Proposed Amendments to Part 354, Parent Companies of Industrial Banks and Industrial Loan Companies
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FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 354
RIN 3064 – AF88
Parent Companies of Industrial Banks and Industrial Loan Companies
AGENCY: Federal Deposit Insurance Corporation
ACTION: Notice of Proposed Rulemaking.
Summary:
The Federal Deposit Insurance Corporation is seeking comments on proposed
amendments to its regulation governing parent companies of industrial banks and industrial loan
companies. Part 354, which was adopted in December 2020, requires certain conditions and
written commitments in situations that would result in an industrial bank or industrial loan
company becoming a subsidiary of a company that is not subject to consolidated supervision by
the Federal Reserve Board.
The proposed amendments would revise the definition of “Covered Company” to (1)
include conversions involving a proposed industrial bank or industrial loan company under
section 5 of the Home Owners’ Loan Act, or other transactions as determined by the FDIC; (2)
ensure that a parent company of an industrial bank subject to a change of control, or a parent
company of an industrial bank subject to a merger in which it is the resultant entity, would be
subject to part 354; and (3) provide the FDIC the regulatory authority to apply part 354 to other
situations where an industrial bank would become a subsidiary of a company that is not subject
to Federal consolidated supervision. Additionally, the proposed amendments would clarify the
relationship between written commitments and the FDIC’s evaluation of the relevant statutory
factors, and would set forth additional criteria that the FDIC would consider when assessing the
art 354 to other
situations where an industrial bank would become a subsidiary of a company that is not subject
to Federal consolidated supervision. Additionally, the proposed amendments would clarify the
relationship between written commitments and the FDIC’s evaluation of the relevant statutory
factors, and would set forth additional criteria that the FDIC would consider when assessing the
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risks presented to an industrial bank or industrial loan company by its parent company and any
affiliates and evaluating the institution’s ability to function independently of the parent company
and any affiliates.
Dates: Comments will be accepted until [INSERT DATE 60 DAYS AFTER PUBLICATION IN
THE FEDERAL REGISTER].
ADDRESSES: Interested parties are invited to submit written comments, identified by RIN
[3064–AF88], by any of the following methods:
• Agency Website: https://www.fdic.gov/resources/regulations/federal-register-publications/.
Follow the instructions for submitting comments on the agency website.
• Email: comments@fdic.gov. Include RIN [3064–AF88] in the subject line of the message.
• Mail: James P. Sheesley, Assistant Executive Secretary, Attention: Comments—RIN–AF88,
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington, DC 20429.
• Hand Delivery: Comments may be hand delivered to the guard station at the rear of the 550
17th Street NW building (located on F Street NW) on business days between 7 a.m. and 5 p.m.
• Public Inspection: Comments received, including any personal information provided, may be
posted without change to https://www.fdic.gov/resources/regulations/federal-
registerpublications/. Commenters should submit only information that the commenter wishes
to make available publicly. The FDIC may review, redact, or refrain from posting all or any
portion of any comment that it may deem to be inappropriate for publication, such as irrelevant
or obscene material
n provided, may be
posted without change to https://www.fdic.gov/resources/regulations/federal-
registerpublications/. Commenters should submit only information that the commenter wishes
to make available publicly. The FDIC may review, redact, or refrain from posting all or any
portion of any comment that it may deem to be inappropriate for publication, such as irrelevant
or obscene material. The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally identify the number of
identical or substantially identical comments represented by the posted example. All comments
that have been redacted, as well as those that have not been posted, that contain comments on the
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merits of the proposed rule will be retained in the public comment file and will be considered as
required under all applicable laws. All comments may be accessible under the Freedom of
Information Act.
FOR FURTHER INFORMATION CONTACT:
Catherine Topping, Counsel, (202) 898-3975, ctopping@fdic.gov; Gregory Feder, Counsel,
(202) 898-8724, gfeder@fdic.gov; Amy Ledig, Senior Attorney, (571) 213-3644,
aledig@fdic.gov, Legal Division; Scott Leifer, Senior Review Examiner, (703) 632-9153,
sleifer@fdic.gov, Division of Risk Management Supervision; Dawnelle Guyette, Senior Policy
Analyst, (816) 234-8130, dguyette@fdic.gov, Division of Depositor and Consumer Protection;
Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I
) 213-3644,
aledig@fdic.gov, Legal Division; Scott Leifer, Senior Review Examiner, (703) 632-9153,
sleifer@fdic.gov, Division of Risk Management Supervision; Dawnelle Guyette, Senior Policy
Analyst, (816) 234-8130, dguyette@fdic.gov, Division of Depositor and Consumer Protection;
Federal Deposit Insurance Corporation, 550 17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
I.
Policy Objectives
The Federal Deposit Insurance Corporation (FDIC) monitors, evaluates, and takes
necessary action to ensure the safety and soundness of State nonmember banks,1 including
industrial banks and industrial loan companies (together, industrial banks).2 Through part 354 of
the FDIC Rules and Regulations (part 354),3 the FDIC formalized its framework to supervise
industrial banks and mitigate risk to the Deposit Insurance Fund (DIF) that may otherwise be
1 See, e.g., 12 U.S.C. 1811, 1818, 1821, 1831o-1, 1831p-1.
2 Herein, the term “industrial bank” means any insured State-chartered bank that is an industrial bank, industrial loan
company, or other similar institution that is excluded from the definition of “bank” in the Bank Holding Company
Act pursuant to 12 U.S.C. 1841(c)(2)(H). State laws refer to both industrial loan companies and industrial banks.
For purposes of this proposed rule, the FDIC is treating the two types of institutions as the same. The amended rule
would not apply to limited purpose trust companies and credit card banks that also are exempt from the definition of
“bank” pursuant to section 1841(c)(2).
3 12 CFR part 354. See 86 FR 10703 (Feb. 23, 2021).
s refer to both industrial loan companies and industrial banks.
For purposes of this proposed rule, the FDIC is treating the two types of institutions as the same. The amended rule
would not apply to limited purpose trust companies and credit card banks that also are exempt from the definition of
“bank” pursuant to section 1841(c)(2).
3 12 CFR part 354. See 86 FR 10703 (Feb. 23, 2021).
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presented in the absence of Federal consolidated supervision4 of an industrial bank and its parent
company.
Industrial banks are exempted from the definition of “bank” for purposes of the Bank
Holding Company Act (BHCA). As a result, both financial and commercial companies can
control an industrial bank without being subject to the BHCA’s activities restrictions or Federal
Reserve Board (FRB) supervision and regulation. Some of the companies recently pursuing an
industrial bank charter engage in commercial activities or have diversified business operations
and activities that would not otherwise be permissible for bank holding companies (BHCs) under
the BHCA and applicable regulations. There has been 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 where the operations of the
proposed industrial bank would be interconnected with, or reliant on, the operations of the parent
company or its affiliates. The FDIC is concerned about increased risk to the DIF in situations
where there is a significant degree of dependence on the parent company or affiliates,
particularly with respect to the primary business functions of the proposed institution. The FDIC
is also focused on ensuring that such business models would appropriately serve the convenience
and needs of the community
or its affiliates. The FDIC is concerned about increased risk to the DIF in situations
where there is a significant degree of dependence on the parent company or affiliates,
particularly with respect to the primary business functions of the proposed institution. The FDIC
is also focused on ensuring that such business models would appropriately serve the convenience
and needs of the community.
Dependent relationships raise supervisory concerns because the industrial bank’s
operations and condition may be vulnerable to any financial distress or operational disruptions at
the parent organization. In such circumstances, there may be undue pressures or influences from
4 In the context of this proposed rule, “Federal consolidated supervision” refers to the supervision of a parent
company and its subsidiaries by the Federal Reserve Board (FRB). Consolidated supervision of a bank holding
company (BHC) by the FRB encompasses the parent company and its subsidiaries, and allows the FRB to
understand “the organization’s structure, activities, resources, and risks, as well as to address financial, managerial,
operational, or other deficiencies before they pose a danger to the BHC’s subsidiary depository institutions.” See SR
Letter 08-9, “Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign
Banking Organizations” (Oct. 16, 2008).
FRB to
understand “the organization’s structure, activities, resources, and risks, as well as to address financial, managerial,
operational, or other deficiencies before they pose a danger to the BHC’s subsidiary depository institutions.” See SR
Letter 08-9, “Consolidated Supervision of Bank Holding Companies and the Combined U.S. Operations of Foreign
Banking Organizations” (Oct. 16, 2008).
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the parent organization that impair the industrial bank’s ability to maintain independent oversight
and decision-making at the bank level. Further, where financial distress is experienced across
the organization, concerns may develop that negatively impact capital and liquidity levels,
earnings prospects, and the capacity of affiliates to fulfill their service commitments or other
obligations to the industrial bank.
In addition, significant resolution concerns may be presented if the industrial bank’s
parent company fails or otherwise faces significant financial difficulty that impairs its ability to
perform under the agreements required by part 354. An industrial bank could have its business
operations disrupted if critical support services provided by a parent company or its affiliates are
lost. Additionally, overreliance on parent company support for daily operations could leave the
industrial bank with little independent franchise value in the event of a failure. In such a case,
the FDIC as receiver potentially would be faced with limited and more costly resolution options,
such as establishing a bridge bank or employing a deposit payout.
In light of these concerns, the FDIC has identified a number of changes to part 354 that
are warranted to clarify and enhance the supervisory framework with respect to industrial banks
alue in the event of a failure. In such a case,
the FDIC as receiver potentially would be faced with limited and more costly resolution options,
such as establishing a bridge bank or employing a deposit payout.
In light of these concerns, the FDIC has identified a number of changes to part 354 that
are warranted to clarify and enhance the supervisory framework with respect to industrial banks.
The proposed rule addresses the FDIC’s concerns regarding the potential risk presented to an
industrial bank subsidiary from its parent organization, including the relevant interdependencies,
operational risks, and other circumstances or events that could create safety and soundness
concerns and attendant risk to the DIF. The proposed amendments would incorporate criteria
that the FDIC will consider in assessing the overall impact of a parent company and its affiliates
on its industrial bank subsidiary and would provide notice and transparency to those companies
that would seek to establish or acquire an industrial bank.
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The FDIC has received a limited number of filings where the parent company would
control an industrial bank as a result of a conversion pursuant to section 5(i)(5) of the Home
Owners’ Loan Act (HOLA).5 Such proposed conversions from a Federal savings association to
an industrial bank, although infrequent, raise similar issues to those raised by the filings currently
triggering the applicability of part 354, namely that such conversions also would result in an
industrial bank becoming a subsidiary of a company that is not subject to Federal consolidated
supervision.6 Consequently, the FDIC is proposing to amend the definition of “Covered
Company” to include filings made pursuant to section 5(i)(5) of the HOLA
ssues to those raised by the filings currently
triggering the applicability of part 354, namely that such conversions also would result in an
industrial bank becoming a subsidiary of a company that is not subject to Federal consolidated
supervision.6 Consequently, the FDIC is proposing to amend the definition of “Covered
Company” to include filings made pursuant to section 5(i)(5) of the HOLA.
The FDIC is also proposing to amend the definition of “Covered Company” in order to
ensure that if a parent company of an industrial bank organized before April 1, 2021 is subject to
a change of control, or such parent company is subject to a merger in which it is the resultant
entity, it would be subject to part 354. Finally, the FDIC is proposing an amendment that would
provide the FDIC the regulatory authority to apply part 354 to other situations where an
industrial bank would become a subsidiary of a company that is not subject to Federal
consolidated supervision.
II.
Background
A.
2020-2021 Rulemaking—Part 354
On February 23, 2021, the FDIC published a final rule governing the parent companies of
industrial banks, codified at part 354.7 Part 354 took effect on April 1, 2021. The rule requires
certain conditions and written commitments for each deposit insurance application approval,
5 12 U.S.C. 1464(i)(5).
