Home/Federal/Federal Register/2024-17637

Proposed Rule2024-17637

Parent Companies of Industrial Banks and Industrial Loan Companies

Primary source

Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.

Published

August 12, 2024

Issuing agencies

Federal Deposit Insurance Corporation

Abstract

The Federal Deposit Insurance Corporation (FDIC) is seeking comments on proposed amendments to its regulation governing parent companies of industrial banks and industrial loan companies. This regulation, which was adopted in December 2020, requires certain conditions and written commitments in situations that would result in an industrial bank or industrial loan company becoming a subsidiary of a company that is not subject to consolidated supervision by the Federal Reserve Board. The proposed amendments would revise the definition of "Covered Company" to include conversions involving a proposed industrial bank or industrial loan company under section 5 of the Home Owners' Loan Act, or other transactions as determined by the FDIC; ensure that a parent company of an industrial bank subject to a change of control, or a parent company of an industrial bank subject to a merger in which it is the resultant entity, would be subject to the FDIC's regulation; and provide the FDIC the regulatory authority to apply the regulation to other situations where an industrial bank would become a subsidiary of a company that is not subject to Federal consolidated supervision. Additionally, the proposed amendments would clarify the relationship between written commitments and the FDIC's evaluation of the relevant statutory factors. The proposed amendments also would set forth additional criteria that the FDIC would consider when assessing the risks presented to an industrial bank or industrial loan company by its parent company and any affiliates and evaluating the institution's ability to function independently of the parent company and any affiliates.

Full Text

<html>
<head>
<title>Federal Register, Volume 89 Issue 155 (Monday, August 12, 2024)</title>
</head>
<body><pre>
[Federal Register Volume 89, Number 155 (Monday, August 12, 2024)]
[Proposed Rules]
[Pages 65556-65568]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2024-17637]

========================================================================
Proposed Rules
Federal Register
________________________________________________________________________

This section of the FEDERAL REGISTER contains notices to the public of
the proposed issuance of rules and regulations. The purpose of these
notices is to give interested persons an opportunity to participate in
the rule making prior to the adoption of the final rules.

========================================================================

Federal Register / Vol. 89 , No. 155 / Monday, August 12, 2024 /
Proposed Rules

[[Page 65556]]

FEDERAL DEPOSIT INSURANCE CORPORATION

12 CFR Part 354

RIN 3064-AF88

Parent Companies of Industrial Banks and Industrial Loan
Companies

AGENCY: Federal Deposit Insurance Corporation.

ACTION: Notice of proposed rulemaking.

-----------------------------------------------------------------------

SUMMARY: The Federal Deposit Insurance Corporation (FDIC) is seeking
comments on proposed amendments to its regulation governing parent
companies of industrial banks and industrial loan companies. This
regulation, which was adopted in December 2020, requires certain
conditions and written commitments in situations that would result in
an industrial bank or industrial loan company becoming a subsidiary of
a company that is not subject to consolidated supervision by the
Federal Reserve Board. The proposed amendments would revise the
definition of ``Covered Company'' to include conversions involving a
proposed industrial bank or industrial loan company under section 5 of
the Home Owners' Loan Act, or other transactions as determined by the
FDIC; ensure that a parent company of an industrial bank subject to a
change of control, or a parent company of an industrial bank subject to
a merger in which it is the resultant entity, would be subject to the
FDIC's regulation; and provide the FDIC the regulatory authority to
apply the regulation to other situations where an industrial bank would
become a subsidiary of a company that is not subject to Federal
consolidated supervision. Additionally, the proposed amendments would
clarify the relationship between written commitments and the FDIC's
evaluation of the relevant statutory factors. The proposed amendments
also would set forth additional criteria that the FDIC would consider
when assessing the risks presented to an industrial bank or industrial
loan company by its parent company and any affiliates and evaluating
the institution's ability to function independently of the parent
company and any affiliates.

DATES: Comments will be accepted until October 11, 2024.

ADDRESSES: Interested parties are invited to submit written comments,
identified by RIN 3064-AF88, by any of the following methods:
<bullet> Agency Website: <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>. Follow the instructions for
submitting comments on the agency website.
<bullet> Email: <a href="/cdn-cgi/l/email-protection#63000c0e0e060d17102305070a004d040c15">[email&#160;protected]</a>. Include RIN 3064-AF88 in the
subject line of the message.
<bullet> Mail: James P. Sheesley, Assistant Executive Secretary,
Attention: Comments--RIN 3064-AF88, Federal Deposit Insurance
Corporation, 550 17th Street NW, Washington, DC 20429.
<bullet> Hand Delivery: Comments may be hand delivered to the guard
station at the rear of the 550 17th Street NW building (located on F
Street NW) on business days between 7 a.m. and 5 p.m.
<bullet> Public Inspection: Comments received, including any
personal information provided, may be posted without change to <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/">https://www.fdic.gov/resources/regulations/federal-register-publications/</a>.
Commenters should submit only information that the commenter wishes to
make available publicly. The FDIC may review, redact, or refrain from
posting all or any portion of any comment that it may deem to be
inappropriate for publication, such as irrelevant or obscene material.
The FDIC may post only a single representative example of identical or
substantially identical comments, and in such cases will generally
identify the number of identical or substantially identical comments
represented by the posted example. All comments that have been
redacted, as well as those that have not been posted, that contain
comments on the merits of the proposed rule will be retained in the
public comment file and will be considered as required under all
applicable laws. All comments may be accessible under the Freedom of
Information Act.

