[Federal Register: February 5, 2007 (Volume 72, Number 23)]
[Proposed Rules]
[Page 5217-5228]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr05fe07-12]
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Proposed Rules
Federal Register
________________________________________________________________________
This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.
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[[Page 5217]]
FEDERAL DEPOSIT INSURANCE CORPORATION
12 CFR Part 354
RIN 3064-AD15
Industrial Bank Subsidiaries of Financial Companies
AGENCY: Federal Deposit Insurance Corporation (FDIC).
ACTION: Notice of proposed rulemaking.
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SUMMARY: The FDIC is publishing for comment proposed rules that would
impose certain conditions and requirements on each deposit insurance
application approval and non-objection to a change in control notice
that would result in an insured industrial loan company or industrial
bank (collectively ``industrial bank'' or ``ILC'') \1\ becoming, after
the effective date of any final rules, a subsidiary \2\ of a company
that is engaged solely in financial activities and that is not subject
to consolidated bank supervision by the Federal Reserve Board or the
Office of Thrift Supervision (``Federal Consolidated Bank
Supervision''). The proposed rules would also require that before any
industrial bank may become a subsidiary of a company that is engaged
solely in financial activities and that is not subject to Federal
Consolidated Bank Supervision (a ``Non-FCBS Financial Company''), such
company and the industrial bank must enter into one or more written
agreements with the FDIC. Simultaneously with the proposed rules, the
FDIC is publishing a Notice to extend for one year its moratorium for
applications for deposit insurance and change in control notices for
industrial banks that will become subsidiaries of companies engaged in
non-financial activities (``commercial companies'').\3\ By this action,
however, the FDIC is not expressing any conclusion about the propriety
of ownership or control of industrial banks by commercial companies.
The FDIC has determined that it is appropriate to provide additional
time for review of such ownership and the related issues by the FDIC
and by Congress.
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\1\ The term ``industrial bank'' or ``ILC'' means any insured
State 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).
\2\ The term ``subsidiary'' means any company that is
controlled, directly or indirectly, by another company.
\3\ A financial activity is generally any activity that is
permissible for a financial holding company or a savings and loan
holding company. See the proposed section 354.2 for a detailed
definition of the term. Any other activity is ``non-financial.''
DATES: Written comments must be received by the FDIC no later than May
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7, 2007.
ADDRESSES: You may submit comments, identified by RIN number 3064-AD15,
by any of the following methods:
Federal eRulemaking Portal: http://www.regulations.gov;
submissions must include the agency's name (``FDIC'') and the RIN
(3064-AD15) for this rulemaking,
Agency Web site: http://www.FDIC.gov/regulations/laws/federal/propose.html
,
Mail: Robert E. Feldman, Executive Secretary, Attention:
Comments/Legal ESS, Federal Deposit Insurance Corporation, 550 17th
Street, NW., Washington, DC 20429.
Hand Delivery/Courier: The guard station at the rear of
the 550 17th Street Building (located on F Street), on business days
between 7 a.m. and 5 p.m., or
E-mail: comments@FDIC.gov. Include RIN number 3064-AD15 in
the subject line of the message.
Public Inspection
Comments may be inspected and photocopied in the FDIC
Public Information Center, Room E-1002, 3501 North Fairfax Drive,
Arlington, VA, between 9 a.m. and 4:30 p.m. on business days.
Comments received will be posted without change to http://www.FDIC.gov/regulations/laws/federal/propose.html
and will include any
personal information provided, except that the FDIC may redact any
inappropriate matter.
FOR FURTHER INFORMATION CONTACT: Robert C. Fick, Counsel (202) 898-
8962, A. Ann Johnson, Counsel (202) 898-3573 or Thomas P. Bolt,
Counsel, (202) 898-6750, Federal Deposit Insurance Corporation, 550
17th Street, NW., Washington, DC 20429.
SUPPLEMENTARY INFORMATION:
Background
I. History Of Industrial Banks
Industrial banks were first chartered in the early 1900's as small
loan companies for industrial workers. Over time the chartering states
have expanded the powers of their industrial banks to the extent that
some industrial banks now have generally the same powers as state
commercial banks.\4\
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\4\ Most of the industrial banks operating today do not offer
demand deposits. Even in those states that have authorized
industrial banks to offer demand deposits, industrial banks
generally do not offer them. Offering demand deposits could, under
certain circumstances, make any company that controls the industrial
bank subject to supervision under the Bank Holding Company Act. See
generally, The FDIC's Supervision of Industrial Loan Companies: A
Historical Perspective, Supervisory Insights (Summer 2004).
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Industrial banks are state-chartered banks,\5\ and all of the
existing FDIC-insured industrial banks are ``state nonmember banks''
under the Federal Deposit Insurance Act (FDI Act). As a result, their
primary Federal banking supervisor is the FDIC. The FDIC generally
exercises the same supervisory and regulatory powers over industrial
banks that it does over other state non-member banks.
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\5\ 12 U.S.C. 1813(a)(2).
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While industrial banks are ``banks'' under the FDI Act,\6\ they
generally are not ``banks'' under the Bank Holding Company Act
(BHCA).\7\ One result of this difference in treatment is that a company
that owns an FDIC-insured industrial bank could engage in commercial
activities and/or may not be subject to Federal Consolidated Bank
Supervision. By contrast, bank holding companies or savings and loan
holding companies are generally prohibited from engaging in commercial
activities. Another result is that some of the companies that own
insured industrial banks are not subject to Federal Consolidated Bank
Supervision. The FDIC has noted a recent increase in deposit insurance
applications for, and change in control notices with respect to,
industrial banks that would be affiliated with commercial concerns or
other companies that would not have a
[[Page 5218]]
Federal Consolidated Bank Supervisor.\8\ Some members of Congress, the
Government Accountability Office, the FDIC's Office of Inspector
General, and members of the public have expressed concerns regarding
the lack of Federal Consolidated Bank Supervision, the uncertainty
regarding the parent company's willingness or ability to serve as a
source of strength to the subsidiary industrial bank, the potential
risks from mixing banking and commerce, the potential for conflicts of
interest, and the potential for an ``uneven playing field.''
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\6\ 12 U.S.C. 1813(a)(2).
\7\ See 12 U.S.C. 1841(c)(2)(H).
\8\ The term ``Federal Consolidated Bank Supervisor'' means
either the Federal Reserve Board or the Office of Thrift
Supervision.
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In 1987 Congress enacted the Competitive Equality Banking Act
(CEBA) \9\ which exempted companies that control certain industrial
banks from the BHCA. The industrial bank industry has grown and evolved
significantly since CEBA was enacted. As of year-end 1987, 105
industrial banks reported aggregate total assets of $4.2 billion and
aggregate total deposits of $2.9 billion. The reported total assets for
these industrial banks ranged from $1.0 million to $411.9 million, with
the average industrial bank reporting $40.0 million in total assets and
$27.3 million in total deposits.
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\9\ Public Law 100-86, 101 Stat. 552 (codified as amended in
various sections of title 12 of the U.S. Code).
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Between 1987 and 2006 total assets held by industrial banks grew
from $4.2 billion to $177 billion. In 1996 one large financial services
firm moved its entire credit card operation into its subsidiary
industrial bank, increasing the assets in the industry to $22.6
billion. Within the period from 1999 to 2000 another large financial
services firm moved approximately $40 billion from uninsured funds into
insured deposits in its subsidiary industrial bank.\10\
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\10\ Since 2000 at least three additional financial services
firms that control industrial banks have offered their clients the
option of holding their cash funds in insured deposits in the firms'
industrial banks.
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As of year-end 1999, the FDIC insured 55 industrial banks with
aggregate total assets of $43.6 billion and aggregate total deposits of
$22.5 billion. The reported total assets for these industrial banks
ranged from $2.4 million to $15.6 billion, with 10 institutions
reporting total assets of more than $1 billion. The four largest
institutions reported total assets of $15.6 billion, $4.4 billion, $3.8
billion, and $3.0 billion. Six other institutions reported total assets
of $1.1 billion to $2.5 billion. The remaining portfolio of industrial
banks, on average, reported total assets of $152.5 million.
Since January 1, 2000, 24 industrial banks became insured.\11\ As
of January 30, 2007, there were fifty-eight insured industrial banks
\12\ with aggregate total assets of approximately $177 billion. Six
industrial banks reported total assets of $10 billion or more; eleven
other industrial banks reported total assets of $1 billion or more. The
remaining forty-one institutions, on average, reported total assets of
approximately $231.8 million. Forty-five of those fifty-eight operated
in Utah and California.\13\ Of the fifty-eight existing industrial
banks, forty-three were either owned by one or more individuals or
controlled by a parent company whose business is financial in nature.
As of January 30, 2007, thirty-one of the fifty-eight existing
industrial banks were owned by financial companies that were not
subject to Federal Consolidated Bank Supervision. Fifteen industrial
banks were subsidiaries of holding companies that are commercial in
nature. Eight of the fifty-eight industrial banks (representing
approximately sixty-nine percent of industrial bank industry assets)
were owned by companies that were engaged solely in financial
activities and were subject to consolidated supervision by the FRB or
the OTS. Four of the fifty-eight industrial banks were owned by
individuals.