6 The FDIC considers the statutory factors applicable to each filing it receives. However, as a general matter, when
the purpose for a filing is to avoid the application of requirements imposed by another Federal banking agency, such
a purpose will be viewed negatively within the context of the FDIC’s consideration of the relevant factors.
7 86 FR 10703 (Feb. 23, 2021).
.C. 1464(i)(5).
6 The FDIC considers the statutory factors applicable to each filing it receives. However, as a general matter, when
the purpose for a filing is to avoid the application of requirements imposed by another Federal banking agency, such
a purpose will be viewed negatively within the context of the FDIC’s consideration of the relevant factors.
7 86 FR 10703 (Feb. 23, 2021).
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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 that is not subject to Federal consolidated
supervision by the FRB. The rule also requires that, before any industrial bank may become a
subsidiary of a company that is not subject to Federal consolidated supervision, such industrial
bank and company must enter into one or more written agreements with the FDIC. The rule
additionally requires the FDIC’s prior written approval for certain actions proposed by the
industrial bank, such as making a material change in its business plan. The rule applies to any
industrial bank that becomes a subsidiary of a company not subject to Federal consolidated
supervision as a result of a change in bank control or merger, or that is granted deposit insurance,
on or after April 1, 2021.
B.
The Industrial Bank Charter
Under the Federal Deposit Insurance Act (FDI Act), industrial banks are “State banks”8
and all of the existing FDIC-insured industrial banks are “State nonmember banks.”9 As a result,
the FDIC is the appropriate Federal banking agency for industrial banks.10 Each industrial bank
is also regulated by its respective State chartering authority. The FDIC exercises the same
supervisory and regulatory authority over industrial banks as it does over other State nonmember
banks and State savings associations
DIC-insured industrial banks are “State nonmember banks.”9 As a result,
the FDIC is the appropriate Federal banking agency for industrial banks.10 Each industrial bank
is also regulated by its respective State chartering authority. The FDIC exercises the same
supervisory and regulatory authority over industrial banks as it does over other State nonmember
banks and State savings associations.
The Competitive Equality Banking Act of 1987 exempted industrial banks from the
definition of “bank” in the BHCA.11 As a result, parent companies that control industrial banks
are not BHCs under the BHCA and are not subject to the BHCA’s activities restrictions or FRB
8 12 U.S.C. 1813(a)(2).
9 12 U.S.C. 1813(e)(2).
10 12 U.S.C. 1813(q)(2).
11 Pub. L. 100-86, 101 Stat. 552 (Aug. 10, 1987).
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supervision and regulation. Industrial banks today are owned by both financial firms and
commercial firms.
C.
Industry Profile
As of June 27, 2024, there were 23 industrial banks12 with $232 billion in aggregate total
assets. Six industrial banks reported total assets of $10 billion or more; seven 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 sources other than
core deposits.
Since 2008, there have been two newly established industrial banks: Nelnet Bank,
Draper, Utah, and Square Financial Services, Inc., Salt Lake City, Utah, which became FDIC-
insured- in November 2020 and March 2021, respectively. The applications for Nelnet Bank and
Square Financial Services, Inc
nance operations of their parent company and are funded through sources other than
core deposits.
Since 2008, there have been two newly established industrial banks: Nelnet Bank,
Draper, Utah, and Square Financial Services, Inc., Salt Lake City, Utah, which became FDIC-
insured- in November 2020 and March 2021, respectively. The applications for Nelnet Bank and
Square Financial Services, Inc. were approved in March 2020.13 As part of the approvals, the
FDIC required each industrial bank and their parent companies to enter into written agreements
with the FDIC that contained provisions consistent with the requirements of part 354.
When part 354 was finalized on February 23, 2021, there were six pending industrial
bank deposit insurance applications. Since that time, the FDIC received three additional
industrial bank deposit insurance applications. Of the nine applications received since March
12 Of the 23 industrial banks existing as of June 27, 2024, 15 were chartered in Utah, three in Nevada, three in
California, one in Hawaii, and one in Minnesota.
13 The FDIC Board approved an industrial bank deposit insurance application for Thrivent Bank, subject to
conditions and written agreements, on June 20, 2024. The bank has not yet commenced operations.
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2020, one was approved, six have been withdrawn,14 one was returned as substantially
incomplete, and one remains pending. 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.
D
e 20, 2024. The bank has not yet commenced operations.
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2020, one was approved, six have been withdrawn,14 one was returned as substantially
incomplete, and one remains pending. 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.
D.
Supervision Framework
Because industrial banks are insured State nonmember banks, they are subject to the
FDIC Rules and Regulations, as well as other provisions of law, including restrictions under the
Federal Reserve Act governing transactions with affiliates,15 anti-tying provisions of the
BHCA,16 and insider lending regulations.17 Industrial banks are also subject to regular
examination, including examinations focused on safety and soundness; anti-money laundering
and countering the financing of terrorism compliance; consumer protection, including fair
lending; Community Reinvestment Act; information technology; and trust services, as
appropriate. Pursuant to section 10(b)(4) 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.18
14 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.
15 See 12 U.S.C. 1828(j)(1)(A); 12 CFR part 223
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.
15 See 12 U.S.C. 1828(j)(1)(A); 12 CFR part 223.
16 For 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. 1843(h)(1).
17 See 12 CFR 337.3.
18 12 U.S.C. 1820(b)(4).
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In addition, under section 38A of the FDI Act,19 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.20 Subsection (d) of section 38A 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.21
Part 354 conforms to the FDIC’s historical practice of requiring capital and liquidity
maintenance agreements (CALMAs) and other written agreements between the FDIC and
controlling parties of industrial banks as well as the imposition of prudential conditions when
approving or non-objecting to certain filings involving an industrial bank.
III
ment, and to enforce compliance by such company.21
Part 354 conforms to the FDIC’s historical practice of requiring capital and liquidity
maintenance agreements (CALMAs) and other written agreements between the FDIC and
controlling parties of industrial banks as well as the imposition of prudential conditions when
approving or non-objecting to certain filings involving an industrial bank.
III. Rulemaking Authority
The FDIC amends its regulations under the general rulemaking authority prescribed in
section 9 of the FDI Act22 and under specific authority granted by the FDI Act and other
statutes.23 These include section 5 of the FDI Act, which authorizes the FDIC to grant deposit
insurance, based on the factors in section 6 of the FDI Act; these factors generally focus on the
safety and soundness of the proposed institution, any risk it may pose to the DIF, and the
convenience and needs of the community.24 The FDIC is also authorized to permit or deny
various transactions by State nonmember banks, including merger and change in bank control
transactions.25 Conversions from a Federal savings association to an industrial bank, pursuant to
19 Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).
20 12 U.S.C. 1831o-1(b).
21 12 U.S.C. 1831o-1(d).
22 12 U.S.C. 1819.
23 See, e.g., 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a) (Seventh) and (Tenth), 1820(g), 1831o-1, 3108, 3207.
24 12 U.S.C. 1816.
25 See 12 U.S.C. 1817(j) and 1828(c).
gs association to an industrial bank, pursuant to
19 Pub. L. 111-203, 124 Stat. 1376 (July 21, 2010).
20 12 U.S.C. 1831o-1(b).
21 12 U.S.C. 1831o-1(d).
22 12 U.S.C. 1819.
23 See, e.g., 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a) (Seventh) and (Tenth), 1820(g), 1831o-1, 3108, 3207.
24 12 U.S.C. 1816.
25 See 12 U.S.C. 1817(j) and 1828(c).
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section 5(i)(5) of the HOLA,26 are also subject to review and approval by the FDIC, as the
resulting institution would be an industrial bank that is not subject to Federal consolidated
supervision. While the statutory factors differ by filing type, safety and soundness
considerations and other risk attributes are commonly addressed. In addition, section 39 of the
FDI Act charges the FDIC with ensuring that the institutions it supervises operate in a safe and
sound manner by prescribing standards through regulations or guidelines.27 Finally, section 38A
of the FDI Act empowers the FDIC to ensure that a company that controls an industrial bank
serves as a source of financial strength for that institution.
IV.
Description of the Proposed Amendments to Part 354
A.
Revisions to the Scope of Part 354’s Application
1. Amending the definition of “Covered Company” to expressly include filings
made pursuant to section 5(i)(5) of the HOLA
Part 354 applies to Covered Companies and industrial banks controlled by a Covered
Company
al bank
serves as a source of financial strength for that institution.
IV.
Description of the Proposed Amendments to Part 354
A.
Revisions to the Scope of Part 354’s Application
1. Amending the definition of “Covered Company” to expressly include filings
made pursuant to section 5(i)(5) of the HOLA
Part 354 applies to Covered Companies and industrial banks controlled by a Covered
Company. “Covered Company” is defined in part 354 to mean “any company that is not subject
to Federal consolidated supervision by the FRB and that controls an industrial bank: (1) as a
result of a change in bank control pursuant to section 7(j) of the FDI Act; (2) as a result of a
merger transaction pursuant to section 18(c) of the FDI Act; or (3) that is granted deposit
insurance by the FDIC pursuant to section 6 of the FDI Act, in each case on or after April 1,
2021.”28 The effect of this definition, together with the scope provisions of § 354.1, is that
industrial banks organized on or after April 1, 2021, are subject to part 354, while those
organized prior to April 1, 2021, (legacy institutions) are not subject to part 354 unless a Covered
Company comes to control such an industrial bank through one of the three enumerated routes.
26 12 U.S.C. 1464(i)(5).
27 FDI Act § 39, 12 U.S.C. 1831p-1.
28 12 CFR 354.2.
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As a result, a company that controls an industrial bank that has converted from a Federal savings
association charter would not be a Covered Company.
Section 354.6 currently29 makes it clear that the adoption of part 354 does not impair the
FDIC’s authority to address supervisory concerns. Accordingly, even if part 354 does not apply
to a legacy institution or to an industrial bank or its parent company that do not satisfy one of the
three prongs of the Covered Company definition, the FDIC may impose some or all of the
requirements of part 354 on a given institution as warranted
that the adoption of part 354 does not impair the
FDIC’s authority to address supervisory concerns. Accordingly, even if part 354 does not apply
to a legacy institution or to an industrial bank or its parent company that do not satisfy one of the
three prongs of the Covered Company definition, the FDIC may impose some or all of the
requirements of part 354 on a given institution as warranted. Such an approach makes sense
because the requirements of part 354 reflect the supervisory practices of the FDIC with respect to
industrial banks and their parent companies, codified to provide notice and transparency to those
companies that would seek to establish or acquire an industrial bank.
As noted above, the FDIC has received a limited number of filings where the parent
company would control an industrial bank as a result of a conversion pursuant to section 5(i)(5)
of the HOLA.30 Section 5(i)(5) allows a Federal savings association to convert to a State bank
with the approval of the appropriate State bank supervisor and the appropriate Federal banking
agency if the resulting State bank will meet all financial, management, and capital requirements
applicable to the resulting national or State bank.31 Such proposed conversions from a Federal
savings association to an industrial bank, although infrequent, raise similar issues to those raised
by the filings currently triggering application of part 354, namely that such conversions also
would result in an industrial bank becoming a subsidiary of a company that is not subject to
Federal consolidated supervision. As a result, the FDIC has determined that such conversions, if
approved, should be subject to the provisions of part 354, as if part 354 applied.
29 As proposed, §354.6 would be renumbered to § 354.7.
30 12 U.S.C. 1464(i)(5).
31 12 U.S.C. 1464(i)(5)(A), (B).
bsidiary of a company that is not subject to
Federal consolidated supervision. As a result, the FDIC has determined that such conversions, if
approved, should be subject to the provisions of part 354, as if part 354 applied.
29 As proposed, §354.6 would be renumbered to § 354.7.
30 12 U.S.C. 1464(i)(5).
31 12 U.S.C. 1464(i)(5)(A), (B).