FOR FURTHER INFORMATION CONTACT: Catherine Topping, Counsel, (202) 898-
3975, <a href="/cdn-cgi/l/email-protection#8ceff8e3fcfce5e2ebcceae8e5efa2ebe3fa">[email&#160;protected]</a>; Gregory Feder, Counsel, (202) 898-8724,
<a href="/cdn-cgi/l/email-protection#9dfafbf8f9f8efddfbf9f4feb3faf2eb">[email&#160;protected]</a>; Amy Ledig, Senior Attorney, (571) 213-3644,
<a href="/cdn-cgi/l/email-protection#7f1e131a1b16183f191b161c51181009">[email&#160;protected]</a>, Legal Division; Scott Leifer, Senior Review Examiner,
(703) 632-9153, <a href="/cdn-cgi/l/email-protection#0f7c636a66696a7d4f696b666c21686079">[email&#160;protected]</a>, Division of Risk Management
Supervision; Dawnelle Guyette, Senior Policy Analyst, (816) 234-8130,
<a href="/cdn-cgi/l/email-protection#1e7a796b677b6a6a7b5e787a777d30797168">[email&#160;protected]</a>, Division of Depositor and Consumer Protection;
Federal Deposit Insurance Corporation, 550 17th Street NW, Washington,
DC 20429.

SUPPLEMENTARY INFORMATION:

I. Policy Objectives

The Federal Deposit Insurance Corporation (FDIC) monitors,
evaluates, and takes necessary action to ensure the safety and
soundness of State nonmember banks,\1\ including industrial banks and
industrial loan companies (together, industrial banks).\2\ Through 12
CFR part 354 of the FDIC Rules and Regulations (part 354),\3\ the FDIC
formalized its framework to supervise industrial banks and mitigate
risk to the Deposit Insurance Fund (DIF) that may otherwise be
presented in the absence of Federal consolidated supervision \4\ of an
industrial bank and its parent company.
---------------------------------------------------------------------------

\1\ See, e.g., 12 U.S.C. 1811, 1818, 1821, 1831o-1, 1831p-1.
\2\ Herein, the term ``industrial bank'' means any insured
State-chartered bank that is an industrial bank, industrial loan
company, or other similar institution that is excluded from the
definition of ``bank'' in the Bank Holding Company Act pursuant to
12 U.S.C. 1841(c)(2)(H). State laws refer to both industrial loan
companies and industrial banks. For purposes of this proposed rule,
the FDIC is treating the two types of institutions as the same. The
amended rule would not apply to limited purpose trust companies and
credit card banks that also are exempt from the definition of
``bank'' pursuant to section 1841(c)(2).
\3\ 12 CFR part 354. See 86 FR 10703 (Feb. 23, 2021).
\4\ In the context of this proposed rule, ``Federal consolidated
supervision'' refers to the supervision of a parent company and its
subsidiaries by the Federal Reserve Board (FRB). Consolidated
supervision of a bank holding company (BHC) by the FRB encompasses
the parent company and its subsidiaries, and allows the FRB to
understand ``the organization's structure, activities, resources,
and risks, as well as to address financial, managerial, operational,
or other deficiencies before they pose a danger to the BHC's
subsidiary depository institutions.'' See SR Letter 08-9,
``Consolidated Supervision of Bank Holding Companies and the
Combined U.S. Operations of Foreign Banking Organizations'' (Oct.
16, 2008).
---------------------------------------------------------------------------

Industrial banks are exempted from the definition of ``bank'' for
purposes of the Bank Holding Company Act (BHCA). As a result, both
financial and commercial companies can control an industrial bank
without being subject to

[[Page 65557]]

the BHCA's activities restrictions or Federal Reserve Board (FRB)
supervision and regulation. Some of the companies recently pursuing an
industrial bank charter engage in commercial activities or have
diversified business operations and activities that would not otherwise
be permissible for bank holding companies (BHCs) under the BHCA and
applicable regulations. There has been continuing interest in the
establishment of industrial banks, particularly with regard to proposed
institutions that plan to implement specialty or limited purpose
business models, including those where the operations of the proposed
industrial bank would be interconnected with, or reliant on, the
operations of the parent company or its affiliates. The FDIC is
concerned about increased risk to the DIF in situations where there is
a significant degree of dependence on the parent company or affiliates,
particularly with respect to the primary business functions of the
proposed institution. The FDIC is also focused on ensuring that such
business models would appropriately serve the convenience and needs of
the community.
Dependent relationships raise supervisory concerns because the
industrial bank's operations and condition may be vulnerable to any
financial distress or operational disruptions at the parent
organization. In such circumstances, there may be undue pressures or
influences from the parent organization that impair the industrial
bank's ability to maintain independent oversight and decision-making at
the bank level. Further, where financial distress is experienced across
the organization, concerns may develop that negatively impact capital
and liquidity levels, earnings prospects, and the capacity of
affiliates to fulfill their service commitments or other obligations to
the industrial bank.
In addition, significant resolution concerns may be presented if
the industrial bank's parent company fails or otherwise faces
significant financial difficulty that impairs its ability to perform
under the agreements required by part 354. An industrial bank could
have its business operations disrupted if critical support services
provided by a parent company or its affiliates are lost. Additionally,
overreliance on parent company support for daily operations could leave
the industrial bank with little independent franchise value in the
event of a failure. In such a case, the FDIC as receiver potentially
would be faced with limited and more costly resolution options, such as
establishing a bridge bank or employing a deposit payout.
In light of these concerns, the FDIC has identified a number of
changes to part 354 that are warranted to clarify and enhance the
supervisory framework with respect to industrial banks. The proposed
rule addresses the FDIC's concerns regarding the potential risk
presented to an industrial bank subsidiary from its parent
organization, including the relevant interdependencies, operational
risks, and other circumstances or events that could create safety and
soundness concerns and attendant risk to the DIF. The proposed
amendments would incorporate criteria that the FDIC will consider in
assessing the overall impact of a parent company and its affiliates on
its industrial bank subsidiary and would provide notice and
transparency to those companies that would seek to establish or acquire
an industrial bank.
The FDIC has received a limited number of filings where the parent
company would control an industrial bank as a result of a conversion
pursuant to section 5(i)(5) of the Home Owners' Loan Act (HOLA).\5\
Such proposed conversions from a Federal savings association to an
industrial bank, although infrequent, raise similar issues to those
raised by the filings currently triggering the applicability of part
354, namely that such conversions also would result in an industrial
bank becoming a subsidiary of a company that is not subject to Federal
consolidated supervision.\6\ Consequently, the FDIC is proposing to
amend the definition of ``Covered Company'' to include filings made
pursuant to section 5(i)(5) of the HOLA.
---------------------------------------------------------------------------