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\11\ During 2000, four new industrial banks were insured; two
during each of 2001 and 2002; five during 2003; six during 2004;
four during 2005; and one in 2006.
\12\ The difference between 79 (55 industrial banks at the end
of 1999 plus 24 new ones since then) and 58 results from various
mergers, conversions, voluntary liquidations and one failure.
Aggregate asset figures are as of September 30, 2006, the most
recent reported data.
\13\ Industrial banks also operate in Colorado, Hawaii, Indiana,
Minnesota and Nevada.
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Recent Developments
While some of the industrial banks insured after CEBA are subject
to Federal Consolidated Bank Supervision, many of the recent
applications and notices are from companies that would have no Federal
Consolidated Bank Supervisor. Currently, eight applications for deposit
insurance for industrial banks are pending before the FDIC. In 2006,
the FDIC also received seven notices of change in bank control to
acquire an industrial bank.\14\ None of the potential parent companies
of the current industrial bank applicants or the potential acquirers of
industrial banks would be subject to Federal Consolidated Bank
Supervision.
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\14\ Five of the change in control notices have been withdrawn,
and one was approved.
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In 2005, the Government Accountability Office (GAO) expressed its
concern that industrial banks owned by commercial companies or other
entities without a Federal Consolidated Bank Supervisor created an
uneven playing field when compared to banks and thrifts owned by
holding companies subject to Federal Consolidated Bank Supervision.\15\
The GAO questioned whether the FDIC's examination, regulation, and
supervision authorities were sufficient to protect such industrial
banks. The concerns regarding the lack of consolidated supervision and
the possible limitations of the FDIC's authority echoed those
previously expressed by the FDIC's Office of Inspector General in a
2004 report.\16\
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\15\ U.S. Gov't Accountability Office, GAO-05-621, Industrial
Loan Corporations: Recent Asset Growth and Commercial Interest
Highlight Differences in Regulatory Authority 79-80 (2005)
(hereinafter ``GAO Report 05-621'').
\16\ See Federal Deposit Insurance Corporation Office of
Inspector General, Report No. 2004-048, The Division of Supervision
and Consumer Protection's Approach for Supervising Limited-Charter
Depository Institutions (2004) (hereinafter ``OIG Report'').
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Some industrial banks continue to be small, community-focused
institutions. However, the FDIC has noted a recent increase in the
number of applications for deposit insurance and notices of change in
control for industrial banks that would be affiliated with commercial
companies or other entities that would not be subject to Federal
Consolidated Bank Supervision. These companies are often large
organizations that tend to have complex business plans, and their
subsidiary industrial banks tend to provide specialty lending programs
or financial services or other support to the company.
Whatever their purpose or structure, the industrial bank charter
has generated a significant amount of public interest in recent years
as various entities have explored the feasibility and advantages
associated with including an industrial bank as part of their
operations.
In 2006, the FDIC received more than 13,800 comment letters
regarding the proposed Wal-Mart Bank's 2005 deposit insurance
application.\17\ Most of these comments expressed opposition to
granting deposit insurance to this particular applicant; however, some
commenters raised more universal concerns about industrial banks. Over
640 of the more general comments were specifically focused on the risk
posed to the Deposit Insurance Fund by industrial banks owned by
holding companies without a Federal Consolidated Bank Supervisor.
Similar
[[Page 5219]]
sentiments were expressed by witnesses during three days of public
hearings held by the FDIC regarding the Wal-Mart application. In
addition, The Home Depot also filed a change in control notice in
connection with its proposed acquisition of EnerBank, a Utah industrial
bank. In response to the request for public comment on the change in
control notice, the FDIC received approximately 830 comment letters;
almost all of them expressed opposition to the proposed acquisition.
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\17\ See the FDIC's web site at http://www.fdic.gov/regulations/laws/walmart/
.
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Congress also has had a continuing interest in the industrial bank
charter. Most recently, on July 12, 2006, the House Committee on
Financial Services (Committee) held a hearing regarding industrial
banks. At this hearing, General Counsels from the FDIC and the Federal
Reserve Board (``FRB'') testified before the Committee, discussing the
history, characteristics, current industry profile, and supervision of
industrial banks.\18\ The FDIC's testimony noted that today's
industrial banks are owned by a diverse group of financial and
commercial entities. Among such entities are industrial banks that
serve a particular lending, funding, or processing function within a
larger organizational structure, and those that directly support one or
more affiliate's commercial activities. The FDIC further noted that
industrial banks may share employees and obtain critical support from
affiliated companies. The business plans for these industrial banks
differ substantially from the consumer lending focus of the original
industrial banks. In addition to the hearings, three bills were
introduced in the House in the last two years for the purpose of making
either the FDIC or another banking agency the Federal consolidated bank
supervisor for industrial bank holding companies and prohibiting
ownership or control of an industrial bank by a commercial firm.\19\
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\18\ Industrial Loan Companies: A Review of Charter, Ownership,
and Supervision Issues: Hearing Before the H. Comm. on Financial
Services, 109th Cong. (2006). The Committee also heard testimony
from G. Edward Leary, Commissioner for the Utah Department of
Financial Institutions; Rick Hilman, Director of Financial Markets
and Community Investment, U.S. Government Accountability Office;
George Sutton, Former Commissioner for the Utah Department of
Financial Institutions; Terry Jorde, Chairman, President, and CEO of
CountryBank USA, Chairman of ICBA; John L. Douglas, Partner, Alston
& Bird; Arthur C. Johnson, Chairman and CEO of United Bank of
Michigan; Prof. Lawrence J. White, Professor of Economics, Stern
School of Business of New York University; Michael J. Wilson,
Director, Legislative and Political Action Department, United Food
and Commercial International Union. Also, several organizations
submitted record statements.
\19\ 19 See H.R. 698, 1st Sess. 110th Cong. (2007); H.R. 5746,
109th Cong., 2d Sess. (2006); H.R. 3882, 109th Cong., 1st Sess.
(2005).
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To evaluate the concerns and issues raised with respect to
industrial banks, on July 28, 2006, the FDIC imposed a six-month
moratorium on FDIC action with respect to certain industrial bank
applications or notices.\20\ The FDIC declared the moratorium to enable
it to further evaluate (i) industry developments, (ii) the various
issues, facts, and arguments raised with respect to the industrial bank
industry, (iii) whether there are emerging safety and soundness issues
or policy issues involving industrial banks or other risks to the
insurance fund, and (iv) whether statutory, regulatory, or policy
changes should be made in the FDIC's oversight of industrial banks in
order to protect the Deposit Insurance Fund or important Congressional
objectives.\21\
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\20\ See Moratorium on Certain Industrial Loan Company
Applications and Notices, 71 FR 43482 (August 1, 2006).
\21\ Id. at 43483.
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II. Request for Comments
On August 23, 2006, the FDIC published in the Federal Register a
Notice with a Request for Public Comment on a wide range of issues
concerning industrial banks.\22\ The Notice presented 12 specific
questions for consideration by commenters. The issues presented by the
questions included the current risk profile of the industrial bank
industry; safety and soundness issues uniquely associated with
ownership of such institutions; the FDIC's practice with respect to
evaluating and making determinations on industrial bank applications
and notices; whether a distinction should be made when the industrial
bank is owned by an entity that is commercial in nature; and the
adequacy of the FDIC's supervisory approach with respect to industrial
banks.
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\22\ See Industrial Loan Companies and Industrial Banks, 71 FR
49456 (August 23, 2006).
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The FDIC received over 12,600 comment letters in response to the
Notice during the comment period.\23\ Approximately 12,485 comments
were generated by what appears to be organized campaigns either
supporting or opposing the proposed industrial bank to be owned by Wal-
Mart or the proposed acquisition of Enerbank, also an industrial bank,
by The Home Depot. The remaining comment letters were sent by
individuals, law firms, community banks, financial services trade
associations, existing and proposed industrial banks or their parent
companies, the Conference of State Bank Supervisors, and two members of
Congress. Of the total comments received, seventy-one commenters
addressed specific substantive issues concerning the industrial bank
industry and its regulation.
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\23\ See http://www.fdic.gov/regulations/laws/federal/2006/06comilc.html
.
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Summary of the Substantive Responses by Topic
i. The Current Risk Profile of the Industrial Bank Industry
Some commenters stated that the significant growth in total
industrial bank industry assets and deposits has not adversely affected
the risk profile of the industry and, therefore, industrial banks,
regardless of ownership, present no unique safety and soundness
concerns. These commenters argued that the industrial bank industry
presents significantly less risk, and is therefore superior in
comparison to, the industry profiles for other insured institutions.