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Consequently, the FDIC is proposing to amend the definition of “Covered Company” to
expressly include filings made pursuant to section 5(i)(5) of the HOLA. While § 354.6 preserves
the FDIC’s authority to impose such conditions as it may deem necessary in connection with a
conversion under section 5(i)(5) of the HOLA to an industrial bank, the FDIC believes specific
regulatory language is appropriate.
2. Change in control or merger involving the parent company of an industrial
bank
The FDIC is proposing a second amendment to the definition of “Covered Company” to
include companies that control an industrial bank if, on or after the effective date of the
amendment to the definition of “Covered Company,” there is a change in control at the parent
company or there is a merger transaction in which the parent company is the resultant entity.
The proposed amendment fills an unintended gap that results from the construction of the current
definition of “Covered Company.” Currently, industrial banks and their parent companies would
not be subject to part 354 unless the parent company controls the industrial bank as a result of
one of three triggering events enumerated in the “Covered Company” definition, in each case
after the effective date of part 354. This approach divides industrial banks into (1) legacy
institutions to which part 354 does not apply, on the one hand and (2) legacy institutions that
become subject to part 354 as a result of one of the three triggers, or new institutions, on the
other, and (3) de novo industrial banks
g events enumerated in the “Covered Company” definition, in each case
after the effective date of part 354. This approach divides industrial banks into (1) legacy
institutions to which part 354 does not apply, on the one hand and (2) legacy institutions that
become subject to part 354 as a result of one of the three triggers, or new institutions, on the
other, and (3) de novo industrial banks.
The gap results where there is a change in control or merger that occurs at or above the
level of the parent company that results in a change in the person that controls the parent
company but does not result in a change in the relationship between the industrial bank and its
parent company. Similarly, if the parent company were a party to a merger in which it is the
resultant entity, then new management with a new plan for the industrial bank could be installed.
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The parent company would continue to control the industrial bank, but not as a result of one of
the trigger events, thus failing to make the parent company a Covered Company subject to part
354.
The FDIC has an interest in being able to review changes that impact the parent’s control
of the industrial bank. This interest is recognized specifically in the Change in Bank Control
Act, which requires the prior FDIC approval of the acquisition of direct or indirect control of a
State nonmember bank.32 The proposed amendment would ensure that a parent company subject
to such a change of control, or a parent company subject to a merger in which it is the resultant
entity, would be subject to part 354.
3. Applying Part 354 to situations in which an industrial bank would become a
subsidiary of a company that is not subject to Federal consolidated
supervision
Finally, the FDIC is proposing an amendment that would provide the FDIC the regulatory
authority to apply part 354 to any other situation where an industrial bank would become a
subsidiary of a company that is not subject to Federal consolidated supervision
to situations in which an industrial bank would become a
subsidiary of a company that is not subject to Federal consolidated
supervision
Finally, the FDIC is proposing an amendment that would provide the FDIC the regulatory
authority to apply part 354 to any other situation where an industrial bank would become a
subsidiary of a company that is not subject to Federal consolidated supervision. The FDIC
recognizes that such an amendment could potentially lead to the application of this part to a
legacy institution, despite the April 2021 effective date of part 354. Accordingly, the FDIC
proposes to allow a filer of an application or notice, or participant in a transaction, an opportunity
to present its views in writing if the company does not agree with the FDIC’s determination to
apply part 354 to a particular filing. The proposed amendments to part 354 would make clear
that such a written filing should be submitted in accordance with part 303 of the FDIC Rules and
Regulations.33
32 12 U.S.C. 1817(j)(1).
33 See 12 CFR part 303.1 to .19.
15
This type of provision, with the opportunity for a filer to express its views regarding the
FDIC’s determination, is not without precedent in the FDIC Rules and Regulations.34 The FDIC
believes the proposed amendment properly balances the FDIC’s need for the flexibility to be able
to respond to situations that it cannot foresee with a filer’s need for an avenue to react and
respond to the FDIC’s determinations.
Question 1: What situations—other than those that require a notice subject to section
7(j) of the FDI Act or an application subject to sections 5 or 18(c) of the FDI Act or section
5(i)(5) of the HOLA—present similar risks such that they should also subject the industrial bank
and its parent company to part 354?
B
filer’s need for an avenue to react and
respond to the FDIC’s determinations.
Question 1: What situations—other than those that require a notice subject to section
7(j) of the FDI Act or an application subject to sections 5 or 18(c) of the FDI Act or section
5(i)(5) of the HOLA—present similar risks such that they should also subject the industrial bank
and its parent company to part 354?
B.
Clarifying the Relationship between Written Commitments and the FDIC’s
Evaluation of Statutory Factors
The FDIC has the responsibility to consider filings based on statutory criteria. For
example, when reviewing an application for deposit insurance, the FDIC must consider the
factors enumerated in section 6 of the FDI Act.35 These factors generally focus on the safety and
soundness of the proposed institution, any risk it may pose to the DIF, and the convenience and
needs of the community. The FDIC is also authorized to permit or deny other types of
transactions by State nonmember banks, including those proposed in merger applications and
change in bank control notices, as well as in HOLA conversion applications, based on an
evaluation of the applicable statutory factors relevant to the underlying filing.36 While the
34 See 12 CFR 324.5, 329.2 (allowing notice and opportunity to respond to FDIC determination that additional
capital or liquidity is required). The Office of the Comptroller of the Currency (OCC) and FRB have similar
provisions. See 12 CFR 3.404, 50.2 (OCC); 249.2, 263.202 (FRB)
statutory factors relevant to the underlying filing.36 While the
34 See 12 CFR 324.5, 329.2 (allowing notice and opportunity to respond to FDIC determination that additional
capital or liquidity is required). The Office of the Comptroller of the Currency (OCC) and FRB have similar
provisions. See 12 CFR 3.404, 50.2 (OCC); 249.2, 263.202 (FRB).
35 Such factors are the financial history and condition of the depository institution, the adequacy of the depository
institution’s 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
institution’s corporate powers are consistent with the purposes of the FDI Act. See 12 U.S.C. 1816.
36 See 12 U.S.C. 1817(j), 1828(c), and 1464(i)(5).
16
specific statutory factors differ by filing type, safety and soundness considerations and the
convenience and needs of the community are commonly addressed.
Generally, if all statutory factors are favorably resolved, FDIC staff will recommend
approval of or non-objection to the filing, subject to prudential conditions and written
commitments for filings involving an industrial bank. If FDIC staff finds unfavorably on one or
more statutory factors based on the filing review, staff generally will recommend denial of or
objection to the filing
d.
Generally, if all statutory factors are favorably resolved, FDIC staff will recommend
approval of or non-objection to the filing, subject to prudential conditions and written
commitments for filings involving an industrial bank. If FDIC staff finds unfavorably on one or
more statutory factors based on the filing review, staff generally will recommend denial of or
objection to the filing. Upon taking action on a filing, or if a proponent withdraws their filing
during the review process, the FDIC Board of Directors may release a statement addressing the
Board’s views regarding the transaction if such a statement is considered to be in the public
interest for purposes of creating transparency for the public and future applicants.37
Per § 354.3, the FDIC requires written agreements among a Covered Company and the
FDIC and the subsidiary industrial bank. These agreements include commitments by the
Covered Company to comply with each of paragraphs (a)(1) through (8) in § 354.4, and such
other written agreements, commitments, or restrictions the FDIC deems appropriate, when
approving or non-objecting to certain filings involving an industrial bank. Section 354.4 requires
each party to a written agreement to comply with paragraphs (a)(1) through (8). These required
commitments are intended to provide the safeguards and protections that the FDIC believes are
prudent to impose in order to maintain the safety and soundness of industrial banks that are
controlled by Covered Companies. The FDIC included these required commitments in part 354
to provide transparency to current and potential industrial banks, the companies that control
them, and the general public.
37 Such a statement would be in addition to any statements individual Board members might choose to make
addressing their personal views regarding the transaction.
The FDIC included these required commitments in part 354
to provide transparency to current and potential industrial banks, the companies that control
them, and the general public.
37 Such a statement would be in addition to any statements individual Board members might choose to make
addressing their personal views regarding the transaction.
17
Moreover, under its general supervision, examination, and enforcement authorities (as
reserved by § 354.6), the FDIC may require additional unique commitments from a Covered
Company or a controlling shareholder of a Covered Company when the FDIC determines it is
necessary to address specific elements of a filing or circumstances related to the filer. Additional
commitments may be derived, for instance, from elements of the business model presented,
including the nature and scope of activities conducted, the risk characteristics of the activities, or
the complexity of operations. The proposed relationships and transactions with the parent
organization that may impact the industrial bank could also be taken into consideration in
determining commitments.
In considering recent industrial bank filings, the FDIC has become concerned that
applicants may be misinterpreting part 354 and the effects of the written commitments required
under the rule as they relate to the FDIC’s assessment of the applicable statutory factors. While
part 354 permits the FDIC to condition the approval of an application or non-objection to a
notice on the Covered Company and industrial bank entering into written agreements and
making required commitments, and the written agreements will be taken into account as part of
the FDIC’s consideration of the underlying filing, they do not replace any statutory factor
applicable to the filing and will not necessarily lead to the favorable resolution of any statutory
factor where the facts and circumstances are otherwise unfavorable
l bank entering into written agreements and
making required commitments, and the written agreements will be taken into account as part of
the FDIC’s consideration of the underlying filing, they do not replace any statutory factor
applicable to the filing and will not necessarily lead to the favorable resolution of any statutory
factor where the facts and circumstances are otherwise unfavorable. This is a longstanding tenet
of FDIC’s applications processing policy and procedures.38
38 Applications Procedures Manual (hereinafter APM), Applications Overview, 1.1,
https://www.fdic.gov/regulations/applications/resources/apps-proc-manual/index.html; APM, Standard and Non-
Standard Conditions, 1.11; and Deposit Insurance Applications Procedures Manual Supplement – Applications from
Non-Bank and Non-Community Bank Applicants,
https://www.fdic.gov/regulations/applications/depositinsurance/procmanual-supplement.pdf.
18
CALMAs and parent company agreements are intended to protect the industrial bank and
mitigate potential risks to the DIF, as well as to provide a means for the FDIC to pursue a formal
enforcement action under sections 8 and 50 of the FDI Act if a party fails to comply with the
agreements. Such agreements also capture in writing the Covered Company’s obligation to serve
as a source of financial strength to the industrial bank. However, such agreements do not in and
of themselves resolve any given statutory factor. If a filing presents material concerns and
fundamental weaknesses with respect to any statutory factor, the written agreements will not
compensate for such weaknesses for purposes of resolving the statutory factor
red Company’s obligation to serve
as a source of financial strength to the industrial bank. However, such agreements do not in and
of themselves resolve any given statutory factor. If a filing presents material concerns and
fundamental weaknesses with respect to any statutory factor, the written agreements will not
compensate for such weaknesses for purposes of resolving the statutory factor. For example, a
written agreement would not be appropriate if the situation involves weak or questionable
earnings projections; an unacceptable or opaque control structure; insufficient capital levels;
weak or marginal management or director candidates; apparent violations of a statute or
regulation; a higher-risk business model; or a failure to meet the convenience and needs of the
community.
Consequently, the FDIC proposes to amend § 354.4 to clarify the FDIC’s implementation
of part 354 to expressly address and make clear, consistent with long-standing applications
processing policy, that written agreements will be taken into account as part of the FDIC’s
consideration of the underlying filing, but do not replace any statutory factor applicable to the
filing and will not necessarily lead to the favorable resolution of any statutory factor where the
facts and circumstances are otherwise unfavorable. This applies to the required commitments
and provisions within any written agreements, the industrial bank subsidiary restrictions that are
also included within part 354, and any other conditions that may be imposed as part of the
FDIC’s approval of, or non-objection to, a filing.
to the favorable resolution of any statutory factor where the
facts and circumstances are otherwise unfavorable. This applies to the required commitments
and provisions within any written agreements, the industrial bank subsidiary restrictions that are
also included within part 354, and any other conditions that may be imposed as part of the
FDIC’s approval of, or non-objection to, a filing.