\5\ 12 U.S.C. 1464(i)(5).
\6\ The FDIC considers the statutory factors applicable to each
filing it receives. However, as a general matter, when the purpose
for a filing is to avoid the application of requirements imposed by
another Federal banking agency, such a purpose will be viewed
negatively within the context of the FDIC's consideration of the
relevant factors.
---------------------------------------------------------------------------

The FDIC is also proposing to amend the definition of ``Covered
Company'' in order to ensure that if a parent company of an industrial
bank organized before April 1, 2021, is subject to a change of control,
or such parent company is subject to a merger in which it is the
resultant entity, it would be subject to part 354. Finally, the FDIC is
proposing an amendment that would provide the FDIC the regulatory
authority to apply part 354 to other situations where an industrial
bank would become a subsidiary of a company that is not subject to
Federal consolidated supervision.

II. Background

A. 2020-2021 Rulemaking--Part 354

On February 23, 2021, the FDIC published a final rule governing the
parent companies of industrial banks, codified at part 354.\7\ Part 354
took effect on April 1, 2021. The rule requires certain conditions and
written commitments for each deposit insurance application approval,
non-objection to a change in control notice, and merger application
approval that would result in an industrial bank becoming a subsidiary
of a company that is not subject to Federal consolidated supervision by
the FRB. The rule also requires that, before any industrial bank may
become a subsidiary of a company that is not subject to Federal
consolidated supervision, such industrial bank and company must enter
into one or more written agreements with the FDIC. The rule
additionally requires the FDIC's prior written approval for certain
actions proposed by the industrial bank, such as making a material
change in its business plan. The rule applies to any industrial bank
that becomes a subsidiary of a company not subject to Federal
consolidated supervision as a result of a change in bank control or
merger, or that is granted deposit insurance, on or after April 1,
2021.
---------------------------------------------------------------------------

\7\ 86 FR 10703 (Feb. 23, 2021).
---------------------------------------------------------------------------

B. The Industrial Bank Charter

Under the Federal Deposit Insurance Act (FDI Act), industrial banks
are ``State banks'' \8\ and all of the existing FDIC-insured industrial
banks are ``State nonmember banks.'' \9\ As a result, the FDIC is the
appropriate Federal banking agency for industrial banks.\10\ Each
industrial bank is also regulated by its respective State chartering
authority. The FDIC exercises the same supervisory and regulatory
authority over industrial banks as it does over other State nonmember
banks and State savings associations.
---------------------------------------------------------------------------

\8\ 12 U.S.C. 1813(a)(2).
\9\ 12 U.S.C. 1813(e)(2).
\10\ 12 U.S.C. 1813(q)(2).
---------------------------------------------------------------------------

The Competitive Equality Banking Act of 1987 exempted industrial
banks from the definition of ``bank'' in the BHCA.\11\ As a result,
parent companies that control industrial banks are not BHCs under the
BHCA and are not subject to the BHCA's activities restrictions or FRB
supervision and regulation. Industrial banks today are owned by both
financial firms and commercial firms.
---------------------------------------------------------------------------

\11\ Public Law 100-86, 101 Stat. 552 (Aug. 10, 1987).

---------------------------------------------------------------------------

[[Page 65558]]

C. Industry Profile

As of June 27, 2024, there were 23 industrial banks \12\ with $232
billion in aggregate total assets. Six industrial banks reported total
assets of $10 billion or more; seven industrial banks reported total
assets of $1 billion or more but less than $10 billion. The industrial
bank sector today includes a diverse group of insured financial
institutions operating a variety of business models. A significant
number of the existing industrial banks support the commercial or
specialty finance operations of their parent company and are funded
through sources other than core deposits.
---------------------------------------------------------------------------

\12\ Of the 23 industrial banks existing as of June 27, 2024, 15
were chartered in Utah, three in Nevada, three in California, one in
Hawaii, and one in Minnesota.
---------------------------------------------------------------------------

Since 2008, there have been two newly established industrial banks:
Nelnet Bank, Draper, Utah, and Square Financial Services, Inc., Salt
Lake City, Utah, which became FDIC-insured in November 2020 and March
2021, respectively. The applications for Nelnet Bank and Square
Financial Services, Inc. were approved in March 2020.\13\ As part of
the approvals, the FDIC required each industrial bank and their parent
companies to enter into written agreements with the FDIC that contained
provisions consistent with the requirements of part 354.
---------------------------------------------------------------------------