These commenters also contended that a supervisory approach that
focuses on the bank itself, as opposed to consolidated supervision, is
more effective for their supervision because current restrictions on
affiliate transactions adequately address conflicts of interest and
other potential forms of risk. Some of these commenters questioned the
propriety of measuring risk on an industry-wide basis, and encouraged
the FDIC to assess risk on an institution-by-institution basis. In
addition, these commenters largely discouraged assessing risk
differently for industrial banks based on considerations such as
whether an institution's owner is subject to Federal Consolidated Bank
Supervision, arguing that what mattered was the individual institution
and its particular characteristics. In the view of these commenters,
these distinctions are arbitrary because there is no evidence showing
that any particular form of ownership or supervision is safer in terms
of risk than another.
Many commenters opposed any mixing of banking and commerce. Other
commenters, however, also noted the recent growth in total industry
assets and deposits and were concerned about the risks that may emerge
from such growth, including for example, dilution of the Federal
deposit insurance system, i.e., the growth of deposits at industrial
banks could result in an increase of bank insurance premiums in order
to bring the deposit insurance funds back to the designated reserve
ratio. These commenters also noted an increase in the number of
industrial banks owned by entities that are commercial in nature. They
are concerned that these industrial banks present unique risks compared
to other insured institutions
[[Page 5220]]
primarily because they are not subject to Federal Consolidated Bank
Supervision and, with respect to publicly traded parent companies of
industrial banks, are primarily concerned with maximizing shareholder
profit. Others also asserted that commercial ownership requires
consolidated supervision because the FDIC lacks legal authority, staff
or expertise to adequately supervise industrial banks owned by large
commercial companies. Additionally, one commenter stated that absence
of consolidated supervision for companies not subject to the Bank
Holding Company Act meant that both commercial ownership and financial
ownership posed increased risks, while some asserted that commercial
ownership presents greater risks than financial ownership and others
(discussed above) asserted that only commercial ownership poses risks.
As to determining how to distinguish between a company that is
financial or commercial in nature, one commenter suggested that a
company should be considered ``financial'' if 80 percent of its
revenues came from financial activities, while another commenter
proposed that 85 percent should be the determinative number.
ii. FDIC's Current Practice When Making Determinations on Industrial
Bank Applications and Notices
Some commenters encouraged the FDIC to continue evaluating all
industrial bank applications on a case-by-case basis. These commenters
believe that the statutory criteria for evaluating industrial bank
applications and notices are thorough and comprehensive, and asserted
that any departure from those criteria might be held by a court to be
arbitrary and capricious agency action. These commenters also urged the
FDIC to continue conditioning Federal deposit insurance on a case-by-
case basis, and they objected to any proposals to impose general
restrictions on industrial banks that are not subject to consolidated
supervision, arguing that general restrictions predicated solely on the
nature or form of industrial bank ownership are arbitrary and
capricious.
Other commenters proposed that the FDIC augment its current
practice with respect to evaluating industrial bank applications and
notices, and presented additional factors for the FDIC to consider.
They argued that the FDI Act authorizes the FDIC to consider any factor
reasonably related to safety and soundness, the risk presented to the
Deposit Insurance Fund, and/or the convenience and needs of the
community; therefore the FDIC may evaluate a parent company's
motivation or purpose for chartering or acquiring an industrial bank,
as well as the parent company's reputation, market reach, and corporate
strategy with respect to competition. However, some of these commenters
also opined that FDIC action on any application or notice which is
based on considerations that are not specifically authorized under the
FDI Act would be arbitrary and capricious.
Several commenters supported extending the FDIC's moratorium on
deposit insurance applications for new industrial banks and
acquisitions of existing industrial banks until Congress has the time
to enact legislation prohibiting affiliations between industrial banks
and commercial or other entities that are not subject to Federal
Consolidated Bank Supervision. Others believed that congressional
action is not required and that the FDIC has the authority to deny any
industrial bank application or notice if the industrial bank would be
controlled by an entity not subject to Federal Consolidated Bank
Supervision. Several commenters also asserted that an affiliation
between an industrial bank and an entity not subject to Federal
Consolidated Bank Supervision--primarily, a commercial entity--
presented several safety and soundness concerns, and that industrial
banks which serve as a support mechanism for an affiliated entity do
not serve the convenience and needs of the community. Another commenter
encouraged the FDIC to discontinue its practice of conditioning Federal
deposit insurance on a case-by-case basis, arguing that conditions lack
a binding effect because they may be removed by the FDIC at a later
time. Some commenters suggested restricting affiliations between
industrial banks and commercial or other entities without a Federal
Consolidated Bank Supervisor by regulation.
iii. Comments Regarding Commercial Ownership of Industrial Banks
Some commenters discounted the concerns commonly expressed
concerning commercially-owned industrial banks, re-emphasizing that
such institutions are subject to regulations that prevent tying and
that, they believe, effectively restrict transactions with affiliates.
Other commenters disagreed, contending that commercially-owned
industrial banks are more likely to have conflicts of interest than
other insured institutions because they have an inherent incentive to
advance the interests of their commercial affiliates. According to
these commenters, this necessarily requires frustrating the interests
of competitors, and creates a propensity for industrial banks to
discriminate in the provision of banking services. Some commenters also
encouraged the FDIC to prohibit commercial entities from chartering or
acquiring an industrial bank because, as mentioned earlier, they
believe that the current statutory and regulatory structure does not
sufficiently mitigate the risks unique to such institutions.
Some commenters disputed the belief that commercially-owned
industrial banks have a significant competitive advantage over other
insured institutions because, in their view, unlike a traditional bank,
an industrial bank operates under a limited-purpose charter which
narrows the range of services an industrial bank may offer. Also, they
asserted that there are public benefits obtained when an industrial
bank provides banking services to discrete customer groups. Other
commenters disagreed, and reiterated their view that industrial banks
have an inherent competitive advantage over other depository
institutions because industrial banks have greater access to capital,
customers, and marketing opportunities through their parent companies.
They also argued that access to niche banking services is already
provided by community banks, and that some industrial banks have the
potential to cause more harm than good because their rapid growth has
added a significant amount of insured deposits to the system in recent
years, thereby diluting the Federal Deposit Insurance Fund.
Some commenters again stated that conditions should only be imposed
on industrial banks on a case-by-case basis because, in their view,
conditions cannot, as a matter of law, be imposed uniformly on such
institutions. Other commenters reiterated their concern that industrial
banks owned by commercial firms present a greater risk to the Federal
Deposit Insurance Fund, and again proposed prohibiting commercial firms
from owning industrial banks, or at a minimum, making these forms of
ownership subject to standard conditions.
iv. Comments on the Need for Supervisory Change
Some commenters urged the FDIC to consider the sound performance
record to date of the industrial bank industry, and the adverse affect
that restricting ownership and growth would have on the dual-banking
system. These commenters also argued that the FDIC lacks authority to
impose restrictions on
[[Page 5221]]
industrial banks concerning affiliations, growth, or operations by
regulation because industrial banks are explicitly exempt from Federal
Consolidated Bank Supervision under the BHCA. In their view, the FDIC's
authority is limited to imposing conditions on deposit insurance
applications and change in control notices until Congress acts to
expand consolidated supervision to cover industrial banks. On the other
hand, one commenter urged the FDIC to compare the current landscape of
the industrial bank industry to the one that existed when Congress
exempted industrial banks from the BHCA, suggesting that Congress did
not intend for the exemption to apply to the kind of industrial banks
that exist today. Other commenters argued that the FDIC has authority
to impose standard conditions on industrial banks by regulation, as
long as such action promotes safety and soundness or mitigates risks
posed to the Federal Deposit Insurance Fund. Some commenters favored
extending the moratorium until Congress has an opportunity to enact
legislation to impose Federal Consolidated Bank Supervision on the
owners of all industrial banks.
III. Necessity for Additional Supervisory Measures
The FDIC's experience suggests no risk or other possible harm that
is unique to the industrial bank charter. Rather, the concerns that
have been raised focus on the ownership or control of the industrial
bank and on the proposed industrial bank's business model or plan.
Consequently, the FDIC's analysis below of how to proceed focuses
primarily on the entities that would control the industrial bank.
The mission of the FDIC is to promote the stability of, and public
confidence in, the nation's banking system. The FDIC's statutory duties
include insuring the deposits of all insured depository institutions,
and maintaining and administering the Deposit Insurance Fund.\24\ While
the bank and thrift chartering agencies seek to maintain the safety and
soundness of the institutions subject to their jurisdiction, the FDIC
has a unique responsibility for the safety and soundness of all insured
banks and savings associations in that it is the only agency which has
the power to grant deposit insurance to a bank or savings association,
and it is the only agency that has the power to take it away.\25\ In
granting deposit insurance, the FDIC must consider the factors listed
in section 6 of the FDI Act; \26\ these factors generally focus on the
safety and soundness of the proposed bank or savings association and
any risk it may pose to the Deposit Insurance Fund. Similarly, the FDIC
can terminate an institution's deposit insurance if the FDIC finds that
the institution is engaging in an unsafe or unsound practice or is in
an unsafe or unsound condition. Moreover, the FDIC is the sole Federal
regulator with responsibility for the safety and soundness of all state
nonmember banks, including industrial banks. Not only does the FDIC
have the responsibility to decide whether to grant or terminate deposit
insurance for state nonmember banks based upon safety and soundness
considerations, but it also can issue cease and desist orders and
impose civil money penalties based upon safety and soundness
considerations.\27\ Finally, the FDIC may permit or deny various
transactions (e.g., branching, mergers, and changes in bank control) by
state nonmember banks based to a large extent on safety and soundness
considerations and on its assessment of the risk posed to the Deposit
Insurance Fund.\28\
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\24\ See sections 1 & 11 of the FDI Act, 12 U.S.C. 1811, 1821.