19
Question 2: What other clarifications, if any, to part 354 and its relationship to the
FDIC’s evaluation of the applicable statutory factors should the FDIC consider?
C.
Shell and Captive Industrial Bank Business Models
1. Supervisory Concerns
Shell and captive bank business models create potentially significant supervisory
concerns for industrial banks. The level of concern with these business models is inherently
heightened due to the substantial reliance on the parent company or its affiliates, particularly
with respect to the primary business operations of the industrial bank. This may include total or
nearly exclusive reliance on the parent organization for sourcing business, conducting key
operational elements (e.g., underwriting, administering, or servicing customer accounts or
relationships), and obtaining a wide range of critical business support services.
In shell or captive structures, the industrial bank’s operations and condition may be
vulnerable to any financial distress or operational disruptions at the parent company or any
affiliates that provide key services to the industrial bank. The heavily integrated relationship
between the industrial bank and the parent organization results in significant concentration risks
that are typically not present in traditional community bank operating structures. Further, the
industrial bank generally has limited or no ability to operate independently from the parent
organization and, as discussed below, lacks franchise value on a standalone basis
y integrated relationship
between the industrial bank and the parent organization results in significant concentration risks
that are typically not present in traditional community bank operating structures. Further, the
industrial bank generally has limited or no ability to operate independently from the parent
organization and, as discussed below, lacks franchise value on a standalone basis.
The FDIC expects an industrial bank to have a sufficiently independent board of directors
and management team, a sustainable financial structure with appropriate capital and liquidity
maintained at the bank level, and a business model that is viable on a standalone basis (as
defined in the proposed § 354.6(b)). Some industrial bank proposals involving shell or captive
structures have lacked one or more of these elements, causing managerial concerns (due to the
lack of independent oversight and decision-making or fully dedicated officers/staff at the
20
industrial bank), as well as financial concerns (due to inadequate capital and liquidity levels, and
earnings prospects that depend on maintaining internal organizational relationships).
The existing part 354 addresses some of the aforementioned concerns by requiring any
Covered Company to enter into written agreements including specific provisions and
commitments intended to ensure that the Covered Company supports the industrial bank and its
ability to operate in a safe and sound manner. Among other items, the written agreements
address board independence, capital and liquidity maintenance and support, and if required by
the FDIC, contingency planning.39 In the absence of Federal consolidated supervision, written
agreements provide the FDIC information and ongoing access to information needed to assess
and monitor the impact the parent organization may have on an industrial bank. The FDIC uses
written agreements to mitigate risk to the industrial bank and to the DIF
aintenance and support, and if required by
the FDIC, contingency planning.39 In the absence of Federal consolidated supervision, written
agreements provide the FDIC information and ongoing access to information needed to assess
and monitor the impact the parent organization may have on an industrial bank. The FDIC uses
written agreements to mitigate risk to the industrial bank and to the DIF. However, as noted
above in section IV.B of this Supplementary Information, the required commitments, written
agreement provisions, and industrial bank subsidiary restrictions of part 354 will be taken into
account as part of the FDIC’s consideration of the underlying filing, but do not replace any
statutory factor applicable to the filing and will not necessarily lead to the favorable resolution of
any statutory factor where the facts and circumstances are otherwise unfavorable. In addition,
where the primary business purpose and operations of the industrial bank are highly dependent
upon the parent company, such agreements may have limited value if the parent company
experiences operational or financial difficulties. Similarly, the managerial restrictions of part
354 intended to ensure the independence of the industrial bank’s management may not be
effective where the business purpose of the industrial bank is to support the parent company’s
operations because there may be direct or indirect organizational influences on business
39 See 12 CFR 354.4.
ies. Similarly, the managerial restrictions of part
354 intended to ensure the independence of the industrial bank’s management may not be
effective where the business purpose of the industrial bank is to support the parent company’s
operations because there may be direct or indirect organizational influences on business
39 See 12 CFR 354.4.
21
decisions from outside the industrial bank that would impact consideration of the relevant
statutory factors.
The FDIC’s experience during the 2008-2009 Financial Crisis showed that business
models involving an insured depository institution (IDI) inextricably tied to and reliant on the
parent and/or its affiliates creates significant challenges and risks to the DIF, especially in
circumstances where the parent organization experiences financial stress and/or declares
bankruptcy.40 Where an industrial bank is significantly reliant on and interconnected with its
parent organization to generate business on both sides of the balance sheet (e.g., for funding and
for lending), as well as operational systems and support, financial difficulties at the parent
organization could be transmitted to the dependent industrial bank. Such a captive model creates
material concerns about the viability of the industrial bank’s proposed business model on a
standalone basis and the industrial bank’s franchise value in the event the parent organization
experiences financial difficulty or failure. These concerns are so significant that the FDIC is
proposing a rebuttable presumption that certain characteristics, if present, will cause an industrial
bank to be a shell or captive institution and a presumption that the shell or captive nature of an
industrial bank will weigh heavily against favorably resolving one or more of the applicable
statutory factors
financial difficulty or failure. These concerns are so significant that the FDIC is
proposing a rebuttable presumption that certain characteristics, if present, will cause an industrial
bank to be a shell or captive institution and a presumption that the shell or captive nature of an
industrial bank will weigh heavily against favorably resolving one or more of the applicable
statutory factors.
The proposed revisions to part 354 would renumber the existing § 354.6 to § 354.7 and at
§ 354.6 would incorporate additional considerations that the FDIC will undertake to determine
the degree of risk presented to the industrial bank from the parent company and its affiliates
when considering the relevant statutory factors. These considerations address the business
purpose for establishing or acquiring control of the industrial bank, intercompany relationships,
40 See, e.g., n.57 and n.59, infra (discussion of NextBank and Advanta).
22
the regulatory and consumer compliance history and supervisory record of each relevant entity,
the novelty of the parent company’s primary businesses (including any new or innovative
processes), accessibility of information, and any plans or processes that mitigate risks presented
by the parent company.41 Expanding part 354 to include these considerations provides increased
transparency regarding how the FDIC evaluates potential risks and concerns presented in an
industrial bank filing.
In addition, the proposed revisions to part 354 include considerations aimed at identifying
shell or captive structures and presumptions the FDIC will apply as a consequence of such
identification
t company.41 Expanding part 354 to include these considerations provides increased
transparency regarding how the FDIC evaluates potential risks and concerns presented in an
industrial bank filing.
In addition, the proposed revisions to part 354 include considerations aimed at identifying
shell or captive structures and presumptions the FDIC will apply as a consequence of such
identification. The FDIC will review each filing covered by the rule on a case-by-case basis, on
the facts and circumstances presented within the context of the applicable statutory factors to
determine the degree to which the industrial bank will have an independent board and
management team, a business model that is viable on a standalone basis, and franchise value that
is independent of the parent company and its affiliates.42 The proposed revisions to part 354
include factors that will focus this inquiry on identifying organizational structures in which the
industrial bank is overly dependent on the parent. The results of this inquiry will give rise to the
presumptions the FDIC will apply as a consequence of such identification.
The proposed revisions would provide in §354.6(c)(1) that an industrial bank will be
presumed to be a shell or captive institution if it: (a) could not function independently of the
parent company, or (b) would be significantly or materially reliant on the parent company or its
affiliates, or (c) would serve only as a funding channel for an existing parent company or affiliate
41 See proposed § 354.6(a).
42 See proposed § 354.6(b).
med to be a shell or captive institution if it: (a) could not function independently of the
parent company, or (b) would be significantly or materially reliant on the parent company or its
affiliates, or (c) would serve only as a funding channel for an existing parent company or affiliate
41 See proposed § 354.6(a).
42 See proposed § 354.6(b).
23
business line. The FDIC will presume that the shell or captive nature of an industrial bank will
weigh heavily against favorably resolving one or more of the applicable statutory factors.43
The proposed amendment to the scope of the definition of “Covered Company” would
allow any company subject to a determination that a transaction would result in the application
of part 354 to contest the determination in writing. Additionally, proposed § 354.6(c)(2) would
afford any company seeking to rebut a presumption described in (c)(1) an opportunity to present
its views in writing. Section 354.6(c)(3) also would establish that a company’s decision to
provide written views regarding the applicability of part 354 or a presumption would place all
related filings and transactions on hold so that the threshold applicability determinations can be
resolved before further proceedings. Such a suspension would prevent the consummation of a
transaction or transactions that may be difficult or costly to unwind.
2. Convenience and Needs Concerns
As noted above, under the FDI Act, the FDIC must consider the convenience and needs
of the community to be served when evaluating a deposit insurance or merger application. For
some industrial bank proposals involving shell or captive structures, the primary deposit and
credit products are both highly dependent upon the parent company and would target the
customers of the parent company
rns
As noted above, under the FDI Act, the FDIC must consider the convenience and needs
of the community to be served when evaluating a deposit insurance or merger application. For
some industrial bank proposals involving shell or captive structures, the primary deposit and
credit products are both highly dependent upon the parent company and would target the
customers of the parent company. Where a proposal for an industrial bank is presumed to be a
shell or captive institution under the presumptions in proposed §354.6(c)(1), if the target market
is such that the institution’s products are only available to customers of an affiliated company or
a narrow segment of the community, this will weigh heavily against favorably resolving the
convenience and needs statutory factor.
43 See proposed § 354.6(c)(2).
24
The public purpose of a bank charter with deposit insurance is that the bank will serve the
convenience and needs of the community broadly. Business models that are not generally
available to the members of the community absent purchasing a product by an affiliated entity
raise serious questions as to whether the general community is sufficiently served to merit the
grant of deposit insurance. Similar to the other presumption in proposed § 354.6(c)(1), the FDIC
will review each filing on a case-by-case basis and filers may present facts to demonstrate that
the community is effectively served notwithstanding the fact that the product offerings are
limited to customers of the affiliated entity or to a narrow segment only.
The evaluation of the convenience and needs of the community is a broad inquiry and not
limited to strategies or plans under the Community Reinvestment Act
n a case-by-case basis and filers may present facts to demonstrate that
the community is effectively served notwithstanding the fact that the product offerings are
limited to customers of the affiliated entity or to a narrow segment only.
The evaluation of the convenience and needs of the community is a broad inquiry and not
limited to strategies or plans under the Community Reinvestment Act. In assessing whether the
convenience and needs of the community are met in industrial bank proposals, the FDIC will
consider the customer base that the applicant intends to serve with its deposit and credit products
and the market need filled through those products. The FDIC will also consider the convenience
and benefits to the community that would not otherwise occur absent the creation of the
industrial bank with deposit insurance. For instance, if there is a demonstrated lack of credit
availability or competition (e.g., existing firms have not met the market demand), this may
support a favorable finding on convenience and needs. On the other hand, if there are existing
non-bank captive finance firms serving the proposed community, the FDIC will evaluate the
additional benefits of an industrial bank in meeting the convenience and needs of the community,
and if the benefits of the insured bank (such as lower cost funds) accrue primarily the parent
rather than to the community, this may weigh against favorably resolving the convenience and
needs statutory factor. The FDIC also will consider whether there would be any negative
IC will evaluate the
additional benefits of an industrial bank in meeting the convenience and needs of the community,
and if the benefits of the insured bank (such as lower cost funds) accrue primarily the parent
rather than to the community, this may weigh against favorably resolving the convenience and
needs statutory factor. The FDIC also will consider whether there would be any negative
25
consequences to the community resulting from the ownership of the industrial bank by the parent
company.
In considering the convenience and needs of the community, the FDIC may require
commitments or conditions from a Covered Company when the FDIC determines it is necessary
to address specific elements of a filing, which may be derived from the business model.