\13\ The FDIC Board approved an industrial bank deposit
insurance application for Thrivent Bank, subject to conditions and
written agreements, on June 20, 2024. The bank has not yet commenced
operations.
---------------------------------------------------------------------------

When part 354 was finalized on February 23, 2021, there were six
pending industrial bank deposit insurance applications. Since that
time, the FDIC received three additional industrial bank deposit
insurance applications. Of the nine applications received since March
2020, one was approved, six have been withdrawn,\14\ one was returned
as substantially incomplete, and one remains pending. The FDIC
anticipates potential continued interest in the establishment of
industrial banks, particularly with regard to proposed institutions
that plan to pursue a specialty or limited purpose business model.
---------------------------------------------------------------------------

\14\ Decisions to withdraw an application are made at the
discretion of the organizers and can be attributed to a variety of
reasons. In some cases, an application is withdrawn and then refiled
after changes are incorporated into the proposal. In such cases, the
new application is reviewed by the FDIC without prejudice. In other
cases, the applicant may, for strategic reasons, determine that
pursuing an insured industrial bank charter is not in the
organizers' best interests.
---------------------------------------------------------------------------

D. Supervision Framework

Because industrial banks are insured State nonmember banks, they
are subject to the FDIC Rules and Regulations, as well as other
provisions of law, including restrictions under the Federal Reserve Act
governing transactions with affiliates,\15\ anti-tying provisions of
the BHCA,\16\ and insider lending regulations.\17\ Industrial banks are
also subject to regular examination, including examinations focused on
safety and soundness; anti-money laundering and countering the
financing of terrorism compliance; consumer protection, including fair
lending; Community Reinvestment Act; information technology; and trust
services, as appropriate. Pursuant to section 10(b)(4) of the FDI Act,
the FDIC has the authority to examine the affairs of any industrial
bank affiliate, including the parent company, as may be necessary to
determine the relationship between the institution and the affiliate,
and the effect of such relationship on the depository institution.\18\
---------------------------------------------------------------------------

\15\ See 12 U.S.C. 1828(j)(1)(A); 12 CFR part 223.
\16\ For purposes of section 106 of the BHCA, an industrial bank
is treated as a ``bank'' and is subject to the anti-tying
restrictions therein. See 12 U.S.C. 1843(h)(1).
\17\ See 12 CFR 337.3.
\18\ 12 U.S.C. 1820(b)(4).
---------------------------------------------------------------------------

In addition, under section 38A of the FDI Act,\19\ the FDIC is
required to impose a requirement on companies that directly or
indirectly own or control an industrial bank to serve as a source of
financial strength for that institution.\20\ Subsection (d) of section
38A provides explicit statutory authority for the appropriate Federal
banking agency to require reports from a controlling company to assess
the ability of the company to comply with the source of strength
requirement, and to enforce compliance by such company.\21\
---------------------------------------------------------------------------

\19\ Public Law 111-203, 124 Stat. 1376 (July 21, 2010).
\20\ 12 U.S.C. 1831o-1(b).
\21\ 12 U.S.C. 1831o-1(d).
---------------------------------------------------------------------------

Part 354 conforms to the FDIC's historical practice of requiring
capital and liquidity maintenance agreements (CALMAs) and other written
agreements between the FDIC and controlling parties of industrial banks
as well as the imposition of prudential conditions when approving or
non-objecting to certain filings involving an industrial bank.

III. Rulemaking Authority

The FDIC amends its regulations under the general rulemaking
authority prescribed in section 9 of the FDI Act \22\ and under
specific authority granted by the FDI Act and other statutes.\23\ These
include section 5 of the FDI Act, which authorizes the FDIC to grant
deposit insurance, based on the factors in section 6 of the FDI Act;
these factors generally focus on the safety and soundness of the
proposed institution, any risk it may pose to the DIF, and the
convenience and needs of the community.\24\ The FDIC is also authorized
to permit or deny various transactions by State nonmember banks,
including merger and change in bank control transactions.\25\
Conversions from a Federal savings association to an industrial bank,
pursuant to section 5(i)(5) of the HOLA,\26\ are also subject to review
and approval by the FDIC, as the resulting institution would be an
industrial bank that is not subject to Federal consolidated
supervision. While the statutory factors differ by filing type, safety
and soundness considerations and other risk attributes are commonly
addressed. In addition, section 39 of the FDI Act charges the FDIC with
ensuring that the institutions it supervises operate in a safe and
sound manner by prescribing standards through regulations or
guidelines.\27\ Finally, section 38A of the FDI Act empowers the FDIC
to ensure that a company that controls an industrial bank serves as a
source of financial strength for that institution.
---------------------------------------------------------------------------

\22\ 12 U.S.C. 1819.
\23\ See, e.g., 12 U.S.C. 1811, 1815, 1816, 1817, 1818, 1819(a)
(Seventh) and (Tenth), 1820(g), 1831o-1, 3108, 3207.
\24\ 12 U.S.C. 1816.
\25\ See 12 U.S.C. 1817(j) and 1828(c).
\26\ 12 U.S.C. 1464(i)(5).
\27\ FDI Act section 39, 12 U.S.C. 1831p-1.
---------------------------------------------------------------------------

