For decades, it has been a Washington parlor game for industries or even individual companies to use policymaking and regulation to gain a competitive advantage in the marketplace. We’ve seen it in trade policy throughout America’s history. In the 18th century, rules favored the sugar and cotton industries; in the 19th century, rules favored the steel and timber industries.
We’ve seen efforts to have policymakers pick winners and losers in emerging industries, such as broadband and mobile technologies. In the tech arena, internet companies like Google, Netflix and Amazon sought policies that would hinder companies like Comcast, AT&T and Verizon from competing against them for customers.
This approach to shaping policies, and accomplishing what fair competition cannot, may work for the company or the business but usually is never beneficial to the consumer or the broader American economy.
We are seeing this again, with the House Financial Services Committee considering “The Close the ILC Loophole Act.” Industrial banks or industrial loan companies (ILCs) are Federal Deposit Insurance Corp.-regulated depository institutions chartered in California, Colorado, Hawaii, Indiana, Minnesota, Nevada and Utah. The House bill would bar the issuance of ILC charters moving forward, thus limiting financial services options for consumers.
ILCs were originally formed decades ago to offer financial services to blue-collar workers who did not have traditional bank accounts. Today, these important financial institutions serve as competition for consumers’ business. This is particularly so for ILCs operated by such entities as major auto manufacturers that provide vehicle loans or other credit products.
“The Close the ILC Loophole Act” is drawn from the misimpression that ILCs are unregulated or less strenuously regulated than other banks. But that’s not the case.
The Congressional Research Service has noted, “ILCs are subject to the same laws and regulations as all state banks.” Additionally, industrial banks are subject to the same restrictions and requirements, regulatory oversight, and safety and soundness exams as any other kind of FDIC-insured depository institution.
ILCs create more options for consumers and more competition among financial institutions for consumers’ business. That’s a good thing for the marketplace. Still, for decades it has been argued that if certain types of companies received an industrial bank charter, the banking system could collapse. However, ILCs have outperformed all other FDIC-insured institutions for more than 20 years, so it’s not surprising that some might be looking to game the system and hinder that kind of competition.
During the last five decades, industrial banks have compiled among the best records of capitalization and profitability of any group of banks in the nation, and they represent a sector of the financial services industry that should not be eliminated but rather encouraged.
The past year — with increased financial insecurity, rising prices and greater uncertainty for those consumers who do not have traditional bank accounts or access to credit — has highlighted the real need for all consumers to access safe and reliable financial services. Congress has more important financial issues to address in the coming months than to put in place anti-competitive policies that benefit one segment of the financial services industry over the real needs of consumers.