Given the unique nature of industrial banks and the facts and circumstances of a
particular transaction, the FDIC may also consider whether public hearings would be an
appropriate means to obtain further public input on whether a specific application meets the
convenience and needs of the community.
3. Existing Industrial Banks – Structure and Supervision
As noted previously, the universe of industrial banks is relatively small, with only 23
existing institutions. Several of the institutions primarily or entirely provide banking products
and services to customers of affiliated entities within the parent organization (in general, these
industrial banks do not broadly serve the general public, customers of unaffiliated businesses, or
geographic markets that differ from those of the parent company or its affiliates). These include,
but are not limited to, industrial banks established or acquired by commercial companies to
support the sale or lease of manufactured products (e.g., postage meters, automobiles or
motorcycles), by retailers to issue general-purpose credit cards, and by financial companies in
order to enable brokerage customer funds to be swept into insured deposits at the industrial bank
tes). These include,
but are not limited to, industrial banks established or acquired by commercial companies to
support the sale or lease of manufactured products (e.g., postage meters, automobiles or
motorcycles), by retailers to issue general-purpose credit cards, and by financial companies in
order to enable brokerage customer funds to be swept into insured deposits at the industrial bank.
Some of the existing industrial banks rely to a significant extent on their parent
companies or affiliates for business generation, operational aspects, and/or a variety of corporate
support services. While many of the industrial banks are closely integrated with their parent
organizations, they typically maintain adequate capital, have sufficient liquidity, and reflect
satisfactory overall risk profiles. For the most part, the existing industrial banks are seasoned in
26
nature (all but two were established between 1984 and 2006), and fared similarly to other types
of financial institutions during previous banking crises.44 Additionally, because part 354 was
based on the FDIC’s supervisory practice, written agreements are in place for five industrial
banks: two are subject to capital maintenance agreements, one is subject to a CALMA, and two
are subject to both CALMAs and parent company agreements.45
Importantly, industrial banks are subject to all of the same restrictions and requirements,
regulatory oversight, and safety-and-soundness and consumer compliance examinations—
including compliance with fair lending laws and regulations, and the Community Reinvestment
Act—as any other kind of insured state nonmember bank. This includes examining the industrial
bank for compliance with laws and regulations, including affiliate transaction limits and capital
maintenance requirements
,
regulatory oversight, and safety-and-soundness and consumer compliance examinations—
including compliance with fair lending laws and regulations, and the Community Reinvestment
Act—as any other kind of insured state nonmember bank. This includes examining the industrial
bank for compliance with laws and regulations, including affiliate transaction limits and capital
maintenance requirements. The FDIC also has the authority and capacity to regulate industrial
banks and their parent companies.46 This framework of supervision, coupled with part 354 in its
amended form as proposed,47 is expected to continue to protect industrial banks and the DIF
from potential risks related to parent company and affiliate relationships.
4. Resolution Considerations
44 During the 2008-09 Financial Crisis, several parent companies pursued conversions of an industrial bank to a
commercial bank, which required approval of the parent company to become a BHC subject to regulation and
supervision by the FRB. The conversions allowed the respective companies to access programs such as the FDIC’s
Temporary Liquidity Guarantee Program and the Troubled Asset Relief Program administered by the Department of
the Treasury.
45 Previously 10 other industrial banks (that have since merged, converted, or voluntarily liquidated) were also
subject to CALMAs and/or parent company agreements. The FDIC began imposing additional prudential
requirements in Orders granting Federal deposit insurance in March 2004. The FDIC described its imposition of
additional prudential requirements in FDIC: The FDIC’s Supervision of Industrial Loan Companies: A Historical
Perspective – Summer 2004 Vol. 1, Issue 1. GAO further described the FDIC’s approach in pages 41-44 of its 2005
audit, Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in
Regulatory Authority, available at https://www.gao.gov/products/gao-05-621.
46 See, e.g., 12 U.S.C
s in FDIC: The FDIC’s Supervision of Industrial Loan Companies: A Historical
Perspective – Summer 2004 Vol. 1, Issue 1. GAO further described the FDIC’s approach in pages 41-44 of its 2005
audit, Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in
Regulatory Authority, available at https://www.gao.gov/products/gao-05-621.
46 See, e.g., 12 U.S.C. 1820(b)(4)(A) (in making a bank examination, an FDIC examiner shall have the power to
examine the affairs of any affiliate of any depository institution as may be necessary to determine the relationship
between such depository institution and any such affiliate and the effect of such relationship on the depository
institution.); 12 U.S.C. 1831o-1(b).
47 Part 354 applies prospectively to Covered Companies and is not applicable for existing industrial banks, absent
any new filing related to the industrial bank that would be subject to the rule.
27
In addition to the supervisory concerns described above, an FDIC-insured industrial bank
with a shell or captive business model presents the risk of costly and delayed resolution in the
event of the industrial bank’s failure.48 The proposed amendments to part 354 address the risks
that captive or shell business models may present to the DIF. Addressing these risks will
facilitate the FDIC’s accomplishment of its statutory mandates, including as the receiver for a
failed IDI
ank
with a shell or captive business model presents the risk of costly and delayed resolution in the
event of the industrial bank’s failure.48 The proposed amendments to part 354 address the risks
that captive or shell business models may present to the DIF. Addressing these risks will
facilitate the FDIC’s accomplishment of its statutory mandates, including as the receiver for a
failed IDI.
As with any failed IDI, an FDIC-insured industrial bank must be resolved under the FDI
Act.49 When the FDIC is appointed as the receiver for a failed IDI (FDIC-R), it succeeds, by
operation of law, to all of the IDI’s rights, titles, powers, and privileges, including the rights of
stockholders, depositors, officers, and directors with respect to the failed IDI and its assets.50
The FDIC-R has the power to wind up a failed IDI’s operations and transfer its assets and
liabilities to third parties.51 Once appointed, FDIC-R’s objectives are to (i) ensure that
depositors receive access to their insured deposits as quickly as possible; (ii) marshal and sell the
IDI’s assets; (iii) determine claims; and (iv) distribute net recoveries from asset liquidations by
issuing dividends to the FDIC as subrogee to insured depositors, uninsured depositors, and
creditors in accordance with the priority scheme set out in the FDI Act.52
48 In this context, “resolution” means not only the initial phase of the FDIC’s receivership process for a failed IDI,
but also the various responsibilities that fall to the FDIC to liquidate assets that are not purchased by a third party in
that receivership process. This includes necessary bookkeeping, accounting, reporting, identifying and verifying
claims, paying claims, determining whether to bring actions against parties responsible for the institution’s failure,
and monitoring ongoing agreements with asset purchasers, etc. See FDIC, Crisis and Response – An FDIC History,
2008-2013, 176-77 (2017) (Crisis and Response)
y in
that receivership process. This includes necessary bookkeeping, accounting, reporting, identifying and verifying
claims, paying claims, determining whether to bring actions against parties responsible for the institution’s failure,
and monitoring ongoing agreements with asset purchasers, etc. See FDIC, Crisis and Response – An FDIC History,
2008-2013, 176-77 (2017) (Crisis and Response). Additionally, resolution is distinct from “recovery” (i.e., the steps
the industrial bank and the Covered Company could take to mitigate the impacts of financial and operational stress
outside of the receivership process), which is the focus of part 354’s provisions regarding contingency planning. 12
CFR 354.4(b). In addition, the FDIC as receiver of a state-chartered bank has the rights and powers that a state
banking authority would have under applicable state law. 12 U.S.C. 1821(c)(3)(B).
49 11 U.S.C. 109(b)(2), (d); 12 U.S.C. 1821(c)(2)(A)(ii).
50 12 U.S.C. 1821(d)(2)(A)(i); (e)(13)(A).
51 12 U.S.C. 1821(d)(2)(B), (G).
52 12 U.S.C. 1821(d)(11)(A).
28
The most common method of resolution is a purchase and assumption transaction where
a significant portion of a failed IDI’s assets are sold to a healthy financial institution in exchange
for its assumption of part or all of the failed IDI’s deposit liabilities. Other resolution methods
include direct payouts to depositors, the creation of a bridge bank that will perform certain
functions of the failed bank and operate as an interim IDI, or the organization of a deposit
insurance national bank. FDIC-R’s resolution options may be limited by the statutory
requirement to use whichever option will be the least costly to the DIF.53 The FDIC’s
experience in resolving failed IDIs, including during the 2008-2009 Financial Crisis,54 shows
that the franchise value of an IDI has implications for the resolution options that may be
available to the FDIC, as discussed below
urance national bank. FDIC-R’s resolution options may be limited by the statutory
requirement to use whichever option will be the least costly to the DIF.53 The FDIC’s
experience in resolving failed IDIs, including during the 2008-2009 Financial Crisis,54 shows
that the franchise value of an IDI has implications for the resolution options that may be
available to the FDIC, as discussed below.
In some industrial bank proposals that the FDIC has received, the viability and operations
of the bank are dependent on ongoing support from the parent organization. In such cases,
financial or operational stress at the parent company or any of its affiliates reduces the franchise
value of the industrial bank in the event of failure and complicates its resolution. The underlying
value of such an industrial bank lies in its connection with the parent organization, which may
provide benefits including, but not limited to, name recognition, clients or referrals, personnel
and back office support, and/or specific product offerings that complement the parent company’s
or affiliates’ lines of business. If such connections were to be severed, the FDIC likely would
find it more difficult to facilitate a resolution with a healthy bank, and it likely would be forced
to employ less efficient resolution methods that are more lengthy, cumbersome, and costly, such
as depositor payouts and piecemeal loan (or other asset) sales.55
53 12 U.S.C. 1823(c)(4).
54 Between 2007 and 2013, the FDIC resolved 489 failed IDIs with total assets over $686 billion. See Crisis and
Response at 182-83.
55 See, e.g., Crisis and Response at 185.
t resolution methods that are more lengthy, cumbersome, and costly, such
as depositor payouts and piecemeal loan (or other asset) sales.55
53 12 U.S.C. 1823(c)(4).
54 Between 2007 and 2013, the FDIC resolved 489 failed IDIs with total assets over $686 billion. See Crisis and
Response at 182-83.
55 See, e.g., Crisis and Response at 185.
29
Similarly, the loss of critical support services previously provided to the industrial bank by
its parent organization or affiliates would pose a potentially significant challenge in a resolution
scenario, as the parent or affiliated entities may no longer be able to fulfill their obligations under
existing service agreements. If the parent company or its affiliates remain open and operating,
the FDIC-R would have the authority to enforce the failed IDI’s arrangements in accordance
with the contractual terms.56 However, if the parent organization becomes a debtor under the
Bankruptcy Code (either before or after the FDIC-R’s appointment), uncertainty likely would
exist with regard to the parent’s or the affiliates’ willingness or ability to fulfill such
obligations.57 If such arrangements are terminated, the industrial bank’s franchise value would
be significantly diminished.58 This situation could leave the FDIC in a position where it has no
choice but to conduct resolution methods that are more disruptive and expensive.59
56 12 U.S.C. 1821(e)(13)(A).
57 11 U.S.C. 365(a), (g)(1). This uncertainty exists because a bankruptcy debtor has the power to “reject” executory
contracts, a process that amounts to a pre-bankruptcy breach of the contract where the debtor no longer performs and
the counterparty is left with only a claim for damages. The Bankruptcy Courts apply a business judgment standard
when determining whether to approve the rejection of an executory contract. See, e.g., In re Klein Sleep Prods.,
Inc., 78 F.3d 18 (2d Cir. 1996)
“reject” executory
contracts, a process that amounts to a pre-bankruptcy breach of the contract where the debtor no longer performs and
the counterparty is left with only a claim for damages. The Bankruptcy Courts apply a business judgment standard
when determining whether to approve the rejection of an executory contract. See, e.g., In re Klein Sleep Prods.,
Inc., 78 F.3d 18 (2d Cir. 1996). See also FDIC Office of Inspector General, Material Loss Review of Advanta Bank
Corp., Draper, Utah (Oct. 2010), https://www.fdicoig.gov/sites/default/files/reports/2022-08/11-002.pdf. The bank
failed in March 2010. Advanta’s parent company, Advanta Corp., filed for Chapter 11 Bankruptcy protection in
November 2009 and refused to provide capital support to Advanta.
