Seyfarth Synopsis: The Federal Deposit Insurance Corporation (“FDIC”) has issued a new rule codifying and clarifying its expectations for industrial banks and their parent companies to receive approval for federal deposit insurance. As industrial banks are state-regulated and not subject to certain federal restrictions on non-banking activities by ownership, the new rule is especially beneficial to FinTech companies looking to enter the banking space. While the new rule does not materially change the already-existing application process, by formalizing the process in a written rule the FDIC has made that process easier to navigate.
On Tuesday, December 15, 2020, the FDIC—an independent, Congressionally-created agency which, among other things, insures bank deposits in the United States, issued a final rule effective April 1, 2021 codifying and clarifying the conditions for industrial banks and their parent companies to receive deposit insurance application approval (as well as non-objection to change in control notice and merger application approval) (the “Final Rule”).1 The Final Rule is of particular importance to FinTech companies, as it provides a path forward for such companies to provide federally-insured banking services.
In particular, the Final Rule affects industrial banks and industrial loan companies (“ILCs”), a type of financial institution primarily regulated by state authorities and eligible for federal deposit insurance from the FDIC.2 Parent companies of ILCs are largely not subject to federally-imposed restrictions on non-banking commercial activities faced by owners of more traditional banks,3 making ILCs an appealing option for FinTech companies which want to perform banking activities without sacrificing other commercial endeavors.4 Indeed, in her statement supporting the Final Rule, FDIC Chair Jelena McWilliams noted the “continuing interest” in ILC charters, citing the FDIC’s March 2020 approvals of two deposit insurance applications,5 both of which involved companies that operate in the FinTech space.
Importantly, the Final Rule does not represent any sea-change in how the FDIC approaches deposit insurance applications. Rather, as McWilliams explains, the Final Rule serves to “codify and clarify,” and provides “transparency to market participants regarding the FDIC’s minimum expectations for parent companies of industrial banks.”6 Among other things, the Final Rule requires the applicant non-bank parent company (the “Covered Company”) to:
- Submit an annually updated list of its subsidiaries;
- Consent to an FDIC examination (of both the Covered Company and subsidiaries);
- Submit an annual report to the FDIC of the Covered Company’s financial condition, systems for controlling financial and operational risks, transactions with its subsidiaries, and compliance with laws and regulations;
- Obtain an annual independent audit of each of the Covered Company’s subsidiary industrial banks;
- Limit the Covered Company’s direct and indirect representation on the board of each subsidiary industrial bank to less than 50%;
Maintain certain capital and liquidity requirements of subsidiary industrial banks; and,
- Execute a tax allocation agreement with subsidiary industrial banks.7
In addition, the Final Rule provides restrictions on certain activities that an industrial bank controlled by a covered company cannot do without the FDIC’s written approval, such as making a material change in business plan after becoming a subsidiary of a Covered Company, adding or replacing a board member or senior executive officer within the first three years of becoming a subsidiary of a Covered Company.8
Effective April 1, 2021, the Final Rule does not materially change the FDIC’s expectations for FinTech companies seeking to form an FDIC-insured industrial bank. But it does codify and clarify those expectations, and provides a clearer path for more FinTech companies to move forward with their banking goals.
1. 12 CFR Part 354, RIN 3064-AF31. The text of the Final Rule, along with supplementary information from the FDIC providing further background on the history, comments, and a summary of the Final rule (“Supplementary Information”), can be found here: https://www.fdic.gov/news/board/2020/2020-12-15-notice-dis-b-fr.pdf.
2. Supplementary Information at 6-7.
3. Id. at 7-8.
4. See Oney, Cinar, FinTech Industrial Banks and Beyond: How Banking Innovations Affect the Federal Safety Net, 23 Fordham Journal of Corporate & Financial Law 549-550 (2018) (“[U]nder the current banking framework, an industrial bank charter is one of the few ways for a commercial firm to control an institution with lending and deposit-taking powers, making it an attractive venue for FinTech firms seeking an alternative to national or state banking regimes.”).
5. Statement by FDIC Chairman Jelena McWilliams on the Final Rule for Parent Companies of Industrial Banks and Industrial Loan Companies at the FDIC Board Meeting (Dec. 15, 2020), https://www.fdic.gov/news/speeches/spdec1520c.html.
7. Final Rule § 354.4.
8. Id. § 354.5.