IV. Description of the Proposed Amendments to Part 354

A. Revisions to the Scope of Part 354's Application

1. Amending the Definition of ``Covered Company'' To Expressly Include
Filings Made Pursuant to Section 5(i)(5) of the HOLA
Part 354 applies to Covered Companies and industrial banks
controlled by a Covered Company. ``Covered Company'' is defined in part
354 to mean, in each case on or after April 1, 2021, any company that
is not subject to Federal consolidated supervision by the FRB and that
controls an industrial bank (1) as a result of a change in bank control
pursuant to section 7(j) of the FDI Act; (2) as a result of a merger
transaction pursuant to section 18(c) of the FDI Act; or (3) that is
granted deposit insurance by the FDIC pursuant to section 6 of the FDI
Act.\28\ The effect of this definition,

[[Page 65559]]

together with the scope provisions of Sec. 354.1, is that industrial
banks organized on or after April 1, 2021, are subject to part 354,
while those organized prior to April 1, 2021 (legacy institutions), are
not subject to part 354 unless a Covered Company comes to control such
an industrial bank through one of the three enumerated routes. As a
result, a company that controls an industrial bank that has converted
from a Federal savings association charter would not be a Covered
Company.
---------------------------------------------------------------------------

\28\ 12 CFR 354.2.
---------------------------------------------------------------------------

Section 354.6 currently \29\ makes it clear that the adoption of
part 354 does not impair the FDIC's authority to address supervisory
concerns. Accordingly, even if part 354 does not apply to a legacy
institution or to an industrial bank or its parent company that does
not satisfy one of the three prongs of the Covered Company definition,
the FDIC may impose some or all of the requirements of part 354 on a
given institution as warranted. Such an approach makes sense because
the requirements of part 354 reflect the supervisory practices of the
FDIC with respect to industrial banks and their parent companies,
codified to provide notice and transparency to those companies that
would seek to establish or acquire an industrial bank.
---------------------------------------------------------------------------

\29\ As proposed, Sec. 354.6 would be renumbered to Sec.
354.7.
---------------------------------------------------------------------------

As noted above, the FDIC has received a limited number of filings
where the parent company would control an industrial bank as a result
of a conversion pursuant to section 5(i)(5) of the HOLA.\30\ Section
5(i)(5) allows a Federal savings association to convert to a State bank
with the approval of the appropriate State bank supervisor and the
appropriate Federal banking agency if the resulting State bank will
meet all financial, management, and capital requirements applicable to
the resulting national or State bank.\31\ Such proposed conversions
from a Federal savings association to an industrial bank, although
infrequent, raise similar issues to those raised by the filings
currently triggering application of part 354, namely that such
conversions also would result in an industrial bank becoming a
subsidiary of a company that is not subject to Federal consolidated
supervision. As a result, the FDIC has determined that such
conversions, if approved, should be subject to the provisions of part
354, as if part 354 applied.
---------------------------------------------------------------------------

\30\ 12 U.S.C. 1464(i)(5).
\31\ 12 U.S.C. 1464(i)(5)(A), (B).
---------------------------------------------------------------------------

Consequently, the FDIC is proposing to amend the definition of
``Covered Company'' to expressly include filings made pursuant to
section 5(i)(5) of the HOLA. While Sec. 354.6 preserves the FDIC's
authority to impose such conditions as it may deem necessary in
connection with a conversion under section 5(i)(5) of the HOLA to an
industrial bank, the FDIC believes specific regulatory language is
appropriate.
2. Change in Control or Merger Involving the Parent Company of an
Industrial Bank
The FDIC is proposing a second amendment to the definition of
``Covered Company'' to include companies that control an industrial
bank if, on or after the effective date of the amendment to the
definition of ``Covered Company,'' there is a change in control at the
parent company or there is a merger transaction in which the parent
company is the resultant entity. The proposed amendment would fill an
unintended gap that results from the construction of the current
definition of ``Covered Company.'' Currently, industrial banks and
their parent companies would not be subject to part 354 unless the
parent company controls the industrial bank as a result of one of three
triggering events enumerated in the ``Covered Company'' definition, in
each case after the effective date of part 354. This approach divides
industrial banks into (1) legacy institutions to which part 354 does
not apply, on the one hand and (2) legacy institutions that become
subject to part 354 as a result of one of the three triggers, or new
institutions, on the other, and (3) de novo industrial banks.
The gap results where there is a change in control or merger that
occurs at or above the level of the parent company that results in a
change in the person that controls the parent company but does not
result in a change in the relationship between the industrial bank and
its parent company. Similarly, if the parent company were a party to a
merger in which it is the resultant entity, then new management with a
new plan for the industrial bank could be installed. The parent company
would continue to control the industrial bank, but not as a result of
one of the trigger events, thus failing to make the parent company a
Covered Company subject to part 354.
The FDIC has an interest in being able to review changes that
impact the parent's control of the industrial bank. This interest is
recognized specifically in the Change in Bank Control Act, which
requires the prior FDIC approval of the acquisition of direct or
indirect control of a State nonmember bank.\32\ The proposed amendment
would ensure that a parent company subject to such a change of control,
or a parent company subject to a merger in which it is the resultant
entity, would be subject to part 354.
---------------------------------------------------------------------------

\32\ 12 U.S.C. 1817(j)(1).
---------------------------------------------------------------------------

3. Applying Part 354 to Situations in Which an Industrial Bank Would
Become a Subsidiary of a Company That Is Not Subject to Federal
Consolidated Supervision
Finally, the FDIC is proposing an amendment that would provide the
FDIC the regulatory authority to apply part 354 to any other situation
where an industrial bank would become a subsidiary of a company that is
not subject to Federal consolidated supervision. The FDIC recognizes
that such an amendment could potentially lead to the application of
this part to a legacy institution, despite the April 2021 effective
date of part 354. Accordingly, the FDIC proposes to allow a filer of an
application or notice, or participant in a transaction, an opportunity
to present its views in writing if the company does not agree with the
FDIC's determination to apply part 354 to a particular filing. The
proposed amendments to part 354 would make clear that such a written
filing should be submitted in accordance with part 303 of the FDIC
Rules and Regulations.\33\
---------------------------------------------------------------------------