58 The 2008 bankruptcy of Lehman Brothers Holdings Inc. (LBHI) illustrates diminished franchise value concerns.
As described in the debtor’s Chapter 11 plan, LBHI’s two IDI subsidiaries, Woodlands Commercial Bank and
Aurora Bank, FSB, both fell to less than well capitalized status and were vulnerable to failure because of their
dependence on LBHI. The LBHI organization provided the IDIs with operational services, as well as credit, market,
and foreign exchange risk protection provided by a Master Forward Agreement with LBHI. The agreements were
repudiated as a result of the bankruptcy filings. Consequently, the IDIs’ earnings and capital were fully exposed to
changes in credit spreads, interest rates, foreign exchange rates, commodity prices, and equity prices. Market value
losses based on mark-to-market accounting depleted the capital base. While the bankrupt parent, LBHI, received
court approval to support the two IDIs, notwithstanding the capital support, the two IDIs ultimately voluntarily
liquidated. See Debtors’ Disclosure Statement for Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and Its
Affiliated Debtors Pursuant to Section 1125 of the Bankruptcy Code at 71-71, In re: Lehman Bros. Holdings Inc., et
al, Ch
ase. While the bankrupt parent, LBHI, received
court approval to support the two IDIs, notwithstanding the capital support, the two IDIs ultimately voluntarily
liquidated. See Debtors’ Disclosure Statement for Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and Its
Affiliated Debtors Pursuant to Section 1125 of the Bankruptcy Code at 71-71, In re: Lehman Bros. Holdings Inc., et
al, Ch. 11 Case No. 08-13555 (Bankr. S.D.N.Y. 2010),
https://www.sec.gov/Archives/edgar/data/806085/000110465910020165/a10-8193_1ex99d1.htm.
59 The failure of NextBank, N.A., Phoenix, Arizona (NextBank) in 2002 illustrates some of these concerns. In this
case, an IDI was dependent on its parent because its role was gathering deposits and booking credit card receivables
marketed, screened, originated, and securitized by its sole owner and parent company. NextBank had virtually no
staff or facilities at the time of its failure; all bank functions were performed by parent company employees in parent
company facilities. The FDIC needed to negotiate with the parent company to continue critical credit card servicing
30
Importantly, under part 354, the FDIC may require a Covered Company and industrial
bank to commit to provide, and thereafter implement and adhere to, a contingency plan.60
Contingency plans may include one or more strategies for the orderly disposition or dissolution
of the industrial bank without the need for the appointment of a receiver or conservator. One
objective of such a plan would be to mitigate the disruption and damage the IDI may suffer from
significant financial or operational stresses within the parent organization. Such concerns, if not
appropriately addressed, could jeopardize the safe and sound operation of the industrial bank
issolution
of the industrial bank without the need for the appointment of a receiver or conservator. One
objective of such a plan would be to mitigate the disruption and damage the IDI may suffer from
significant financial or operational stresses within the parent organization. Such concerns, if not
appropriately addressed, could jeopardize the safe and sound operation of the industrial bank.
Question 3: What features or aspects of a shell or captive bank business model (not
already discussed above) should affect the FDIC’s evaluation of industrial bank filings?
Question 4: Should the FDIC assess the potential risks posed to safety and soundness,
consumer protection, and the DIF differently for shell or captive bank business models involving
significant or material reliance on the parent organization?
Question 5: Are there other issues or facts that the FDIC should consider in determining
whether to strengthen its supervisory framework with respect to industrial banks and in how the
FDIC evaluates potential risks and concerns presented in an industrial bank filing?
Question 6: How should the FDIC assess the “convenience” and “needs” of the
“community” served by dependent bank business models?
V.
Expected Effects
A.
Overview of Industrial Banks
functions for NextBank and to delay its bankruptcy filing so that staff who were knowledgeable about the IDI’s
operations could assist with the resolution. If NextBank had operated on a standalone basis, it may have been
resolved more quickly and at a lower cost.
60 12 CFR 354.4(b).
s?
V.
Expected Effects
A.
Overview of Industrial Banks
functions for NextBank and to delay its bankruptcy filing so that staff who were knowledgeable about the IDI’s
operations could assist with the resolution. If NextBank had operated on a standalone basis, it may have been
resolved more quickly and at a lower cost.
60 12 CFR 354.4(b).
31
As of March 31, 2024, the FDIC supervised 2,920 IDIs, with combined assets of $4.2
trillion.61 Of these, 24 institutions were industrial banks, comprising 0.8 percent of all FDIC-
supervised institutions.62 The industrial banks held combined assets of $234 billion, comprising
approximately 5.6 percent of the combined assets of FDIC-supervised institutions.63
The proposed rule would apply prospectively to deposit insurance, change in control,
merger, and conversion filings, and other situations as may be determined by the FDIC that
result in an industrial bank that is controlled by a Covered Company. It is difficult to estimate
the number of potential Covered Companies that will seek to establish, acquire, or convert a
Federal savings association to an industrial bank, as such an estimate depends on considerations
that affect Covered Companies’ decisions. These considerations, and how they affect decision
making, are difficult for the FDIC to forecast, estimate, or model, as the considerations include
external parties’ evaluations of potential business strategies for the industrial bank as well as
future financial conditions, rates of return on capital, and innovations in the provision of
financial services, among others.
According to FDIC administrative data on application submissions, one industrial bank
submitted a change in control application and three industrial banks submitted de novo bank
applications between April 1, 2021, and December 31, 2023, for a total of four applications, or
approximately one-and-a-half applications per year
nd innovations in the provision of
financial services, among others.
According to FDIC administrative data on application submissions, one industrial bank
submitted a change in control application and three industrial banks submitted de novo bank
applications between April 1, 2021, and December 31, 2023, for a total of four applications, or
approximately one-and-a-half applications per year. None of these applications have resulted in
an industrial bank being controlled by a Covered Company. For purposes of this analysis, the
FDIC assumes that part 354 would apply to two filings per year seeking to establish, acquire, or
convert to an industrial bank.
61 Data provided by the Division of Insurance and Research.
62 One industrial bank was acquired by an institution supervised by the Office of the Comptroller of the Currency in
a voluntary merger on June 1, 2024.
63 FDIC Call Report Data as of March 31, 2024.
32
The FDIC anticipates that the proposed rule would benefit the public and the DIF by
promoting the safe and sound operation of industrial banks controlled by companies that are not
subject to consolidated supervision by the FRB. These public benefits cannot be reliably
quantified. Specific proposed requirements and potential costs to filers of complying with these
requirements are discussed below.
One amendment in the proposed rule would expand the scope of Covered Companies
under part 354. Specifically, the proposed amendment would apply part 354 to HOLA
conversion applications as well as any other situation where an industrial bank would become a
subsidiary of a company that is not subject to Federal consolidated supervision. The industrial
bank and Covered Company in such situations would be required to enter into certain
agreements
cope of Covered Companies
under part 354. Specifically, the proposed amendment would apply part 354 to HOLA
conversion applications as well as any other situation where an industrial bank would become a
subsidiary of a company that is not subject to Federal consolidated supervision. The industrial
bank and Covered Company in such situations would be required to enter into certain
agreements. These agreements include commitments by the Covered Company to comply with
each paragraph (a)(1) through (8) in § 354.4, and such other written agreements, commitments or
restrictions the FDIC deems appropriate when approving or non-objecting to certain filings
involving industrial banks. Section 354.4(b) also includes an optional contingency plan
requirement that the FDIC may impose depending on the filer’s business plan and other
factors.64
As discussed in the final rule that established part 354,65 the FDIC historically has
imposed prudential conditions and CALMAs and other written agreements between the FDIC
and controlling parties of industrial banks in connection with approving or not objecting to
certain industrial bank filings. Further, § 354.6 makes clear that the FDIC may impose some or
all of the requirements of part 354 on a given industrial bank or parent company as warranted.
Therefore, the FDIC does not believe that the proposed amendment to expand the definition of
64 See 12 CFR 354.4.
65 See 86 Fed. Reg. 10703 (Feb. 23, 2021).
tain industrial bank filings. Further, § 354.6 makes clear that the FDIC may impose some or
all of the requirements of part 354 on a given industrial bank or parent company as warranted.
Therefore, the FDIC does not believe that the proposed amendment to expand the definition of
64 See 12 CFR 354.4.
65 See 86 Fed. Reg. 10703 (Feb. 23, 2021).
33
Covered Company would substantially increase the burden for newly affected industrial banks
and Covered Companies. In addition, regarding the number of entities subject to the rule, HOLA
conversion applications occur infrequently so the proposed expanded definition of Covered
Company would not substantially increase the number of filings subject to part 354.66
As part of the amendment to expand the definition of Covered Company, the proposed
rule would allow any company subject to a determination that a situation would result in the
application of part 354 to present its views in writing. The FDIC believes that this proposed
amendment would not affect the costs incurred by filers and that this proposed amendment will
only serve to provide clarity by codifying existing practice.
Another provision in the proposed rule would amend § 354.4 to expressly address and
make clear, consistent with long-standing applications processing policy, that written agreements
shall not be used as a means to favorably resolve statutory factors or circumstances on which the
FDIC would otherwise make an unfavorable finding. This proposed amendment would mitigate
uncertainty and prevent misunderstandings among prospective filers subject to part 354. This
improved clarity may reduce the time that the FDIC and a Covered Company may spend
discussing and resolving issues with its filing. While the FDIC cannot quantify the time saved,
the FDIC believes that an affected entity would not incur a significant cost as a result of this
amendment
would mitigate
uncertainty and prevent misunderstandings among prospective filers subject to part 354. This
improved clarity may reduce the time that the FDIC and a Covered Company may spend
discussing and resolving issues with its filing. While the FDIC cannot quantify the time saved,
the FDIC believes that an affected entity would not incur a significant cost as a result of this
amendment.
As discussed above, the proposed rule would include considerations to be applied in
identifying shell or captive structures, and presumptions that the FDIC will apply as a
consequence of such identification. The proposed rule would also incorporate additional
66 For purposes of estimating Paperwork Reduction Act burden, the FDIC assumes that the change in scope in this
proposed rule increases the estimated respondent counts for certain information collections by one. See Section
VII.B.
34
considerations that the FDIC will undertake to determine the degree of risk presented to the
industrial bank from the parent company and its affiliates. The existing part 354 already
addresses some of the risks that captive or shell industrial bank business models may present to
the DIF. For example, under both the current part 354 and the proposed rule, the FDIC may
require a Covered Company and industrial bank to commit to provide to the FDIC, and thereafter
adhere to, a contingency plan that sets forth recovery actions to address significant financial or
operational stress that could threaten the safe and sound operation of the industrial bank and
strategies for the orderly disposition of such industrial bank without the need for the appointment
of a receiver or conservator.67 Filers that are covered under the expanded scope of part 354, as
proposed, that commit to providing a contingency plan could therefore incur preparation and
submission costs
tional stress that could threaten the safe and sound operation of the industrial bank and
strategies for the orderly disposition of such industrial bank without the need for the appointment
of a receiver or conservator.67 Filers that are covered under the expanded scope of part 354, as
proposed, that commit to providing a contingency plan could therefore incur preparation and
submission costs. The FDIC does not have data to estimate these costs, but believes that these
costs would be outweighed by the expected benefits to the safety and soundness of the industrial
bank and the DIF.