\25\ See sections 5 & 8(a) of the FDI Act, 12 U.S.C. 1815,
1818(a).
\26\ 12 U.S.C. 1816.
\27\ See section 8 of the FDI Act, 12 U.S.C. 1818.
\28\ See sections 7(j), 18(c), & 18(d) of the FDI Act, 12 U.S.C.
1817(j), 1828(c), & 1828(d).
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As described above, the FDIC has a statutory duty to monitor,
evaluate, and take necessary action to ensure the safety and soundness
of state nonmember banks. In order to carry out that responsibility,
the FDIC must interpret and apply the law to circumstances that may not
have been envisioned or, at least, clearly addressed by statutes
written many years in the past. Furthermore, the FDIC has a duty to be
proactive, not just reactive; the FDIC does not have to wait until
problems or losses occur before it takes action. The FDIC believes that
recent developments in the industrial bank industry mandate that the
FDIC take action now to ensure the safety and soundness of industrial
banks and to protect the Deposit Insurance Fund.
As described above, one of the notable recent developments is the
significant growth of the industrial bank industry. In its 2005 report
on industrial banks, the GAO highlighted the growth in total industrial
bank assets. The GAO noted that between 1987 and 2004, industrial bank
assets grew over 3,500 percent.\29\ The GAO also noted that in 2004,
six industrial banks had at least $3 billion in total assets, and one
had over $66 billion in total assets. The report further stated that
this growth was primarily concentrated in a few large industrial banks
owned by financial services firms. Moreover, the report indicated that
as of the end of 2004, six industrial banks owned $119 billion in
assets or eighty-five percent of the total industrial bank industry
assets and controlled about $64 billion in insured deposits.\30\
Finally, the GAO noted that between 1999 and 2005 the insured deposits
held by all industrial banks grew by more than 500 percent.\31\
---------------------------------------------------------------------------
\29\ See GAO Report 05-621, p. 18.
\30\ Id.
\31\ See Id. at 20.
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Also, as noted above, industrial bank powers have expanded
significantly since the first industrial bank was chartered. When the
first industrial banks were chartered, their powers were generally
limited to consumer lending. However, as time progressed, the states
that chartered industrial banks expanded their powers to the extent
that today many industrial banks have virtually the same powers as a
state commercial bank.\32\
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\32\ California industrial banks currently have the same powers
as California commercial banks except that industrial banks are not
permitted to offer demand deposits. See Cal. Fin. Code sections
1401, 1411, & 1412. Utah industrial banks have essentially the same
powers as Utah commercial banks except that industrial banks have
more limited securities powers and less specific investment
authority than commercial banks. See Utah Code Ann., Title 7,
Chapters 1, 3, & 8. Nevada industrial banks have essentially the
same powers as Nevada commercial banks, except for certain insurance
and securities powers, which require the approval of the
Commissioner of Financial Institutions. See Nev. Rev. Stat. Sec.
657.005, et seq.
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Another circumstance that has raised concerns is the interest shown
by large companies in owning industrial banks. Some of these companies
are engaged in activities that are predominantly commercial in nature,
e.g., manufacturing, retail sales, and trucking. Some of these
companies tend to utilize their subsidiary industrial banks in ways
that involve unusual, affiliate-dependent business plans. It has been
argued that despite the statutory limitations on transactions with
affiliates and on tying between banks and their affiliates, there is
nevertheless a substantial potential for conflicts of interest in the
absence of Federal Consolidated Bank Supervision. Specifically, a bank
may have a strong incentive to take risks, especially credit risks,
that it would not otherwise deem prudent or it may engage in illegal
tying conduct in order to aid its parent company or other affiliates.
A further consideration is that the banking industry as a whole has
enjoyed a period of extraordinary economic
[[Page 5222]]
stability in the recent past. There have been no bank or thrift
failures in over two and one-half years--a record in the recent history
of banking. As a result, the financial viability of industrial banks
that are owned by companies not subject to consolidated oversight is
largely untested in times of economic stress or a downturn in the
economy. There is almost no track record that indicates how such
ownership structures might perform under stress and, specifically,
whether such ownership would tend to cause or exacerbate any risks to
the subsidiary industrial banks or the Deposit Insurance Fund.
Consolidated Federal supervision generally includes reporting,
examination, and minimum capital requirements that provide, at a
minimum, transparency for the early identification of emerging risks in
the affiliated entities. In addition, to the extent that a bank's
parent company can serve as a source of strength to the subsidiary bank
under Federal Consolidated Bank Supervision, the bank has an additional
resource for capital should its financial condition deteriorate. The
sometimes limited transparency of companies that are not subject to
consolidated oversight makes it more difficult to identify and to
control these risks before they may become significant risks to the
industrial bank subsidiary. Also, such companies may have no
expectation that they should serve as a source of strength to their
subsidiary banks. Furthermore, it has been argued that since regulation
necessarily imposes a cost on the regulated entity, it is unfair, from
a competitive standpoint, to allow companies that control one or more
industrial banks to conduct essentially the same business as bank
holding companies, financial holding companies, or thrift holding
companies that are subject to Federal Consolidated Bank Supervision. It
has been argued that to continue to permit this situation would provide
an incentive to those institutions that are subject to Federal
Consolidated Bank Supervision to migrate to the industrial bank model.
Such an incentive would seem contrary to Congress's long-standing
preference for Federal Consolidated Bank Supervision.
The main concerns regarding an industrial bank being controlled by
another company or layers of companies that lack Federal Consolidated
Bank Supervision include (i) the mixing of banking and commerce when a
commercial company controls an industrial bank, (ii) the need for the
parent company to serve as a source of capital for the subsidiary
industrial bank, and (iii) the difficulty in identifying problems or
risks that may develop in the company or its subsidiaries and
controlling or preventing the extent to which they impact the
industrial bank. The FDIC believes that it can deal with the latter two
concerns in the manner detailed by the proposed rules
Banks that are owned by one or more individuals, of course, have
neither a parent company nor parent company subsidiaries, and as a
result, they generally do not present the same potential for problems
as banks owned by companies. Industrial banks that are controlled by
companies, however, do present some significant risks. Because
industrial banks are generally excluded from the definition of ``bank''
under the BHCA, companies, whether engaged in commercial activities or
financial activities, that own an industrial bank would not necessarily
be subject to Federal Consolidated Bank Supervision.
Because the financial services industry continues to evolve to meet
the needs of the marketplace, the regulation of insured depository
institutions needs to continue to evolve to accommodate those changes.
In that regard, the FDIC's views on the supervision of industrial banks
to be owned by companies have also evolved. While any one of the
developments that have occurred in the industrial bank industry over
the last two decades might not, in isolation, be sufficient to warrant
regulatory action, the convergence of all of these developments at this
point in time argues for caution and for an approach designed to
provide greater transparency and to limit potential risks to industrial
banks and to the Deposit Insurance Fund resulting from control by
companies that are not subject to Federal Consolidated Bank
Supervision. The adoption of a set of comprehensive safeguards would
provide a Federal set of standards and requirements \33\ that the FDIC
can apply and enforce independent of the state authorities in a manner
that fulfills the FDIC's mission efficiently and to the fullest extent
possible.
---------------------------------------------------------------------------
\33\ While some of the chartering states do have supervisory
authority over companies that control industrial bank subsidiaries,
that is not true of all of the states that charter industrial banks.
---------------------------------------------------------------------------
The FDIC believes that it is prudent to limit or control the
exposure presented by some of these ownership structures by imposing
controls on them now before there is a substantial proliferation of
them. There is no reason to believe that interest in industrial banks
will subside; in fact, there is a good possibility that it may
intensify. If problems were to develop once a large number of
industrial banks are controlled by companies not subject to
consolidated oversight, the risks could be magnified greatly and become
more difficult to address than if appropriate regulatory action is
taken now.
The FDIC recognizes that companies that are only engaged in
financial activities are engaged in activities that are generally well-
understood by, or at least, familiar to, the Federal banking agencies.
The FDIC also recognizes that the Federal banking agencies generally
have effective systems and procedures for dealing with the risks
presented by most financial activities. However, unlike companies
subject to Federal Consolidated Bank Supervision, financial companies
that are not subject to consolidated federal supervision (Non-FCBS
Financial Companies) that own industrial banks may not provide the same
level of transparency nor the same opportunity for supervisors to deal
with the risks. As deposit insurer and as the primary Federal banking
supervisor for industrial banks, the FDIC must ensure that the risks
arising from the business activities of the owners of insured
industrial banks do not impair the safety and soundness of those
industrial banks or impose undue risks on the Deposit Insurance Fund.
