial crisis. While these failed institutions were owned by parent companies not subject to Federal consolidated supervision, the failures were not the result of factors related to the industrial bank charter, as further discussed below.
Certain commenters also observed that several large corporate owners of industrial banks experienced stress during the 200809 financial crisis. In some cases, the parent organizations ultimately filed bankruptcy, while others pursued strategies to resolve the stress, including through access to government programs intended to alleviate the effects of the crisis within the financial services sector. These programs included the FDICs Temporary Liquidity Guarantee Program TLGP and the Troubled Asset Relief Program TARP administered by the Department of the Treasury. Desired access to these programs contributed to several companies pursuing conversions of an industrial bank to a commercial bank, which required approval of the 76 See
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12 U.S.C. 1820b and 1820b4A.

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