As part of the amendment aimed at identifying shell or captive structures and resulting
presumptions, the proposed rule would afford any company seeking to rebut a presumption an
opportunity to present its views in writing. While there may be costs incurred in the preparation
of such a rebuttal, the FDIC believes that this burden is not substantially greater than the costs
incurred by filers in existing practice, absent this amendment, to respond to and allay FDIC
concerns about the characteristics of their structures. Furthermore, filers who opt to prepare a
rebuttal are likely to believe that the costs of preparation are outweighed by the expected
benefits.
67 12 CFR 354.4(b).
35
The proposed rule could indirectly affect subsidiaries of Covered Companies. Such
Covered Companies operate through a variety of structures that include a range of subsidiaries
and affiliates. Further, the proposed rule includes the FDIC’s reservation of authority to require
any industrial bank and its parent company, if not otherwise subject to part 354, to enter into
written agreements, provide commitments, or abide by restrictions, as appropriate. Therefore, it
is difficult to estimate the number of subsidiaries and affiliates of prospective Covered
Companies, based on information currently available to the FDIC
s the FDIC’s reservation of authority to require
any industrial bank and its parent company, if not otherwise subject to part 354, to enter into
written agreements, provide commitments, or abide by restrictions, as appropriate. Therefore, it
is difficult to estimate the number of subsidiaries and affiliates of prospective Covered
Companies, based on information currently available to the FDIC. However, given the FDIC’s
experience as the primary Federal regulator of industrial banks,68 the FDIC believes that the
number of subsidiaries of the prospective Covered Companies affected by the proposed rule is
likely to be small. For these affected subsidiaries, the FDIC believes that the proposed
amendments would clarify, provide transparency, and prevent misinterpretation of part 354. To
that end, the proposed rule would reduce the time spent by affected subsidiaries discussing and
resolving issues related to their affiliated industrial banks and Covered Companies.
VI. Request for Comment
The FDIC is inviting comment on all aspects of the proposed amendments to part 354, in
addition to the questions above.
VII. Regulatory Analysis
A. Regulatory Flexibility Act
The Regulatory Flexibility Act (RFA) generally requires an agency, in connection with a
proposed rule, to prepare and make available for public comment an initial regulatory flexibility
analysis that describes the impact of the proposed rule on small entities.69 However, an initial
68 Historically, industrial banks have elected not to become members of the Federal Reserve System. The FDIC is
the primary Federal regulator for State nonmember banks and the insurer for all IDIs.
69 5 U.S.C. 601 et seq.
l regulatory flexibility
analysis that describes the impact of the proposed rule on small entities.69 However, an initial
68 Historically, industrial banks have elected not to become members of the Federal Reserve System. The FDIC is
the primary Federal regulator for State nonmember banks and the insurer for all IDIs.
69 5 U.S.C. 601 et seq.
36
regulatory flexibility analysis is not required if the agency certifies that the proposed rule will
not, if promulgated, have a significant economic impact on a substantial number of small
entities. The Small Business Administration (SBA) has defined ''small entities'' to include
banking organizations with total assets of less than or equal to $850 million.70 Generally, the
FDIC considers a significant economic impact to be a quantified effect in excess of 5 percent of
total annual salaries and benefits or 2.5 percent of total noninterest expenses. The FDIC believes
that effects in excess of one or more of these thresholds typically represent significant economic
impacts for FDIC-supervised institutions.
The FDIC has considered the potential impact of the proposed rule on small entities in
accordance with the RFA. For the reasons stated below, the FDIC certifies that the proposed rule
will not, if promulgated, have a significant economic impact on a substantial number of small
entities.
As of March 31, 2024, the FDIC supervised 2,920 institutions, of which 2198 are
considered small entities for purposes of the RFA.71 Of these 2,920 institutions, 24 were
industrial banks, 72 and the FDIC estimates that no more than 10 of these industrial banks would
be considered small industrial banks for purposes of the RFA.73
70 The SBA defines a small banking organization as having $850 million or less in assets, where an organization's
“assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding
at no more than 10 of these industrial banks would
be considered small industrial banks for purposes of the RFA.73
70 The SBA defines a small banking organization as having $850 million or less in assets, where an organization's
“assets are determined by averaging the assets reported on its four quarterly financial statements for the preceding
year.” See 13 CFR 121.201 (as amended by 87 FR 69118, effective December 19, 2022). In its determination, the
“SBA counts the receipts, employees, or other measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.” See 13 CFR 121.103. Following these regulations, the FDIC uses an IDI’s
affiliated and acquired assets, averaged over the preceding four quarters, to determine whether the IDI is ''small'' for
the purposes of the RFA.
71 FDIC Call Report Data as of March 31, 2024.
72 As mentioned previously, one industrial bank was acquired in a voluntary merger on June 1, 2024. This industrial
bank was not considered a “small entity” for purposes of the RFA as of March 31, 2024.
73 The FDIC uses the assets of an IDI’s affiliated and acquired financial institutions to determine whether the IDI is
“small” for the purposes of RFA. This methodology may over-count the number of industrial banks that are small
entities because it does not take into account the size of non-financial institutions that are affiliated with the
industrial bank. For purposes of RFA certification, this methodology results in a conservative over-estimate of the
number of affected small entities.
ether the IDI is
“small” for the purposes of RFA. This methodology may over-count the number of industrial banks that are small
entities because it does not take into account the size of non-financial institutions that are affiliated with the
industrial bank. For purposes of RFA certification, this methodology results in a conservative over-estimate of the
number of affected small entities.
37
As previously discussed, the requirements under part 354 apply to industrial banks
organized on or after April 1, 2021, and industrial banks coming under the control of a Covered
Company as a result of a transaction pursuant to either section 7(j) or 18(c) of the FDI Act. The
proposed rule would amend the definition of Covered Companies to include prospective
conversions74 pursuant to section 5(i)(5) of the HOLA or any other type of transaction where an
industrial bank would become a subsidiary of a company that is not subject to Federal
consolidated supervision, as determined by the FDIC.75 Since September 2019, the FDIC has
received only two conversion filings related to HOLA and estimates one or fewer such filing per
year going forward. Not all of these filings would involve small entities; for context, only 10 out
of 24 existing industrial banks are small entities for purposes of the RFA. Therefore, the FDIC
expects the proposed amendment to the definition of Covered Company to affect one or fewer
small entities per year. Given this limited number of anticipated filings, the FDIC believes the
proposed amendment is unlikely to affect a substantial number of small entities.
Notwithstanding the effect due to the change in the scope of affected entities described
above, the FDIC also examined whether the other changes reflected in the proposed rule would
have a significant effect on affected small entities
r year. Given this limited number of anticipated filings, the FDIC believes the
proposed amendment is unlikely to affect a substantial number of small entities.
Notwithstanding the effect due to the change in the scope of affected entities described
above, the FDIC also examined whether the other changes reflected in the proposed rule would
have a significant effect on affected small entities. As discussed above, these amendments
clarify certain provisions in part 354, provide increased transparency regarding how the FDIC
evaluates potential risks and concerns, and serve to prevent any misinterpretation of part 354 that
would be inconsistent with the FDIC’s long-standing applications processing policy. The
proposed rule affords any company seeking to rebut a presumption of a shell or captive
institution an opportunity to present its views in writing – such filings should comport with the
74 The proposed amended definition would only apply to filings involving an industrial bank or Covered Company
after the effective date of the proposed rule.
75 The proposed amendment would also allow any company subject to a determination that a transaction would
result in the application of part 354 to present its views in writing.
38
FDIC’s existing rules regarding filing procedures. These amendments may reduce the time that
the FDIC and a filer would spend discussing and resolving issues with its filing. While the FDIC
cannot quantify the time saved, the FDIC believes that an affected entity would not incur a
significant economic effect as a result of these amendments.
Based on the preceding information, the FDIC certifies that the proposed rule does not
significantly affect a substantial number of small entities. The FDIC invites comments on all
aspects of the supporting information provided in this RFA section
t quantify the time saved, the FDIC believes that an affected entity would not incur a
significant economic effect as a result of these amendments.
Based on the preceding information, the FDIC certifies that the proposed rule does not
significantly affect a substantial number of small entities. The FDIC invites comments on all
aspects of the supporting information provided in this RFA section. In particular, would this
proposed rule have any significant effects on a substantial number of small entities that the
FDIC has not identified?
B. Paperwork Reduction Act
Certain provisions of the proposed rule contain “collection of information” requirements
within the meaning of the Paperwork Reduction Act (PRA).76 In accordance with the
requirements of the PRA, the FDIC may not conduct or sponsor, and the respondent is not
required to respond to, an information collection unless it displays a currently valid Office of
Management and Budget (OMB) control number. The FDIC’s OMB control number associated
with this proposed rule is 3064-0213 and is titled, “Industrial Banks and Industrial Loan
Companies.”
As stated above, the proposed rule would change the scope of the existing rule by
revising the definition of “Covered Company” to include conversions involving a proposed
industrial bank or industrial loan company under section 5 of the HOLA, or other situations as
determined by the FDIC; clarifying the relationship between written commitments and the
FDIC’s evaluation of the relevant statutory factors; and setting forth additional criteria that the
76 44 U.S.C. 3501 et seq.
ude conversions involving a proposed
industrial bank or industrial loan company under section 5 of the HOLA, or other situations as
determined by the FDIC; clarifying the relationship between written commitments and the
FDIC’s evaluation of the relevant statutory factors; and setting forth additional criteria that the
76 44 U.S.C. 3501 et seq.
39
FDIC would consider when assessing the risks presented to an industrial bank by its parent
company and any affiliates, and evaluating the industrial bank’s ability to function independently
of the parent company and any affiliates.
For these reasons, the information collection requirements contained in this proposed
rulemaking will be submitted by the FDIC to OMB for review and approval under section
3507(d) of the PRA (44 U.S.C. 3507(d)) and section 1320.11 of the OMB's implementing
regulations (5 C.F.R. 1320). Given the change in scope in the proposed rule, the FDIC has
increased the estimated respondent count by one in information collections 1 - 4. Comments are
invited on:
(a) Whether the collection of information is necessary for the proper performance of the
FDIC’s functions, including whether the information has practical utility;
(b) The accuracy of the estimate of the burden of the information collection, including the
validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collection on respondents, including
through the use of automated collection techniques or other forms of information technology;
and
stimate of the burden of the information collection, including the
validity of the methodology and assumptions used;
(c) Ways to enhance the quality, utility, and clarity of the information to be collected;
(d) Ways to minimize the burden of the information collection on respondents, including
through the use of automated collection techniques or other forms of information technology;
and
(e) Estimates of capital or start-up costs and costs of operation, maintenance, and
purchase of services to provide information.
All comments will become a matter of public record. Comments on the collection of
information should be sent to the address listed in the ADDRESS section of this document. A
copy of the comments may also be submitted to the OMB desk officer: By mail to U.S. Office of
Management and Budget, 725 17th Street NW, #10235, Washington, DC 20503, or by facsimile
40
to 202-395-6974; or email to oira_submission@omb.eop.gov, Attention, Federal Banking
Agency Desk Officer.
Information Collection
Title: Industrial Banks and Industrial Loan Companies.
OMB Number: 3064-0213.
Affected Public: Prospective parent companies of industrial banks and industrial loan
companies.