This requires a focus on the risks from the insured institution's
activities as well as the activities of its owner. Where insured
industrial banks are owned by Non-FCBS Financial Companies, it is
increasingly important for the FDIC to exercise its powers as deposit
insurer and as the primary Federal banking supervisor for industrial
banks to provide oversight to control the risks that may be created by
such owners.
The regulatory action that the FDIC is proposing today is directed
only at industrial banks that will become subsidiaries of Non-FCBS
Financial Companies, that is, companies that (i) are engaged only in
financial activities, and (ii) are not subject to Federal Consolidated
Bank Supervision. As noted in the notice of limited extension of the
moratorium published elsewhere in the Federal Register today, the FDIC
is not proposing any changes in its regulation or supervision of
industrial banks that will be directly controlled by one or more
individuals. Furthermore, the FDIC is not proposing any changes in its
regulation or supervision of an industrial bank that will become a
subsidiary (direct or indirect) of an FCBS Financial Company, that is,
a company that (i) is engaged only in financial activities and (ii) is
subject to Federal Consolidated Bank Supervision
[[Page 5223]]
(i.e., a bank holding company, a financial holding company, or a
savings and loan holding company). With respect to industrial banks
that will be owned by companies engaged in commercial activities, the
FDIC is extending the moratorium to allow more time for study by the
FDIC and to allow time for Congress to consider the issues presented by
such an ownership model. In publishing the proposed rules, and in
extending the moratorium for one year, the FDIC is not expressing any
conclusion about the propriety of control of industrial banks by
commercial companies. Rather, the FDIC has determined that it is
appropriate to provide additional time for review of such ownership and
the related issues by the FDIC and by Congress.
As noted above, the proposed rules are limited in their application
to industrial banks that will become subsidiaries of Non-FCBS Financial
Companies. The current limitation is essential to limit any change in
the nature of the corporate owner's business to financial activities
until such time as the moratorium expires or other appropriate action
is taken by the FDIC or Congress.
Access to current and complete information about the potential
risks to an insured industrial bank that may be created by the
operations of its parent company or its affiliates is especially
critical today because of the speed with which an industrial bank or
its parent company can move into new and more risky business
operations. Changes in the overall corporate focus of the owners of
even well-rated institutions could lead to participation in risky or
emerging activities that could jeopardize the insured institution's
safety and soundness well before supervisory ratings would typically be
adjusted. More fundamentally, under current regulations the FDIC may
not always have timely access to information about the risks posed by
changes in the business focus of parent companies without direct access
to these owners. We believe that it is prudent to issue the proposed
Part 354 in order to gain an understanding of the emerging risks that
may be developing in some of the large and complex companies that may
desire to control an industrial bank.
With respect to industrial banks that become subsidiaries of Non-
FCBS Financial Companies, the proposed rules are intended to provide
the safeguards that the FDIC believes could be helpful to identify and
avoid or control, on a consolidated basis, the safety and soundness
risks and the risks to the Deposit Insurance Fund that may result from
that kind of company-ownership model. The proposed rules would,
therefore, provide enhanced transparency and a system of controls that
should effectively deal with the risks presented by such ownership
structures.
The proposed rules would not apply to industrial banks that are
already owned by financial companies not subject to Federal
Consolidated Bank Supervision. However, the FDIC will continue to
exercise close supervision of these industrial banks and any risks that
may be created in the future from their parent companies or affiliates
to ensure that these institutions continue to operate in a safe and
sound manner.
Finally, while the proposed rules are pending, the FDIC will
consider deposit insurance applications and change in control notices
with respect to industrial banks that will be controlled by financial
companies that are not subject to Federal Consolidated Bank Supervision
on a case-by-case basis. After any final rules are adopted, the FDIC
will consider requests to modify any conditions and requirements agreed
to during the period between issuance of the proposed rules and the
effective date of the final rules to conform such conditions and
requirements to those in the final rules.
IV. Authority for Additional Supervisory Measures
The FDIC has the authority to issue such rules and regulations as
it deems necessary to carry out the provisions of the FDI Act \34\
including rules to ensure the safety and soundness of industrial banks
and to protect the Deposit Insurance Fund.\35\ The FDIC also has the
authority to issue rules to ensure the safety and soundness of insured
depository institutions. As noted above, the mission of the FDIC is to
promote the stability of, and public confidence in, the nation's
banking system and to protect the Deposit Insurance Fund. Moreover, as
deposit insurer, the FDIC has a unique responsibility for the safety
and soundness of all insured banks and savings associations. In
granting deposit insurance for any insured depository institution,
including industrial banks, as well as in terminating it, the FDIC must
assess the safety and soundness of the institution.\36\ The FDIC also
can issue a cease and desist order against, or impose civil money
penalties on, an industrial bank and any institution-affiliated party
(including a parent company of the industrial bank) based upon the
FDIC's assessment of safety and soundness considerations.\37\
Furthermore, the FDIC can order an industrial bank and its parent
company to take other corrective action, e.g., provide indemnification,
dispose of any asset, or rescind contracts based upon safety and
soundness considerations.\38\ Finally, the FDIC may permit or deny
various transactions (e.g., branching, mergers, and changes in bank
control) by industrial banks based on, at least in part, safety and
soundness considerations and risk to the Deposit Insurance Fund.
---------------------------------------------------------------------------
\34\ See sections 9(a)(Tenth) and 10(g) of the FDI Act, 12
U.S.C. 1819(a)(Tenth), 1820(g).
\35\ See section 8 of the FDI Act, 12 U.S.C. 1818.
\36\ See sections 5, 6, & 8(a) of the FDI Act, 12 U.S.C. 1815,
1816, & 1818(a).
\37\ See section 8(b), (i) of the FDI Act, 12 U.S.C. 1818(b),
(i).
\38\ See section 8(b)(6) of the FDI Act, 12 U.S.C. 1818(b)(6).
---------------------------------------------------------------------------
Also as discussed above, the FDIC has a statutory duty to monitor,
evaluate, and take necessary action to ensure the safety and soundness
of industrial banks. Courts have recognized that the determination of
what is safe and sound is committed to the expertise of the regulatory
agencies.\39\ The proposed rules reflect the FDIC's concern that,
without the provisions detailed in the proposed rules, control of
industrial banks by financial companies that are not subject to Federal
Consolidated Bank Supervision limits the FDIC's ability to oversee the
potential risks to the industrial bank and to the Deposit Insurance
Fund from such owners. Importantly, the FDIC has a duty to take
appropriate action to guard against threats to the safety and soundness
of industrial banks and to the Deposit Insurance Fund; the FDIC does
not have to wait until problems or losses occur before it takes
action.\40\ The FDIC believes that the recent developments in the
industrial bank industry described above mandate that the FDIC take
action now in the form of the proposed rules to ensure the safety and
soundness of industrial banks controlled by such financial companies
and to protect the Deposit Insurance Fund.
---------------------------------------------------------------------------
\39\ See Groos National Bank v. Comptroller of the Currency, 573
F.2d 889, 897 (5th Cir. 1978), First National Bank of LaMargue v.
Smith, 610 F.2d 1258, 1265 (5th Cir. 1980).
\40\ See Independent Bankers Ass'n of Am. v. Heimann, 613 F.2d
1164, 1169 (D.C. Cir. 1979), cert. denied 449 U.S. 823 (1980);
Investment Company Institute v. FDIC, 815 F.2d 1540, 1549 (D.C. Cir.
1987); National Council of Savings Institutions v. FDIC, 664 F.
Supp. 572 (D.D.C. 1987) see also First Nat'l Bank of Lamarque v.
Smith, 610 F.2d 1258 (5th Cir. 1980).
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V. Discussion of Proposed Rules
Some of the principal concerns that have emerged regarding
industrial banks to be controlled by Non-FCBS Financial Companies
center on the transparency
[[Page 5224]]
of such parent companies and their subsidiaries, the need for a source
of strength for the industrial bank subsidiary, capital maintenance,
and dependence by the industrial bank on the parent company and its
subsidiaries. Generally, the proposed rules would assure, through
reporting and examinations, that the FDIC has the ability to obtain
transparency with respect to a parent company and its subsidiaries.
Furthermore, the proposed rules would require that the parent company
serve as a resource for additional capital for the industrial bank.
Finally, the proposed rules would provide some control over the
dependence of the industrial bank on the parent company and its other
subsidiaries. For example, the proposed rules would limit a parent
company's representation on the board of a subsidiary industrial bank
to 25%. Additionally, the proposed rules also would require prior FDIC
approval before the industrial bank may make a material change in its
business plan or add or replace a board member or senior executive
officer during the first three years after becoming a subsidiary of a
financial company.
The conditions and requirements proposed in part 354 are not novel.