\33\ See 12 CFR part 303.1 to 303.19.
---------------------------------------------------------------------------

This type of provision, with the opportunity for a filer to express
its views regarding the FDIC's determination, is not without precedent
in the FDIC Rules and Regulations.\34\ The FDIC believes the proposed
amendment properly balances the FDIC's need for the flexibility to be
able to respond to situations that it cannot foresee with a filer's
need for an avenue to react and respond to the FDIC's determinations.
---------------------------------------------------------------------------

\34\ See 12 CFR 324.5 and 329.2 (allowing notice and opportunity
to respond to FDIC determination that additional capital or
liquidity is required). The Office of the Comptroller of the
Currency (OCC) and FRB have similar provisions. See 12 CFR 3.404 and
50.2 (OCC); 12 CFR 249.2 and 263.202 (FRB).
---------------------------------------------------------------------------

Question 1: What situations--other than those that require a notice
subject to section 7(j) of the FDI Act or an application subject to
sections 5 or 18(c) of the FDI Act or section 5(i)(5) of the HOLA--
present similar risks such that they should also subject the industrial
bank and its parent company to part 354?

[[Page 65560]]

B. Clarifying the Relationship Between Written Commitments and the
FDIC's Evaluation of Statutory Factors

The FDIC has the responsibility to consider filings based on
statutory criteria. For example, when reviewing an application for
deposit insurance, the FDIC must consider the factors enumerated in
section 6 of the FDI Act.\35\ These factors generally focus on the
safety and soundness of the proposed institution, any risk it may pose
to the DIF, and the convenience and needs of the community. The FDIC is
also authorized to permit or deny other types of transactions by State
nonmember banks, including those proposed in merger applications and
change in bank control notices, as well as in HOLA conversion
applications, based on an evaluation of the applicable statutory
factors relevant to the underlying filing.\36\ While the specific
statutory factors differ by filing type, safety and soundness
considerations and the convenience and needs of the community are
commonly addressed.
---------------------------------------------------------------------------

\35\ Such factors are the financial history and condition of the
depository institution, the adequacy of the depository institution's
capital structure, the future earnings prospects of the depository
institution, the general character and fitness of the management of
the depository institution, the risk presented by such depository
institution to the DIF, the convenience and needs of the community
to be served by such depository institution, and whether the
depository institution's corporate powers are consistent with the
purposes of the FDI Act. See 12 U.S.C. 1816.
\36\ See 12 U.S.C. 1817(j), 1828(c), and 1464(i)(5).
---------------------------------------------------------------------------

Generally, if all statutory factors are favorably resolved, FDIC
staff will recommend approval of or non-objection to the filing,
subject to prudential conditions and written commitments for filings
involving an industrial bank. If FDIC staff finds unfavorably on one or
more statutory factors based on the filing review, staff generally will
recommend denial of or objection to the filing. Upon taking action on a
filing, or if a proponent withdraws their filing during the review
process, the FDIC Board of Directors may release a statement addressing
the Board's views regarding the transaction if such a statement is
considered to be in the public interest for purposes of creating
transparency for the public and future applicants.\37\
---------------------------------------------------------------------------

\37\ Such a statement would be in addition to any statements
individual Board members might choose to make addressing their
personal views regarding the transaction.
---------------------------------------------------------------------------

Per Sec. 354.3, the FDIC requires written agreements among a
Covered Company and the FDIC and the subsidiary industrial bank. These
agreements include commitments by the Covered Company to comply with
each of paragraphs (a)(1) through (8) in Sec. 354.4, and such other
written agreements, commitments, or restrictions the FDIC deems
appropriate, when approving or non-objecting to certain filings
involving an industrial bank. Section 354.4 requires each party to a
written agreement to comply with paragraphs (a)(1) through (8). These
required commitments are intended to provide the safeguards and
protections that the FDIC believes are prudent to impose in order to
maintain the safety and soundness of industrial banks that are
controlled by Covered Companies. The FDIC included these required
commitments in part 354 to provide transparency to current and
potential industrial banks, the companies that control them, and the
general public.
Moreover, under its general supervision, examination, and
enforcement authorities (as reserved by Sec. 354.6), the FDIC may
require additional unique commitments from a Covered Company or a
controlling shareholder of a Covered Company when the FDIC determines
it is necessary to address specific elements of a filing or
circumstances related to the filer. Additional commitments may be
derived, for instance, from elements of the business model presented,
including the nature and scope of activities conducted, the risk
characteristics of the activities, or the complexity of operations. The
proposed relationships and transactions with the parent organization
that may impact the industrial bank could also be taken into
consideration in determining commitments.
In considering recent industrial bank filings, the FDIC has become
concerned that applicants may be misinterpreting part 354 and the
effects of the written commitments required under the rule as they
relate to the FDIC's assessment of the applicable statutory factors.
While part 354 permits the FDIC to condition the approval of an
application or non-objection to a notice on the Covered Company and
industrial bank entering into written agreements and making required
commitments, and the written agreements will be taken into account as
part of the FDIC's consideration of the underlying filing, they do not
replace any statutory factor applicable to the filing and will not
necessarily lead to the favorable resolution of any statutory factor
where the facts and circumstances are otherwise unfavorable. This is a
longstanding tenet of FDIC's applications processing policy and
procedures.\38\
---------------------------------------------------------------------------