Table 1. Summary of Estimated Annual Burden (OMB No. 3064-0213)
Information
Collection
(Obligation to
Respond)
Type of
Burden
(Frequency of
Response)
Number of
Respondents
Number of
Responses per
Respondent
Time per
Response
(HH:MM)
Annual
Burden
(Hours)
1. Initial Listing of
Subsidiaries,
12 CFR
354.4(a)(1)
(Mandatory)
Reporting
(On Occasion)
3
1
04:00
12
2. Annual Update
of Subsidiaries
List,
12 CFR
354.4(a)(1)
(Mandatory)
Reporting
(Annual)
3
1
04:00
12
3. Annual Report
of Covered
Company and
Subsidiaries and
Other Reports as
the FDIC may
require,
12 CFR
354.4(a)(3)
(Mandatory)
Reporting
(Annual)
3
1
10:00
30
4. Recordkeeping
requirements in
written agreement,
12 CFR
Recordkeeping
(Annual)
3
1
10:00
30
0
12
2. Annual Update
of Subsidiaries
List,
12 CFR
354.4(a)(1)
(Mandatory)
Reporting
(Annual)
3
1
04:00
12
3. Annual Report
of Covered
Company and
Subsidiaries and
Other Reports as
the FDIC may
require,
12 CFR
354.4(a)(3)
(Mandatory)
Reporting
(Annual)
3
1
10:00
30
4. Recordkeeping
requirements in
written agreement,
12 CFR
Recordkeeping
(Annual)
3
1
10:00
30
41
354.4(a)(4)
(Mandatory)
5. Contingency
Plan,
12 CFR 354.4(b)
(Mandatory)
Reporting
(Annual)
1
1
345:00
345
Total Annual Burden (Hours):
429
Source: FDIC.
Note: The annual burden estimate for a given collection is calculated in two steps. First, the total number of annual
responses is calculated as the whole number closest to the product of the annual number of respondents and the
annual number of responses per respondent. Then, the total number of annual responses is multiplied by the time
per response and rounded to the nearest hour to obtain the estimated annual burden for that collection. This
rounding ensures the annual burden hours in the table are consistent with the values recorded in the OMB’s
regulatory tracking system.
The FDIC has increased the estimated respondent count by one in Information Collections 1 - 4 to account for the
effect in the change in scope in this proposed rule.
C.
Plain Language
Section 722 of the Gramm-Leach-Bliley Act77 requires each Federal banking agency to
use plain language in all of its proposed and final rules published after January 1, 2000. The
FDIC sought to present the proposed rule in a simple and straightforward manner
t by one in Information Collections 1 - 4 to account for the
effect in the change in scope in this proposed rule.
C.
Plain Language
Section 722 of the Gramm-Leach-Bliley Act77 requires each Federal banking agency to
use plain language in all of its proposed and final rules published after January 1, 2000. The
FDIC sought to present the proposed rule in a simple and straightforward manner.
•
Has the FDIC organized the material to suit your needs? If not, how could it present the
proposed rule more clearly?
•
Has the FDIC clearly stated the requirements of the proposed rule? If not, how could the
proposed rule be more clearly stated?
•
Does the proposed rule contain technical jargon that is not clear? If so, which language
requires clarification?
•
Would a different format (grouping and order of sections, use of headings, paragraphing)
make the proposed rule easier to understand? If so, what changes would make the
proposed rule easier to understand?
77 12 U.S.C. 4809.
42
•
What else could the FDIC do to make the proposed rule easier to understand?
D.
Riegle Community Development and Regulatory Improvement Act of 1994
Pursuant to section 302(a) of the Riegle Community Development and Regulatory
Improvement Act of 199478 (RCDRIA), in determining the effective date and administrative
compliance requirements for new regulations that impose additional reporting, disclosure, or
other requirements on IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any administrative burdens that such
regulations would place on affected depository institutions, including small depository
institutions, and customers of depository institutions, as well as the benefits of such regulations
eporting, disclosure, or
other requirements on IDIs, each Federal banking agency must consider, consistent with
principles of safety and soundness and the public interest, any administrative burdens that such
regulations would place on affected depository institutions, including small depository
institutions, and customers of depository institutions, as well as the benefits of such regulations.
In addition, section 302(b) of RCDRIA requires new regulations and amendments to regulations
that impose additional reporting, disclosures, or other new requirements on IDIs generally to take
effect on the first day of a calendar quarter that begins on or after the date on which the
regulations are published in final form.79 The FDIC invites comments that further will inform its
consideration of RCDRIA.
E. Providing Accountability Through Transparency Act of 2023
The Providing Accountability Through Transparency Act of 202380 requires that a notice
of proposed rulemaking include the Internet address of a summary of not more than 100 words in
length of a proposed rule, in plain language, that shall be posted on the Internet website under
section 206(d) of the E-Government Act of 2002.81
The FDIC proposes to modify the rule governing the parent companies of industrial
banks, part 354. The amendments would revise the regulation’s scope to include conversions
78 12 U.S.C. 4802(a).
79 12 U.S.C. 4802(b).
80 12 U.S.C. 553(b)(4).
81 44 U.S.C. 3501 note.
the Internet website under
section 206(d) of the E-Government Act of 2002.81
The FDIC proposes to modify the rule governing the parent companies of industrial
banks, part 354. The amendments would revise the regulation’s scope to include conversions
78 12 U.S.C. 4802(a).
79 12 U.S.C. 4802(b).
80 12 U.S.C. 553(b)(4).
81 44 U.S.C. 3501 note.
43
involving proposed industrial banks under section 5 of the Home Owners’ Loan Act and other
situations as determined by the FDIC; clarify the relationship between written commitments and
the FDIC’s evaluation of relevant statutory factors; and set forth additional criteria the FDIC
would consider when assessing the risks presented to an industrial bank by its parent company
and affiliates and evaluating the institution’s ability to function independently of its parent
company and affiliates.
List of Subjects in 12 CFR Part 354
Bank deposit insurance, Banks, Banking, Finance, Holding companies, Industrial banks,
Industrial loan companies, Insurance, Parent company, Reporting and recordkeeping
requirements, Savings associations.
Authority and Issuance
For the reasons stated in the preamble, the Federal Deposit Insurance Corporation
proposes to amend 12 CFR part 354 as follows:
PART 354—INDUSTRIAL BANKS
■ 1. Amend the authority for 12 CFR part 354 as follows:
Authority: 12 U.S.C. 1464, 1811, 1815, 1816, 1817, 1818, 1819(a) (Seventh) and
(Tenth), 1820(g), 1831o-1, 3108, 3207.
■ 2. Revise § 354.2 to read as follows:
§ 354.2 Definitions
* * * * *
Covered Company means
urance Corporation
proposes to amend 12 CFR part 354 as follows:
PART 354—INDUSTRIAL BANKS
■ 1. Amend the authority for 12 CFR part 354 as follows:
Authority: 12 U.S.C. 1464, 1811, 1815, 1816, 1817, 1818, 1819(a) (Seventh) and
(Tenth), 1820(g), 1831o-1, 3108, 3207.
■ 2. Revise § 354.2 to read as follows:
§ 354.2 Definitions
* * * * *
Covered Company means
(a) any company that is not subject to Federal consolidated supervision by the FRB and
that controls an industrial bank:
(1) As a result of a change in bank control pursuant to section 7(j) of the FDI Act;
(2) As a result of a merger transaction pursuant to section 18(c) of the FDI Act;
(3) As a result of a conversion pursuant to section 5(i)(5) of the Home Owners’ Loan Act;
(4) That is granted deposit insurance by the FDIC pursuant to section 6 of the FDI Act; or
44
(5) As determined by the FDIC after providing the company an opportunity to present its
views in writing as to why the provisions of this part should not apply;
in each case on or after April 1, 2021; or
(b)
A company that controls an industrial bank, if, on or after [the effective date of the final
rule]:
(1) The control of such company changes, requiring a notice subject to section 7(j) of the FDI
Act; or
(2) The company is the resultant entity following a merger transaction.
* * * * *
■ 3. In § 354.4:
■ a. Revise the introductory text of paragraph (a); and
■ b. Revise paragraph (c).
The revisions read as follows:
§ 354.4 Required commitments and provisions of written agreement
of such company changes, requiring a notice subject to section 7(j) of the FDI
Act; or
(2) The company is the resultant entity following a merger transaction.
* * * * *
■ 3. In § 354.4:
■ a. Revise the introductory text of paragraph (a); and
■ b. Revise paragraph (c).
The revisions read as follows:
§ 354.4 Required commitments and provisions of written agreement
(a) The commitments required to be made in the written agreements referenced in § 354.3
are set forth in paragraphs (a)(1) through (8) of this section. In addition, with respect to an
industrial bank subject to this part, the FDIC will condition each grant of deposit insurance, each
issuance of a non-objection to a change in control, each approval of a merger, each approval of a
conversion, and each determination of Covered Company status on compliance with paragraphs
(a)(1) through (8) of this section by the parties to the written agreement. As required, each
Covered Company must:
* * * * *
(c) For each type of filing through which an industrial bank would become subject to this
part, the FDIC must evaluate the appropriate statutory factors pursuant to applicable law. The
required commitments, written agreement provisions, and industrial bank subsidiary restrictions,
as described in this part, will be taken into account as part of the FDIC’s consideration of the
underlying filing, but do not replace any statutory factor applicable to an underlying filing and
will not necessarily lead to the favorable resolution of any statutory factor where the facts and
circumstances are otherwise unfavorable.
* * * * *
■ 4. Redesignate § 354.6 as § 354.7
■ 5. Add § 354.6 to read as follows:
§ 354.6 Additional considerations.
45
of the
underlying filing, but do not replace any statutory factor applicable to an underlying filing and
will not necessarily lead to the favorable resolution of any statutory factor where the facts and
circumstances are otherwise unfavorable.
* * * * *
■ 4. Redesignate § 354.6 as § 354.7
■ 5. Add § 354.6 to read as follows:
§ 354.6 Additional considerations.
45
(a) Parent company – The FDIC shall consider the degree of risk presented to the
industrial bank from the parent company and its affiliates. In assessing the degree of risk
presented from the parent company and its affiliates, the FDIC shall consider the following
elements:
(1) The parent company’s business purpose for establishing or acquiring control of the
industrial bank;
(2) The existing and proposed relationships among the parent company and its affiliates;
(3) The parent company’s history of regulatory and consumer compliance, including the
status of any significant pending or outstanding enforcement actions, investigations,
administrative matters, or contingent liabilities;
(4) The supervisory record of the parent company and any affiliates regulated by the
federal banking agencies;
(5) The novelty of the parent company’s primary businesses, and the extent to which new
or innovative processes are being implemented or utilized;
(6) The accessibility of information, including the books and records of the parent
company and any affiliated domestic or foreign entities; and
(7) Any plans or processes that mitigate risks presented by the parent company.
anking agencies;
(5) The novelty of the parent company’s primary businesses, and the extent to which new
or innovative processes are being implemented or utilized;
(6) The accessibility of information, including the books and records of the parent
company and any affiliated domestic or foreign entities; and
(7) Any plans or processes that mitigate risks presented by the parent company.
(b) Industrial Bank – In every case, the FDIC shall also consider the degree to which the
industrial bank will have:
(1) An independent board and management team; and
(2) A business model that is viable on a standalone basis and that has franchise value
independent of the parent organization. A business model is viable on a standalone basis and has
franchise value if the main business functions of the industrial bank will not be reliant on the
parent organization, including the industrial bank’s operations, loans and investments, deposits
and other funding sources, client sourcing, and any other primary business activities.
(c)(1) Rebuttable presumptions regarding shell or captive industrial banks. Any
proposal for an industrial bank that presents the following characteristics will be presumed to be
a shell or captive industrial bank. The industrial bank –
(i) Could not function independently of the parent company;
(ii) Would be significantly or materially reliant on the parent company or its affiliates; or
(iii) Would serve only as a funding channel for an existing parent company or affiliate
business line.
(2) The FDIC shall presume that the shell or captive nature of an industrial bank involved
in a filing weighs heavily against favorably resolving one or more applicable statutory factors.
(ii) Would be significantly or materially reliant on the parent company or its affiliates; or
(iii) Would serve only as a funding channel for an existing parent company or affiliate
business line.
(2) The FDIC shall presume that the shell or captive nature of an industrial bank involved
in a filing weighs heavily against favorably resolving one or more applicable statutory factors.
(3) Rebuttal of presumptions. The FDIC will afford any company seeking to rebut a
presumption in this subsection (c) an opportunity to present its views in writing. While the FDIC
is considering any such materials, the FDIC will suspend consideration of any related filings,
time periods shall be tolled, and transactions shall not be consummated.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.