In many cases financial companies, e.g., companies engaged in
securities or mortgage lending, come under some type of supervision
already and, therefore, are used to some form of regulatory scheme and
supervision. Moreover, some of the requirements that would be imposed
by these proposed rules have been imposed in the past on a case-by-case
basis. For example, in the course of considering deposit insurance
applications or change in control notices, the FDIC has required parent
companies to execute written agreements to maintain a subsidiary bank's
capital and liquidity at certain minimum levels; in addition, the FDIC
has required that a bank maintain its capital at a certain level and
obtain the FDIC's prior consent before it changes its business plan or
replaces a board director. The FDIC has concluded that the statutory
objectives of maintaining the safety and soundness of industrial banks
and controlling the risks to the Deposit Insurance Fund would be
furthered if the proposed requirements were imposed uniformly on all
industrial banks that are to be owned by Non-FCBS Financial Companies.
The following is a section-by-section discussion of the proposed rules.
Section 354.1 Scope
This section describes the industrial banks that are subject to the
requirements detailed in part 354. The requirements described in the
following sections of part 354 are in addition to the statutory and
regulatory requirements otherwise applicable to applications and
notices filed with respect to such industrial banks. The industrial
banks that are subject to the following requirements are those that
will, after the effective date of the rules, become subsidiaries of
companies that are engaged solely in financial activities and that are
not subject to Federal Consolidated Bank Supervision by the FRB or the
OTS, that is, Non-FCBS Financial Companies. The proposed rules would
apply to such industrial banks whether they become subsidiaries of such
Non-FCBS Financial Companies as a result of the grant of deposit
insurance to a newly-chartered industrial bank, as a result of a change
in control with respect to the industrial bank, or as a result of a
merger or consolidation of a parent company of the industrial bank with
one or more other companies. Thus, this part would not apply to any
industrial bank that will, after the effective date of the rules,
become a subsidiary of any company that is engaged solely in financial
activities and that is, or will be, subject to Federal Consolidated
Bank Supervision by the FRB or the OTS, that is, a FCBS Financial
Company. In addition, this part does not apply to any industrial bank
that will be wholly, and directly, owned by one or more individuals
(i.e., the industrial bank will not be controlled, directly or
indirectly, by any company). Finally, this part does not apply to any
industrial bank that will become a subsidiary of any company engaged in
non-financial activities (i.e., activities other than financial
activities as that term is defined in section 354.2).
Section 354.2 Definitions
This section lists the definitions that apply to this part. The
term ``control'' would be defined as it is in the FDIC's change in
control regulations at 12 CFR 303.81(c) and specifically would include
the rebuttable presumption of control at 12 CFR 303.82(b)(2).
Under these provisions a person (including a company) would control
an industrial bank if the person would have the power, directly or
indirectly, to (i) vote 25 percent or more of any class of voting
shares of any industrial bank or any company that controls the
industrial bank (i.e., a parent company), or (ii) direct the management
or policies of any industrial bank or any parent company. In addition,
the FDIC presumes that a person would have the power to direct the
management or policies of any industrial bank or any parent company if
the person will, directly or indirectly, own, control, or hold with
power to vote at least 10 percent of any class of voting shares of any
industrial bank or any parent company, and either the industrial bank's
shares or the parent company's shares are registered under section 12
of the Securities Exchange Act of 1934, or no other person (including a
company) will own, control or hold with power to vote a greater
percentage. If two or more persons (including companies), not acting in
concert, will each have the same percentage, each such person will have
control. As noted above, control of an industrial bank can be indirect.
For example, company A may control company B which in turn may control
company C which may control an industrial bank. Company A and company B
would each have indirect control of the industrial bank, and company C
would have direct control. As a result, the industrial bank would be a
subsidiary (as defined below) of each such company. The term
``financial activity'' would be defined to include any activity that
either of the following entities may engage in: (i) A financial holding
company, as described in the BHCA and the implementing regulations of
the FRB,\41\ or (ii) a savings and loan holding company, as described
in the Home Owners' Loan Act (``HOLA''). The FDIC intends to follow the
written guidance of the FRB and OTS in its interpretations of the term
``financial activity'' and to consult with the FRB and/or OTS before
making any decisions. The term ``Non-FCBS Financial Company'' would be
defined to mean any company that is not subject to Federal Consolidated
Bank Supervision and that is engaged solely in financial activities.
This definition, therefore, would exclude financial companies that are
subject to Federal Consolidated Bank Supervision by the FRB or OTS
(``FCBS Financial Companies''), as well as commercial companies. The
term ``industrial bank'' would be defined to mean any insured state
bank that is an industrial bank, industrial loan company or other
similar institution that is excluded from the BHCA definition of
``bank.'' The term ``senior executive officer'' would have the meaning
given to it in the FDIC's regulations on changes in senior executive
officer at 12 CFR 303.101(b). The term ``subsidiary'' would be
specifically defined to mean any
[[Page 5225]]
company which is controlled, directly or indirectly, by another
company. Finally, the terms ``company'' and ``insured depository
institution'' would have the meanings given them in the FDI Act.
---------------------------------------------------------------------------
\41\ Bank holding companies are not separately listed because
financial holding companies can engage in every activity that a bank
holding company can.
---------------------------------------------------------------------------
Section 354.3 Written Agreement
This section would prohibit any industrial bank from becoming a
subsidiary of a Non-FCBS Financial Company unless the Non-FCBS
Financial Company enters into one or more written agreements with the
FDIC and the industrial bank. In such agreements the company would make
certain commitments to the FDIC including those listed in paragraphs
(a) through (h) of section 354.4 and such other provisions as the FDIC
may deem appropriate in the particular circumstances. When two or more
financial companies will control (as the term ``control'' is defined in
section 354.2), directly or indirectly, the industrial bank, each such
financial company would have to execute such written agreement(s). This
circumstance could occur, for example, (i) when two or more Non-FCBS
Financial Companies will each have the power to vote 10% or more of the
voting stock of an industrial bank or of a company that controls an
industrial bank which stock is registered under section 12 of the
Securities Exchange Act of 1934, or (ii) when one Non-FCBS Financial
Company will control another financial company that directly controls
an industrial bank.
Section 354.4 Conditions and Provisions of Written Agreement
This section would include a list of the commitments that the Non-
FCBS Financial Company would agree to observe. There are eight
commitments lettered (a) through (h); they are intended to provide the
safeguards and protections that the FDIC believes would be prudent to
impose with respect to maintaining the safety and soundness of
industrial banks that are controlled by Non-FCBS Financial Companies.
In order to provide the FDIC with more timely and more complete
information about the activities, financial condition, operations, and
risks of each parent Non-FCBS Financial Company and its subsidiaries,
the FDIC believes that each such Non-FCBS Financial Company that
controls the industrial bank must furnish the FDIC an initial listing,
with annual updates, of all of the company's subsidiaries (commitment
(a)); consent to the FDIC's examination of the company and each of its
subsidiaries (commitment (b)); submit to the FDIC an annual report on
the company and its subsidiaries, and such other reports as the FDIC
may request (commitment (d)); maintain such records as the FDIC deems
necessary to assess the risks to the industrial bank and to the Deposit
Insurance Fund (commitment (e)); and cause an independent annual audit
of each subsidiary industrial bank to be performed during the first
three years after the industrial bank becomes its subsidiary
(commitment (f)). In order to ensure that each Non-FCBS Financial
Company parent remains a financial company, it would also have to
commit that it will engage, directly or indirectly, only in financial
activities (commitment (c)). In order to ensure that the subsidiary
industrial bank maintains sufficient capital and/or liquidity, each
parent financial company would commit to maintain each industrial bank
subsidiary's capital and/or liquidity at such levels as the FDIC deems
appropriate and/or take such other action as the FDIC deems appropriate
to provide each industrial bank with a resource for additional capital/
or liquidity (commitment (h)). Finally, in order to limit the extent of
each parent financial company's influence over the subsidiary
industrial bank, each such company would commit to limit its
representation on the industrial bank's board of directors to 25% of
the members of the board, or if the bank is organized as a limited
liability company and is managed by a board of managers, to 25% of the
members of the board of managers, or if the bank is organized as a
limited liability company and is managed by its members, to 25% of
managing member interests (commitment (g)). For example, if company A
controlled company B which had 15% representation on the industrial
bank's board, company B's representation would be attributed to company
A, and company A would be limited to 10% direct representation on the
bank's board.
This section would also provide that each approval of a deposit
insurance application and each issuance of a non-objection to a change
in control with respect to an industrial bank that would become a
subsidiary of a financial company would be conditioned on each parent
Non-FCBS Financial Company complying with (a) through (h) of the
commitments.