\38\ Applications Procedures Manual (hereinafter APM),
Applications Overview, 1.1, <a href="https://www.fdic.gov/regulations/applications/resources/apps-proc-manual/index.html">https://www.fdic.gov/regulations/applications/resources/apps-proc-manual/index.html</a>; APM, Standard
and Non-Standard Conditions, 1.11; and Deposit Insurance
Applications Procedures Manual Supplement--Applications from Non-
Bank and Non-Community Bank Applicants, <a href="https://www.fdic.gov/regulations/applications/depositinsurance/procmanual-supplement.pdf">https://www.fdic.gov/regulations/applications/depositinsurance/procmanual-supplement.pdf</a>.
---------------------------------------------------------------------------

CALMAs and parent company agreements are intended to protect the
industrial bank and mitigate potential risks to the DIF, as well as to
provide a means for the FDIC to pursue a formal enforcement action
under sections 8 and 50 of the FDI Act if a party fails to comply with
the agreements. Such agreements also capture in writing the Covered
Company's obligation to serve as a source of financial strength to the
industrial bank. However, such agreements do not in and of themselves
resolve any given statutory factor. If a filing presents material
concerns and fundamental weaknesses with respect to any statutory
factor, the written agreements will not compensate for such weaknesses
for purposes of resolving the statutory factor. For example, a written
agreement would not be appropriate if the situation involves weak or
questionable earnings projections, an unacceptable or opaque control
structure, insufficient capital levels, weak or marginal management or
director candidates, apparent violations of a statute or regulation, a
higher-risk business model, or a failure to meet the convenience and
needs of the community.
Consequently, the FDIC proposes to amend Sec. 354.4 to clarify the
FDIC's implementation of part 354 to expressly address and make clear,
consistent with long-standing applications processing policy, that
written agreements will be taken into account as part of the FDIC's
consideration of the underlying filing, but do not replace any
statutory factor applicable to the filing and will not necessarily lead
to the favorable resolution of any statutory factor where the facts and
circumstances are otherwise unfavorable. This applies to the required
commitments and provisions within any written agreements, the
industrial bank subsidiary restrictions that are also included within
part 354, and any other conditions that may be imposed as part of the
FDIC's approval of, or non-objection to, a filing.
Question 2: What other clarifications, if any, to part 354 and its
relationship to the FDIC's evaluation of the applicable statutory
factors should the FDIC consider?

[[Page 65561]]

C. Shell and Captive Industrial Bank Business Models

1. Supervisory Concerns
Shell and captive bank business models create potentially
significant supervisory concerns for industrial banks. The level of
concern with these business models is inherently heightened due to the
substantial reliance on the parent company or its affiliates,
particularly with respect to the primary business operations of the
industrial bank. This may include total or nearly exclusive reliance on
the parent organization for sourcing business, conducting key
operational elements (e.g., underwriting, administering, or servicing
customer accounts or relationships), and obtaining a wide range of
critical business support services.
In shell or captive structures, the industrial bank's operations
and condition may be vulnerable to any financial distress or
operational disruptions at the parent company or any affiliates that
provide key services to the industrial bank. The heavily integrated
relationship between the industrial bank and the parent organization
results in significant concentration risks that are typically not
present in traditional community bank operating structures. Further,
the industrial bank generally has limited or no ability to operate
independently from the parent organization and, as discussed below,
lacks franchise value on a standalone basis.
The FDIC expects an industrial bank to have a sufficiently
independent board of directors and management team, a sustainable
financial structure with appropriate capital and liquidity maintained
at the bank level, and a business model that is viable on a standalone
basis (as defined in the proposed Sec. 354.6(b)). Some industrial bank
proposals involving shell or captive structures have lacked one or more
of these elements, causing managerial concerns (due to the lack of
independent oversight and decision-making or fully dedicated officers/
staff at the industrial bank), as well as financial concerns (due to
inadequate capital and liquidity levels, and earnings prospects that
depend on maintaining internal organizational relationships).
The existing part 354 addresses some of the aforementioned concerns
by requiring any Covered Company to enter into written agreements
including specific provisions and commitments intended to ensure that
the Covered Company supports the industrial bank and its ability to
operate in a safe and sound manner. Among other items, the written
agreements address board independence, capital and liquidity
maintenance and support, and if required by the FDIC, contingency
planning.\39\ In the absence of Federal consolidated supervision,
written agreements provide the FDIC information and ongoing access to
information needed to assess and monitor the impact the parent
organization may have on an industrial bank. The FDIC uses written
agreements to mitigate risk to the industrial bank and to the DIF.
However, as noted above in section IV.B of this SUPPLEMENTARY
INFORMATION, the required commitments, written agreement provisions,
and industrial bank subsidiary restrictions of part 354 will be taken
into account as part of the FDIC's consideration of the underlying
filing, but do not replace any statutory factor applicable to the
filing and will not necessarily lead to the favorable resolution of any
statutory factor where the facts and circumstances are otherwise
unfavorable. In addition, where the primary business purpose and
operations of the industrial bank are highly dependent upon the parent
company, such agreements may have limited value if the parent company
experiences operational or financial difficulties. Similarly, the
managerial restrictions of part 354 intended to ensure the independence
of the industrial bank's management may not be effective where the
business purpose of the industrial bank is to support the parent
company's operations because there may be direct or indirect
organizational influences on business decisions from outside the
industrial bank that would impact consideration of the relevant
statutory factors.
---------------------------------------------------------------------------

\39\ See 12 CFR 354.4.
---------------------------------------------------------------------------

