WASHINGTON — After a year when
The Federal Deposit Insurance Corp., helmed by newly confirmed chairman Martin Gruenberg, has had an inconsistent track record in recent years on granting new ILC applications, and that inconsistency is attributable largely to the different attitudes of the agency's leadership over that time.
ILCs are state-chartered and FDIC-insured depositories owned by nonfinancial companies. Fourteen companies have applied for ILC charters since 2017, but approvals of those applications were few and far between until 2020. In the first year of the pandemic, after 14 years without approvals, Block — formerly Square Financial Services — and the education financing company Nelnet Bank were granted charters by the FDIC under the leadership of former Chair Jelena McWilliams.
McWilliams also pushed through a set of
Expectations for new ILC charters have been muted since President Biden assumed office in 2021, but attention around nonbank charters refocused when
The FDIC did not immediately return a request for comment for this article.
Whether or not Musk's ambitions for Twitter come to fruition, a coalition of fintech skeptics has taken shape since the announcement, including regulators, politicians, consumer groups and the banking industry, united in their opposition to the idea of nonbanks engaging in finance despite having varying motives for that opposition.
"I think the ILC situation is essentially at a stalemate," said Ian Katz, managing director of Capital Alpha Partners. "I don't think the FDIC is very interested in accepting applications. Gruenberg isn't a fan of ILCs, so it's unlikely that a sizable or high-profile one would get approved."
Even so, some lawmakers want to ensure that ILCs don't get a favorable regulatory environment should any new charters be approved. Senate Banking Committee Chairman Sherrod Brown, D-Ohio, reintroduced the industry-supported Close the Shadow Banking Loophole Act late last year, a bill that would subject ILCs to supervision by the Federal Reserve.
Lack of supervision "will only open doors for predatory lending, invasions of consumer privacy, and broader financial instability," Brown said in a statement accompanying the introduction of the bill. "To protect consumers' pocketbooks and ensure a strong banking system for Main Street, we need to ensure all banking institutions play by the same rules."
Brown's bill, introduced in the lame-duck portion of the last Congress, was a message bill that is unlikely to advance in the Republican-controlled House. But it was still supported by consumer advocates and the banking industry alike.
"I also don't see the ILC legislation getting far," Katz said. "Like most legislation, it's weighted by partisan differences, and with a split Congress it's unlikely to advance. It's essentially a message reasserting that progressive Democrats are suspicious of ILCs. So I think for the next two years you see mainly the status quo."
Isaac Boltansky, managing director and director of policy research at BTIG, said even without the passage of legislation that levels the playing field between bank holding companies and ILCs, the FDIC under Gruenberg will serve as something of a de facto ban on ILC approvals while Biden remains in office.
"Whenever we think about an institution that's attempting to get access to the benefits without compliance with the requirements, there will inherently be questions. It doesn't mean that ILCs don't make sense. It just means that no one's going to get a charter during the Biden administration," Boltansky said. "It's exceedingly clear to me that ILCs are increasingly viewed with great skepticism in Democratic circles. Every indication is that the chairman Gruenberg will take that conceptual stance and operationalize it through stopping future ILC applications."
Cliff Stanford, a partner with Alston & Bird, said there was still some hope for ILC applications to be approved by the FDIC in the coming years. Gruenberg's opposition to ILCs is more case-by-case than categorical, he said, and if a firm makes the right pitch they may receive a more favorable reception than a firm that is less thoughtful about their application.
"ILCs and the controversy surrounding them are nothing new," Stanford said. "While now-Chairman Gruenberg voted against the FDIC's 2020 rule, he did so on grounds that the final rule was weaker than the rules originally proposed, not because he thought the FDIC should never approve of insurance for new ILCs."
Stanford added that Gruenberg has voted in favor of some ILC applications in the recent past, suggesting his view may be more nuanced than the conventional wisdom might presume. This could have particular salience for companies like the automaker
"He voted for the application of Nelnet, and against the approval of Square's ILC insurance application," Stanford said. "His votes on those applications reflected a focus on whether the parent would be able to be a 'source of strength' to the ILC, applying the law, and not on whether the FDIC should consider applications in the first instance. In other words, while the bar is high, I don't see that there is an inherent, categorical bias against approval of new applications at the FDIC."