Section 354.5 Restrictions on Industrial Bank Subsidiaries of Financial
Companies
This section would require the FDIC's prior written approval before
an industrial bank that becomes a subsidiary of a Non-FCBS Financial
Company may take certain actions. These restrictions, like the
commitments discussed above, are generally intended to provide the
safeguards and protections that the FDIC believes would be prudent to
impose with respect to maintaining the safety and soundness of
industrial banks that become controlled by financial companies not
subject to Federal Consolidated Bank Supervision. Accordingly, the
proposed rules would require prior FDIC approval if the subsidiary
industrial bank wanted to take any of five actions. In order to ensure
that the industrial bank does not immediately after becoming a
subsidiary of a Non-FCBS Financial Company engage in high-risk or other
inappropriate activities, the bank would have to get the FDIC's prior
approval to make a material change in its business plan during the
first three years after becoming a subsidiary of a financial company
(paragraph (a)). In order to limit the influence of its parent Non-FCBS
Financial Company, the bank would have to get the FDIC's prior approval
to add or replace a member of the board of directors or board of
managers or a managing member, as the case may be, during the first
three years after becoming a subsidiary of a financial company
(paragraph (b)); add or replace a senior executive officer during the
first three years after becoming a subsidiary of a financial company
(paragraph (c)); employ a senior executive officer who is associated in
any manner with an affiliate of the industrial bank, e.g., as a
director, officer, employee, agent, owner, partner, or consultant of
the financial company or a financial company subsidiary (paragraph
(d)); or finally, enter into any contract for essential services with
the financial company or a financial company subsidiary (paragraph
(e)).
Request for Comments
The FDIC is seeking comments on all aspects of the proposed rules,
including the following questions:
1. The requirements described in this notice would apply to
industrial banks that become subsidiaries of companies that are engaged
solely in financial activities, but that are not subject to Federal
Consolidated Bank Supervision, and to those financial companies (``Non-
FCBS Financial Companies''). Some of the provisions include continuing
requirements, e.g., to maintain capital or to engage only in financial
activities. Should the regulations include a cure period in the event
that the industrial bank or its parent company initially comply with
these requirements, but
[[Page 5226]]
later fall out of compliance? If so, should such a cure period be
provided for all requirements or just some of them (please specify)?
For example, section 4(m) of the BHCA, 12 U.S.C. 1843(m), generally
provides a 180-day cure period for a financial holding company if any
of its subsidiary depository institutions fails to be well-capitalized
and/or well-managed.
2. With regard to such continuing requirements, whether or not
there is a cure period, should the rules provide for remedies beyond
cease and desist orders and civil money penalties, e.g., should
violations of some of these requirements require divestiture of the
industrial bank similar to the divestiture provisions in section
4(m)(4) of the BHCA, 12 U.S.C. 1843(m)(4)? If so, for which
requirements? Should the written agreement with the parent company and
the industrial bank include a provision requiring the parent company to
divest the industrial bank if the parent company begins to engage,
directly or indirectly, in non-financial activities? Alternatively,
should the FDIC simply rely on section 8(b)(7) of the FDI Act, 12
U.S.C. 1818(b)(7), to order divestiture? \42\
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\42\ Section 8(b)(7) generally provides that in the event that
an institution-affiliated party engages in an unsafe or unsound
practice, violates any law, regulation, or condition imposed in
writing in connection with the granting of any application or
request by the depository institution, or any written agreement
entered into with the agency, the FDIC may ``place limitations on
the activities or functions of an insured depository institution or
any institution-affiliated party.'' The term ``institution-
affiliated party'' would include a company that is a controlling
stockholder of the bank and any person who has filed or is required
to file a change in control notice with the FDIC.
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3. Under the Bank Holding Act, a commercial company that becomes a
bank holding company has a period of time after becoming a bank holding
company subject to the supervision of the FRB in which to divest itself
of its nonconforming commercial activities or, alternatively, of its
bank(s). Should a commercial company seeking to acquire an industrial
bank and to divest itself of its commercial activities so that it would
become a Non-FCBS Financial Company similarly be given a period of time
by the FDIC within which it would be subject to the FDIC's supervisory
oversight, but would be allowed to divest itself of its commercial
activities or its industrial bank(s)? If so, for what period of time?
4. Should the FDIC further define ``services essential to the
operations of the industrial bank'' as that phrase is used in the
proposed section 354.5(e)? Should the restriction in that section be
clarified to include core banking services or risk management
functions?
5. For purposes of transparency and identifying any potential risks
to the industrial bank, we have included commitments requiring
examination and reporting. Is this approach the best way to gain that
transparency, or is there a better way? To what extent, if any, is the
FDIC's supervision enhanced by requiring a parent company of an
industrial bank to consent to examination of the company and each of
its subsidiaries as proposed in part 354? Is there another way to
identify any potential risks?
6. Is it appropriate for the FDIC to impose reporting and
recordkeeping requirements on a parent company of an industrial bank
and/or the parent company's subsidiaries?
7. The Gramm-Leach-Bliley Act of 1999 imposed certain restrictions
on the extent to which a Federal banking agency may regulate and
supervise a functionally regulated affiliate of an insured depository
institution.\43\ For example, such restrictions limit the FDIC's
authority to require reports from, examine, and impose capital
requirements on such a functionally regulated affiliate. In view of
these restrictions, should the conditions and requirements contained in
the proposed rules be modified to the extent that they might apply to
insurance companies and securities companies that may wish to control
an industrial bank?
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\43\ See section 45 of the FDI Act, 12 U.S.C. 1831v.
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8. The proposed regulation does not apply to a financial company
that is supervised by the FRB or the OTS. Should this treatment be
extended to a financial company that is subject to consolidated Federal
supervision by the U.S. Securities and Exchange Commission as a
``consolidated supervised entity'' pursuant to 17 CFR 240.15c3-1(a)(7),
240.15c3-1e, 240.15c3-1g, 240.17a-4(b)(12), 240.17a-5(a)(5) and (k),
240.17a-11(b)(2) and (h), 240.17h-1T(d)(4), and 240.17h-2T(b)(4)?
9. In order to ensure that each parent financial company can serve
as a source of strength to its industrial bank subsidiary and fulfill
its obligation under a capital maintenance agreement, should the FDIC
include a commitment that the parent company will maintain its own
capital at such a level that the Tier 1 capital ratio for the company,
on a consolidated basis, is at least 4% or some other level in some or
all circumstances?
10. If, at the conclusion of the moratorium, Congress has not acted
on legislation, how should the FDIC address the pending and any future
applications by commercial companies?
Regulatory Analysis and Procedure
A. Solicitation of Comments on Use of Plain Language
Section 722 of the Graham-Leach-Bliley Act requires the Federal
banking agencies to use ``plain language'' in all proposed and final
rules published after January 1, 2000. The FDIC invites comments on
whether the proposed rules are clearly written and if not, how the
language of the proposed rules might be improved.
B. Regulatory Flexibility Act
When an agency issues a rulemaking proposal, the Regulatory
Flexibility Act (``RFA'') (5 U.S.C. 601 et. seq.) requires the agency
to prepare and make available for public comment an initial regulatory
flexibility analysis (5 U.S.C. 603) or certify, in lieu of preparing an
analysis, that the proposed rules, if adopted, would not have a
significant economic impact on a substantial number of small entities
(5 U.S.C. 605). The proposed rules directly affect two types of
entities: (i) Any financial company that is not subject to Federal
Consolidated Bank Supervision that after the effective date of the
rules becomes the parent company of an industrial bank, and (ii) the
financial company's subsidiary industrial bank formed or acquired after
the effective date of the rules. Based on its experience with deposit
insurance applications and change in control notices involving
industrial bank subsidiaries of financial companies (as defined in the
proposed rules) from 1996 through 2005, and focusing particularly on
the period from 2001 through 2005, the FDIC estimates for purposes of
the threshold RFA analysis that in the future the proposed rules will
affect an average of three entities per year, only one of which will be
a small entity. One entity is not a substantial number. Therefore, the
FDIC certifies that the proposed rules will not have a significant
economic impact on a substantial number of small entities.
C. Paperwork Reduction Act
In accordance with the Paperwork Reduction Act (44 U.S.C. 3501 et
seq.), the FDIC may not conduct or sponsor, and a person is not
required to respond to, a collection of information unless it displays
a currently valid Office of Management and Budget (OMB) control number.
The collection of information contained in the proposed rules has been
submitted to OMB for review.
[[Page 5227]]
ADDRESSES: Interested parties are invited to submit written comments to
the FDIC concerning the Paperwork Reduction Act implications of this
proposal. Such comments should refer to ``PRA-Industrial Banks.''
Comments on Paperwork Reduction Act issues may be submitted by any of
the following methods:
http://www.FDIC.gov/regulations/laws/federal/propose.html.. E-mail: comments@FDIC.gov. Include ``PRA--Industrial
Banks'' in the subject line of the message.
Mail: Steve Hanft (202-898-3907), 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 17th Street Building (located on F Street),
on business days between 7 a.m. and 5 p.m.
A copy of the comments may also be submitted to: OMB desk
officer for the FDIC, Office of Information and Regulatory Affairs,
Office of Management and Budget, New Executive Office Building,
Washington, DC 20503.
