Independent Banker - February 2020 - 47

today, and some big tech and commercial enterprises are
looking to take advantage of it. This again poses a serious
threat to the personal and economic lives of Americans.
Last fall alone, three firms filed ILC applications.
Once more, ICBA is leading the charge to defeat these
applications and permanently close the ILC loophole.
The danger of unregulated banks
The FDIC is currently considering deposit insurance applications
for several Utah-based ILC charters, including
those filed by Square, Nelnet (a student loan company and
educational services provider), IBG (a brokerage firm) and
Rakuten (Japan's version of Amazon). With the Office of the
Comptroller of the Currency's (OCC) fintech charter ruled
invalid by a district court, the ILC charter is a backdoor way
for a fintech company to try to get into banking without
partnering with a federally regulated financial institution.
It's also an attractive option for a fintech looking to avoid
the Bank Holding Company Act (BHCA) rules that prohibit
companies that own banks from engaging in activities unrelated
to banking. For example, if Rakuten owned an ILC,
it could engage in banking without having to divest any of
its e-commerce, communications and energy companies,
including one that owns a baseball team.
While mixing banking and commerce has always been
a dangerous combination, today's era of dominant Big
Data, social media and e-commerce conglomerates; artificial
intelligence; and financial technology, would give even
more reach into the economic lives of Americans, adding
privacy concerns on top of existing economic concerns.
An ILC charter would allow these companies to avoid
consolidated Federal Reserve supervision. This leaves a
dangerous gap in safety and soundness oversight. Commercial
firms that want to get into the business of banking
through an ILC are trying to take advantage of the federal
safety net while avoiding legal restrictions and company
oversight, which is counter to the principles upon which the
FDIC was founded.
Mixing a company's banking and commercial activities
also jeopardizes the impartial allocation of credit, creates
egregious conflicts of interest and results in a dangerous
concentration of commercial and economic power.
Halting ILCs for good
ICBA is fighting the ILC battle on both the legislative and
regulatory fronts.
Senate Banking Committee member John Kennedy
(R-La.) recently introduced the ICBA-backed Eliminating
Corporate Shadow Banking Act of 2019 (S.2839). The bill
would close the ILC loophole by amending the definition of
How you can help
As ICBA continues to work with all concerned
policymakers to close the ILC loophole and
maintain the separation of banking and commerce,
community bank grassroots advocates across the
nation will continue to play an important role in
gathering support.
Community bankers should be on the lookout
for alerts as ILC legislation moves forward. Seize
the opportunity to bring up the ILC loophole and
the danger it presents to the financial system when
meeting with members of Congress. All concerned
community bankers should ensure their members
of Congress cosponsor legislation to close the
ILC loophole.
Check out the ICBA grassroots action center at
icba.org/beheard where you can sign up for alerts
and compose your own message to Congress.
" bank " under Section 2 of the BHCA so that ILCs would no
longer be exempted from the definition of " bank. "
As a result, the parent companies of ILCs would be subject
to the BHCA, including provisions requiring entities
that own or control banks to only be engaged in activities
that are closely related to banking or finance. The bill would
grandfather in existing ILCs, therefore permitting them to
continue their commercial affiliations. ICBA is working with
lawmakers to build bipartisan support for S.2839 and to
introduce a companion bill in the House.
On the regulatory front, ICBA has penned letters to the
San Francisco office of the FDIC opposing ILC charter
applications filed by IBG, Square, Nelnet and Rakuten and
requested a temporary moratorium on future ILC deposit
insurance applications.
It's a strategy that's been successful in the past. Recognizing
the dangers of mixing banking and commerce, both the
FDIC and Congress have previously placed moratoriums on
the use of ILCs following ICBA's successful campaign against
Walmart's bid for an ILC charter in 2006. Social Finance
withdrew its ILC application for SoFi Bank in 2017 after
the company was rocked by an internal scandal. Meanwhile,
both Square and Nelnet withdrew previous applications in
2017 and 2018, respectively, before refiling them in 2019.
Closing the ILC loophole and leveling the playing field for
community banks will remain a top priority for ICBA as an
increasing number of nonbank technology companies look
to exploit this outdated charter.
independentbanker.org Q 47
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Independent Banker - February 2020

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