The latest industrial loan company (ILC) charter granted to Thrivent Financial for Lutherans breaks a four-year dormancy, but it does not indicate changes in current regulators' postures in guarding ILC charters from nonbanks, industry experts said.
In June, the Federal Deposit Insurance Corp. approved Thrivent's industrial bank application for deposit insurance, as well as a companion application for Thrivent to merge with an affiliated credit union Thrivent FCU. The approvals enable Thrivent FCU to convert from a credit union to a bank. It is the first ILC approval in recent years, after Square Financial Services Inc., a subsidiary of payments giant Block Inc., and Nelnet, Inc., a student loan servicer, obtained an ILC charter in March 2020.
The decision to grant Thrivent an ILC charter may not have broader implications for such companies as financial technology firms seeking an ILC because Thrivent has already operated an established credit union and the goal is to turn it into a bank, said Todd Baker, a senior fellow at the Richard Paul Richman Center for Business, Law and Public Policy at Columbia Business School and Columbia Law School.
An indication that ILC charter application approvals for nonbanks are not ramping up came in the same month of the Thrivent announcement when automobile manufacturer General Motors Co. said it terminated the application process for a subsidiary to become an FDIC-insured industrial bank. The subsidiary, GM Financial Bank, received an approval from the Utah Department of Financial Institutions on June 14, but decided to withdraw the same application submitted to the FDIC after that.
The incentive for the auto makers to own an industrial bank is to reduce the cost of making loans on a nationwide basis, because industrial banks do not need to consider every state's usury laws that cap interest rates, but only the state where it is chartered, said Chip MacDonald, managing director of MacDonald Partners LLC.
Bank-nonbank battleground
ILC charters have long been a battleground between banks and nonbanks. It allows commercial firms to own a bank unit, but the parent company will not be supervised by federal banking agencies nor subject to the Bank Holding Company Act. While the flexibility of owning a bank with less regulatory requirements is attractive to retailers, auto makers and financial technology companies, the banking industry sees it as a means to skirt regulations creating an unfair playing field.
FDIC chairman Martin Gruenberg is viewed to be conservative in his stance as to the suitability of nonfinancial companies having ILC charter. In the decision about Square Financial Services' ILC application, Gruenberg voted against it, citing weakness in its parent company's ability as an unprofitable payment company to meet the financial source of strength requirement, while then FDIC chair Jelena McWilliams voted for it. Both McWilliams and Gruenberg voted to approve the ILC charter to Nelnet in 2020, which has been a student loan servicer since inception in 1978.
Thrivent's focus on providing traditional banking services is likely the key factor leading to the approval, said Jason Cave, senior consultant at Patomak Global Partners. Cave worked at the FDIC for three decades and was previously a senior adviser to Gruenberg and former FDIC Chair Sheila Bair.
The newly formed Thrivent Bank will be fully digital without physical branches, but will follow "a traditional bank business model" by gathering core deposits and making loans to consumers without regard to religious affiliation, according to an FDIC press release. The agency typically views the access to retail deposits as a funding source critical for the soundness of banking operations, Cave noted.
For other companies interested in an ILC charter application, "I would say that the more you look like a traditional bank and you have that retail funding, you're probably going to have a better chance," Cave said in an interview.
ILC challenges
For nonfinancial companies, there are often pushes and pulls with the FDIC about where to place the capital funds, which could extend the timeline of the regulatory review, Cave said. While large commercial companies tend to have complex legal structures and manage cash more dynamically among different entities, the FDIC would prefer a clear setup to ensure the parent company's ability to be the source of strength for the bank unit, he explained.
"I think that's probably one of those issues that the agency staff struggles with," Cave said. "Some of the applicants want money [to be] fungible. They don't want to have it all locked down into one place."
In general, being in the same industry as the existing charter holders is not sufficient enough to make the case strong, Cave noted. There are other factors including the economic and market environments during different periods of time, the business plan to showcase parental support for the long term, and the applicant's composition of professionals, he added. While both Toyota and BMW had their ILC charter approved in the early 2000s, the auto industry went through a difficult time in the 2008 financial crisis, and then President George Bush approved a $17.4 billion bailout to General Motors and Chrysler in December 2008.
"If you are more along the lines of some of the structures that did not hold up as well in the financial crisis, I think you're going to find that [difficult], at least under the current administration," Cave said.
Push from lawmakers
As ILC approvals slowed down in recent years, lawmakers have pressed the FDIC to give candidates a "fair consideration." Some of the most recent efforts came in March via a letter from a bipartisan led by Sen. Mitt Romney (R-Utah).
While one of the arguments supporting the ILC charter regime is to serve the population that banks may not serve well, the banking industry has been more responsive to technology developments and being more aggressive in improving services and retaining customers, said Phil Buffington, partner in banking and financial services at Balch & Bingham.
"A lot of people suggest the banking industry is trying to keep anybody from entering the industry, and I really take a different view on that. I think that the banking industry is trying to make sure there is competitive quality," Buffington said.