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Week Ending May 25, 2006

H.R.698 To amend the Federal Deposit Insurance Act to establish industrial bank holding company regulation, and for other purposes.

The bill aims to separate banks and commerce by prohibiting commercial ownership of industrial banks and installing the FDIC to oversee such operations. Today, industrial banks are more frequently owned by for-profit international companies. The holdings of such companies has risen meteorically raising concerns over the relative unregulated actions of the holding companies and the solvency of the banks they control. Industrial bank are not considered banks and are regulated differently. This bill reflects the effort to reduce future control of the industrial banks by commercial companies. Commercial companies are defined as companies deriving 15% or more of gross revenue from non-financial activities. An industrial bank is any insured State bank that operates as an industrial bank, loan company or similar institution, but the companies are not considered banks. A holding company is any company that directly or indirectly controls and industrial bank but is not more than one of the following: a savings and loan, a company subject to the Bank Holding Company Act of 1956 or a holding company regulated by the SEC.

The bill sets rules, conditions and requirements for companies applying for industrial bank holding company status including financial solvency. A holding company’s responsibilities to the industrial bank it controls are defined as serving as a source of financial and managerial strength and not conducting the operations in an unsafe or unsound manner.

“Industrial banks operating under the Bank Holding Company Act exception can offer a range of federally insured retail deposit accounts; commercial, mortgage, credit card, and other loans; and other banking services. Industrial banks with greater than $100 million in assets may operate under the exception so long as they do not accept demand deposits, but many such industrial banks offer `negotiable order of withdrawal' accounts that are the functional equivalent of demand deposits. Federal law also allows industrial banks to branch across state lines to the same extent as other types of insured banks” the committee reported.

Industrial bank holding companies must register and file reports with the FDIC within 90 days after becoming a holding company. The new company may not be controlled by a commercial firm but some existing companies are grandfathered in prior to October 1, 2003.

After January 28, 2007 no foreign bank may acquire, directly or indirectly, control of an industrial bank unless the Board of Governors of the Federal Reserve System has determined that the foreign bank is subject to comprehensive supervision or regulation on a consolidated basis by appropriate authorities in the bank’s home country.

Sponsor:  Rep. Paul E. Gilmore (R-OH-5^th)

Vote: Passed House 371 to 16 with 1 voting 'Present' May 22, 2007 (RC 384)

Cost to the taxpayers: Enacting this bill would affect direct spending and revenues, but CBO estimates that such effects would be negligible

Earmark Certification:   “H.R. 698 does not contain any congressional earmarks, limited tax benefits, or limited tariff benefits as defined in clause 9 of rule XXI.”

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MORE INFORMATION

Section 1. Short title

This section establishes the short title of the bill, the `Industrial Bank Holding Company Act of 2007.'

Section 2. Industrial bank holding company regulation

This section provides for regulation of industrial bank holding companies by amending the Federal Deposit Insurance Act (FDIA) to (i) add, among others, definitions of industrial bank and industrial bank holding company, (ii) add a new section 51, (iii) provide the FDIC with enforcement authority over industrial bank holding companies, and (iv) provide the FDIC with authority to take certain actions against industrial bank holding companies under the prompt corrective action provisions of the FDIA. This section also makes a number of technical and conforming amendments.

Section 2(a). Definitions

This subsection establishes various definitions. The term `industrial bank holding company' is defined as any company that controls an industrial bank and is not (i) a type of company already subject to consolidated supervision by the Federal Reserve, the Office of Thrift Supervision (OTS), or the Securities and Exchange Commission (SEC), or (ii) controlled by a company described in (i). This subsection, along with other provisions of this legislation, also clarifies that the FDIC may set regulatory capital standards on industrial bank holding companies.

Section 2(b). Industrial bank holding company registration and ownership

This subsection amends the FDIA by adding a new section 51 to codify the regulation of industrial bank holding companies. A specific description of section 51 is set forth below.

FDIA Section 51(a). Acquisition of industrial bank shares or assets

This subsection grants the FDIC the authority to approve the formation of industrial bank holding companies and their acquisition of industrial banks that is comparable to the Federal Reserve's authority over the formation of bank holding companies and their acquisition of banks. This subsection references section 3 of the Bank Holding Company Act and clarifies certain defined terms.

