Industrial banks don’t need Fed to be safe and sound

Much of the recent discussion about industrial banks — also known as industrial loan companies, or ILCs — focuses on differences in the way their parent companies are regulated versus the oversight for bank holding companies.

The Federal Reserve has called the method for regulating IB parents a “supervisory blind spot,” echoing other IB critics who say the specialized structure that leaves the Fed out of the equation is a risk to the banking system. I am familiar with both models and I hope the following will clarify the actual differences.

In the simplest terms, the Fed regulates the organizations that own or are affiliated with a bank, while IB regulators regulate the relationship between the bank and its affiliates.

Both Fed and IB regulators have similar powers to ensure compliance with applicable laws. (IBs are regulated by the states where they are housed and the Federal Deposit Insurance Corp.) Under both the Fed and non-Fed regimes, bank parents are subject to regular examinations, and possible cease-and-desist orders and civil money penalties. Both the Fed and the FDIC can ban institution-affiliated parties from further participation in the affairs of the bank.

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