Comment is solicited on:
(1) Whether the proposed collection of information is necessary for
the proper performance of the functions of the agency, including
whether the information will have practical utility;
(2) The accuracy of the agency's estimate of the burden of the
proposed collection of information, including the validity of the
methodology and assumptions used;
(3) The quality, utility, and clarity of the information to be
collected; and
(4) Ways to minimize the burden of the collection of information on
those who are to respond, including the use of appropriate automated,
electronic, mechanical, or other technological collection techniques or
other forms of information technology; e.g., permitting electronic
submission of responses.
(5) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchases of services to provide information.
Title of the collection: Industrial Banks.
Summary of the collection: The collection consists of reporting and
recordkeeping requirements associated with the supervision of insured
industrial loan companies or industrial banks that become subsidiaries
of financial companies after the effective date of the rules. More
specifically, the collection consists of an initial listing of all of
the company's subsidiaries, and an annual update to that list; an
annual report regarding the company's operations and activities;
occasional other reports regarding the activities, financial condition,
risk monitoring systems, transactions with the subsidiary industrial
bank, and compliance with Federal laws, of, or by, the company and each
of its subsidiaries; quarterly reports on capital ratio calculations;
external audits; Board membership; maintenance of capital and
liquidity; maintenance of certain records; and notices and applications
seeking FDIC approval to take certain actions. These information
collections are contained in sections 354.4 and 354.5 of the rules.
Frequency of the collection: For the listing of all of the
company's subsidiaries, and the report regarding the company's
operations and activities, the frequency of response is annual; the
other collections occur on occasion.
Annual burden estimate:
Estimated number of respondents: Three.
Estimated annual burden per respondent: 255 burden hours.
Total estimated annual burden: 765 burden hours.
The Treasury and General Government Appropriations Act, 1999--
Assessment of Impact of Federal Regulation on Families
The FDIC has determined that this proposal will not affect family
well-being within the meaning of section 654 of the Treasury and
General Government Appropriations Act, 1999, Public Law 105-277, 112
Stat. 2681.
List of Subjects in 12 CFR Part 354
Bank deposit insurance, Banks, Banking, Finance, Holding companies,
Industrial banks, Insurance, Reporting and recordkeeping requirements,
Savings associations.
For the reasons set forth in the preamble, the Board of Directors
of the Federal Deposit Insurance Corporation proposes to add 12 CFR
part 354 as follows:
PART 354--INDUSTRIAL BANK SUBSIDIARIES OF FINANCIAL COMPANIES
Sec.
354.1 Scope.
354.2 Definitions.
354.3 Written agreement.
354.4 Conditions and provisions of written agreement.
354.5 Restrictions on industrial bank subsidiaries of financial
companies.
Authority: 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a)
(Seventh) and (Tenth), 1820(g), 3108, 3207.
Sec. 354.1 Scope.
(a) This part, in addition to applicable notice or application
procedures in part 303 of this chapter, establishes certain
requirements for an industrial bank to become, after the effective date
of the rules, a subsidiary of a company that is engaged solely in
financial activities and that is not subject to Federal Consolidated
Bank Supervision by the Federal Reserve Board (FRB) or the Office of
Thrift Supervision (OTS) (a ``Non-FCBS Financial Company'').
(b) This part does not apply to:
(1) Any industrial bank that will become, after the effective date
of the rules, controlled by a company that is engaged solely in
financial activities and that is subject to Federal Consolidated Bank
Supervision by the FRB or the OTS,
(2) any industrial bank that will not become a subsidiary of a
company, and
(3) any industrial bank that will become, after the effective date
of the rules, a subsidiary of a company engaged in non-financial
activities.
Sec. 354.2 Definitions.
For purposes of this part the following definitions apply.
(a) The term ``control'' has the meaning given it in 12 U.S.C.
1817(j)(8) and 12 CFR 303.81(c) and includes the rebuttable presumption
of control at 12 CFR 303.82(b)(2).
(b) The term ``financial activity'' includes
(1) banking, managing or controlling banks or savings associations;
(2) any activity permissible for financial holding companies under
12 U.S.C. 1843(k), any specific activity that is listed as permissible
for bank holding companies under 12 U.S.C. 1843(c) and activities that
the Federal Reserve Board (FRB) has permitted for bank holding
companies under 12 CFR 225.28 and 225.86, and
(3) any activity permissible for all savings and loan holding
companies under 12 U.S.C. 1467a(c).
(c) The term ``Non-FCBS Financial Company'' means a company that is
not subject to Federal Consolidated Bank Supervision by the FRB or the
OTS, and that is solely engaged, directly or indirectly, in financial
activities.
(d) The term ``industrial bank'' means any insured State 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 (BHCA) pursuant to 12 U.S.C. 1841(c)(2)(H).
(e) The term ``senior executive officer'' has the meaning given it
in 12 CFR 303.101(b).
[[Page 5228]]
(f) The term ``subsidiary'' means any company which is controlled,
directly or indirectly, by another company.
(g) The terms ``company'' and ``insured depository institution''
have the meanings given them in section 3 of the Federal Deposit
Insurance Act, 12 U.S.C. 1813.
Sec. 354.3 Written agreement.
No industrial bank may become a direct or indirect subsidiary of a
Non-FCBS Financial Company unless the Non-FCBS Financial Company enters
into one or more written agreements with the FDIC and the subsidiary
industrial bank which contain commitments by the company to comply with
each of paragraphs (a) through (h) in Sec. 354.4 and such other
provisions as the FDIC deems appropriate in the particular
circumstances.
Sec. 354.4 Conditions and provisions of written agreement.
The commitments required to be made in the written agreements
referenced in Sec. 354.3 by each Non-FCBS Financial Company that will
control an industrial bank are listed as paragraphs (a) through (h) of
this section. In addition, each grant of deposit insurance and each
issuance of a non-disapproval of a change in control with respect to an
industrial bank subject to this part will be conditioned on each parent
Non-FCBS Financial Company complying with paragraphs (a) through (h) of
this section:
(a) Submitting to the FDIC an initial listing of all of the
company's subsidiaries, and updating that list annually;
(b) consenting to examination of the company and each of its
subsidiaries to monitor compliance with the provisions of the Federal
Deposit Insurance Act or any other Federal law that the FDIC has
specific jurisdiction to enforce against such company or subsidiary and
those governing transactions and relationships between any depository
institution subsidiary and its affiliates;
(c) engaging, directly or indirectly, only in financial activities;
(d) submitting to the FDIC an annual report regarding the company's
operations and activities, in the form and manner prescribed by the
FDIC, and such other reports as may be requested by the FDIC to keep
the FDIC informed as to financial condition, systems for monitoring and
controlling financial and operating risks, and transactions with
depository institution subsidiaries of the company; and compliance by
the company or subsidiary with applicable provisions of the Federal
Deposit Insurance Act or any other Federal Law that the FDIC has
specific jurisdiction to enforce against such company or subsidiary;
(e) maintaining such records as the FDIC may deem necessary to
assess the risks to the industrial bank or to the Deposit Insurance
Fund;
(f) causing an independent annual audit of each subsidiary
industrial bank to be performed during the first three years after the
industrial bank becomes a subsidiary of the company;
(g) limiting its representation, direct and indirect, on the board
of directors or board of managers, as the case may be, of each
subsidiary industrial bank to no more than 25% of the members of such
board of directors or board of managers, in the aggregate, and, in the
case of a subsidiary industrial bank that is organized as a member-
managed limited liability company, limiting its representation as a
managing member to no more than 25% of the managing member interests of
the subsidiary industrial bank, in the aggregate;
(h) maintaining the subsidiary industrial bank's capital and
liquidity at such levels as the FDIC deems appropriate, and/or taking
such other actions as the FDIC deems appropriate to provide the
industrial bank with a resource for additional capital and liquidity
including, for example, pledging assets, obtaining and maintaining a
letter of credit, and indemnifying the industrial bank.
Sec. 354.5 Restrictions on industrial bank subsidiaries of financial
companies.
Without the FDIC's prior written approval, no industrial bank that
becomes a subsidiary of a Non-FCBS Financial Company after the
effective date of the rules shall:
(a) Make a material change in its business plan during the first
three years after becoming a subsidiary industrial bank,
(b) add or replace a member of the board of directors, board of
managers, or a managing member, as the case may be, of the subsidiary
industrial bank during the first three years after becoming a
subsidiary industrial bank,
(c) add or replace a senior executive officer during the first
three years after becoming a subsidiary industrial bank,
(d) employ a senior executive officer who is associated in any
manner (e.g., as a director, officer, employee, agent, owner, partner,
or consultant) with an affiliate of the industrial bank, or
(e) enter into any contract for services essential to the
operations of the industrial bank (for example, loan servicing
function) with its parent financial company or any subsidiary thereof.
Dated at Washington, DC, this 31st day of January, 2007.
By order of the Board of Directors.
Federal Deposit Insurance Corporation.
Valerie J. Best,
Assistant Executive Secretary.
[FR Doc. E7-1854 Filed 2-2-07; 8:45 am]
BILLING CODE 6714-01-P