FDIA Section 51(b). Application process

This subsection provides that an application under subsection (a) will be treated as an application for a deposit facility for purposes of this legislation and any other Federal law.

FDIA Section 51(c). Registration

This subsection provides that each industrial bank holding company must register with the FDIC within 180 days of the later of the date of becoming an industrial bank holding company or the date of the enactment of this legislation. The FDIC may extend this 180-day period.

FDIA Section 51(d). Reports and examinations

Subparagraph (1) requires industrial bank holding companies and their non-industrial bank subsidiaries to file reports with the FDIC. The FDIC may accept reports that have been provided to other federal or state supervisors or to an appropriate self-regulatory organization.

Subparagraph (2) provides that industrial bank holding companies and their non-industrial bank subsidiaries will be subject to examination by the FDIC. The FDIC may furnish the examination and other reports to any other federal agency or any appropriate state bank supervisor. In addition, the FDIC may use reports of examination made by any other federal agency or any appropriate state bank supervisor.

Subparagraph (3) mirrors similar language in section 5 of the Bank Holding Company Act and limits the FDIC's ability to set capital adequacy standards on certain functionally regulated affiliates of depository institutions controlled by industrial bank holding companies.

FDIA Section 51(e). Access to information

Subparagraph (1) provides that any confidential supervisory information pertaining to an industrial bank that the FDIC shares with other agencies will remain confidential unless the FDIC consents in writing.

Subparagraph (2) directs the appropriate Federal supervisory agency of a holding company of an industrial bank to forego examination of depository institution subsidiaries to the fullest extent possible and instead use the reports of exam made by the appropriate banking agency.

Subparagraph (3) provides that upon request by the FDIC, the appropriate Federal supervisory agency may provide information to the FDIC regarding an industrial bank, a holding company of an industrial bank, or any other affiliates. If this information is not provided to the FDIC and is necessary to assess the risk to the industrial bank, the FDIC then may require that the information be provided by the bank, company, or affiliate.

Subparagraph (4) provides that the FDIC will not be prevented from examining a holding company or an affiliate of an industrial bank pursuant to section 10(b) of the FDIA if the examination is necessary to determine the condition of the industrial bank. With regard to entities regulated by the SEC, the FDIC will first ask the SEC for information and then proceed with the examination only if the SEC does not timely provide the information.

Nothing in this subsection (e) or subsection (g)(5) below is intended to affect or alter the existing and well-established allocation of supervisory responsibilities, authorities and functions as well as information-sharing arrangements among the Federal banking agencies with respect to organizations that are a bank holding company or a savings and loan holding company.

FDIA Section 51(f). Limitation on control

This subsection provides that no industrial bank may be controlled, directly or indirectly, by a commercial firm unless it qualifies for one of two grandfather provisions. The test for a commercial firm looks back one year: a firm is commercial if it had 15 percent or more of its gross revenues on a consolidated basis from non-financial activities in three of the last four calendar quarters.

The first grandfather provision in paragraph (3) applies to any industrial bank that became an insured depository institution or had its application for deposit insurance approved before October 1, 2003. Such an industrial bank is exempt from the prohibition on commercial ownership of industrial banks set forth in paragraph (1) as long as it does not undergo a change in control that requires certain enumerated regulatory filings. An internal corporate reorganization does not result in a loss of the grandfather status.

The second grandfather provision in paragraph (4) applies to any commercial firm that became a holding company of an industrial bank on or after October 1, 2003 and before January 29, 2007. Such a commercial firm is exempt from the prohibition on commercial ownership of industrial banks set forth in paragraph (1) as long as it does not acquire control of another insured depository institution after January 28, 2007, does not undergo a change in control that requires certain enumerated regulatory filings, and does not violate the activity and branching limitations set forth in subparagraph (4)(B). An internal corporate reorganization does not result in a loss of the grandfather status.

The activity limitation in subparagraph (4)(B)(i) restricts any industrial bank subsidiary of a commercial firm from commencing new activities after January 28, 2007. It is intended that the FDIC apply these activity limitations by regulation or order so as to allow the industrial bank to engage in a substantially similar activity that falls within the same category of activities in which it was engaged prior to January 28, 2007, so long as the activity was permissible under state law before that date. The activity limitation of subparagraph (4)(B)(i) prevents a grandfathered industrial bank from materially changing the overall mix of the deposits that it offers or receives after January 28, 2007. For example, if substantially all of a grandfathered industrial bank's deposits were obtained from affiliated persons before January 28, 2007, it could not receive a substantial part of its deposits from unaffiliated third parties after that date.

FDIA Section 51(g). Procedures and timing for termination of activities or divestitures

Paragraph (1) directs companies that fail to comply with the provisions of subsection (f) to divest their industrial bank subsidiaries no later than two years after the date such companies ceased to comply with subsection (f). Under this provision, a company that acquired an existing industrial bank would have two years, with the potential for a one-year extension, to divest the acquired industrial bank if, after the acquisition, the company did not meet the 85 percent financial test established by this legislation. However, consistent with the prohibition set forth in subsection (f)(1), a company that does not meet the 85 percent financial test may not acquire or establish a de novo industrial bank.

Paragraph (2) allows the appropriate Federal supervisory agency to impose any conditions or restrictions on the companies or their nonbank subsidiaries during the period set forth in paragraph (1).

Paragraph (3) authorizes, after due notice and opportunity for hearing, the appropriate Federal supervisory agency to order a holding company of an industrial bank, at the election of the holding company, either to (i) terminate any activity or ownership or control of any nonbank subsidiary (other than a nonbank subsidiary of a depository institution) or (ii) terminate ownership or control of its industrial bank, for reasons of financial safety, soundness, or stability.

Paragraph (4) provides that a foreign bank may not acquire an industrial bank unless the Federal Reserve, after consultation with the FDIC, determines that the foreign bank is subject to comprehensive consolidated supervision in its home country.

Paragraph (5) applies to all holding companies that own industrial banks. This provision is designed to ensure that the holding companies of industrial banks, like bank holding companies under current law, are required to serve as a source of strength to their subsidiary banks and to conduct their activities in a safe and sound manner. Under this provision, the relevant holding company supervisors would take action as necessary to assure that holding companies meet these obligations in an appropriate way. For example, the SEC requires that the Consolidated Supervised Entities must maintain a liquidity portfolio of cash or highly liquid and highly rated unencumbered debt instruments. Those liquid assets could be available to the industrial bank and other regulated entities as required by the relevant regulator.

It is intended that the FDIC will draft rules governing the application of the grandfather provisions and the divestiture provisions as well as the definition of `commercial firm' in subsections 51(f) and 51(g) to avoid interpretations that could cause undue hardship on a company subject to this legislation. For example, it is intended that the FDIC will undertake to implement the definition of `commercial firm' in subparagraph 51(f)(2), which is based on the previous four quarters of revenues, so that no restatement of past earnings prior to the most recent four quarters will affect a company's compliance with the test.

FDIA Section 51(h). Administrative provisions

This subsection authorizes the FDIC to require an industrial bank holding company to appoint an agent for service of process and to release a registered industrial bank holding company from any previously made registration.

FDIA Section 51(i). Definitions

This subsection defines the term `appropriate Federal supervisory agency,' with respect to a company that controls an industrial bank, as (i) the FDIC for an industrial bank holding company, (ii) the Federal Reserve for a bank holding company or a company subject to the Bank Holding Company Act pursuant to section 8(a) of the International Banking Act, (iii) the OTS for a savings and loan holding company, and (iv) the SEC for a company regulated by the SEC as a Consolidated Supervised Entity under the applicable regulation in effect as of January 29, 2007. More than one agency may be the appropriate supervisor for a company that controls an industrial bank.

Section 2(c). Enforcement

This subsection amends the FDIA to clarify that industrial bank holding companies and their nonbank subsidiaries are subject to the existing enforcement provisions in the FDIA.

Section 2(d). Prompt corrective action

This subsection amends the FDIA to give the FDIC prior approval authority over capital distributions by an industrial bank holding company if an insured depository institution subsidiary is (i) significantly undercapitalized or (ii) undercapitalized and fails to submit and implement a capital restoration plan.

Section 2(e). Technical and conforming amendments

This subsection makes technical and conforming changes in existing law to include industrial bank holding companies.

Section 3. Regulations

This section grants the FDIC the authority to issue regulations as the FDIC determines appropriate to carry out the amendments made by this legislation.

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