The FDIC's experience during the 2008-2009 Financial Crisis showed
that business models involving an insured depository institution (IDI)
inextricably tied to and reliant on the parent and/or its affiliates
creates significant challenges and risks to the DIF, especially in
circumstances where the parent organization experiences financial
stress and/or declares bankruptcy.\40\ Where an industrial bank is
significantly reliant on and interconnected with its parent
organization to generate business on both sides of the balance sheet
(e.g., for funding and for lending), as well as operational systems and
support, financial difficulties at the parent organization could be
transmitted to the dependent industrial bank. Such a captive model
creates material concerns about the viability of the industrial bank's
proposed business model on a standalone basis and the industrial bank's
franchise value in the event the parent organization experiences
financial difficulty or failure. These concerns are so significant that
the FDIC is proposing a rebuttable presumption that certain
characteristics, if present, will cause an industrial bank to be a
shell or captive institution and a presumption that the shell or
captive nature of an industrial bank will weigh heavily against
favorably resolving one or more of the applicable statutory factors.
---------------------------------------------------------------------------

\40\ See, e.g., n.57 and n.59, infra (discussion of NextBank and
Advanta).
---------------------------------------------------------------------------

The proposed revisions to part 354 would renumber the existing
Sec. 354.6 to Sec. 354.7 and at Sec. 354.6 would incorporate
additional considerations that the FDIC would undertake to determine
the degree of risk presented to the industrial bank from the parent
company and its affiliates when considering the relevant statutory
factors. These considerations address the business purpose for
establishing or acquiring control of the industrial bank, intercompany
relationships, the regulatory and consumer compliance history and
supervisory record of each relevant entity, the novelty of the parent
company's primary businesses (including any new or innovative
processes), accessibility of information, and any plans or processes
that mitigate risks presented by the parent company.\41\ Expanding part
354 to include these considerations provides increased transparency
regarding how the FDIC evaluates potential risks and concerns presented
in an industrial bank filing.
---------------------------------------------------------------------------

\41\ See proposed Sec. 354.6(a).
---------------------------------------------------------------------------

In addition, the proposed revisions to part 354 include
considerations aimed at identifying shell or captive structures and
presumptions the FDIC would apply as a consequence of such
identification. The FDIC would review each filing covered by the rule
on a case-by-case basis, on the facts and circumstances presented
within the context of the applicable statutory factors to determine the
degree to which the industrial bank would have an independent board and
management team, a business model that is viable on a standalone basis,
and franchise value that is independent of the parent company and its
affiliates.\42\ The proposed revisions to part 354 include factors that
would focus this inquiry on identifying organizational structures in
which the industrial bank is overly dependent on the parent. The
results of

[[Page 65562]]

this inquiry would give rise to the presumptions the FDIC would apply
as a consequence of such identification.
---------------------------------------------------------------------------

\42\ See proposed Sec. 354.6(b).
---------------------------------------------------------------------------

The proposed revisions would provide in Sec. 354.6(c)(1) that an
industrial bank would be presumed to be a shell or captive institution
if it (a) could not function independently of the parent company, or
(b) would be significantly or materially reliant on the parent company
or its affiliates, or (c) would serve only as a funding channel for an
existing parent company or affiliate business line. The FDIC would
presume that the shell or captive nature of an industrial bank would
weigh heavily against favorably resolving one or more of the applicable
statutory factors.\43\
---------------------------------------------------------------------------

\43\ See proposed Sec. 354.6(c)(2).
---------------------------------------------------------------------------

The proposed amendment to the scope of the definition of ``Covered
Company'' would allow any company subject to a determination that a
transaction would result in the application of part 354 to contest the
determination in writing. Additionally, proposed Sec. 354.6(c)(2)
would afford any company seeking to rebut a presumption described in
paragraph (c)(1) an opportunity to present its views in writing.
Section 354.6(c)(3) also would establish that a company's decision to
provide written views regarding the applicability of part 354 or a
presumption would place all related filings and transactions on hold so
that the threshold applicability determinations can be resolved before
further proceedings. Such a suspension would prevent the consummation
of a transaction or transactions that may be difficult or costly to
unwind.
2. Convenience and Needs Concerns
As noted above, under the FDI Act, the FDIC must consider the
convenience and needs of the community to be served when evaluating a
deposit insurance or merger application. For some industrial bank
proposals involving shell or captive structures, the primary deposit
and credit products are both highly dependent upon the parent company
and would target the customers of the parent company. Where a proposal
for an industrial bank is presumed to be a shell or captive institution
under the presumptions in proposed Sec. 354.6(c)(1), if the target
market is such that the institution's products are only available to
customers of an affiliated company or a narrow segment of the
community, this would weigh heavily against favorably resolving the
convenience and needs statutory factor.
The public purpose of a bank charter with deposit insurance is that
the bank will serve the convenience and needs of the community broadly.
Business models that are not generally available to the members of the
community absent purchasing a product by an affiliated entity raise
serious questions as to whether the general community is sufficiently
served to merit the grant of deposit insurance. Similar to the other
presumption in proposed Sec. 354.6(c)(1), the FDIC would review each
filing on a case-by-case basis and filers may present facts to
demonstrate that the community is effectively served notwithstanding
the fact that the product offerings would be limited to customers of
the affiliated entity or to a narrow segment only.
The evaluation of the convenience and needs of the community is a
broad inquiry and would not be limited to strategies or plans under the
Community Reinvestment Act. In assessing whether the convenience and
needs of the community are met in industrial bank proposals, the FDIC
would consider the customer base that the applicant intends to serve
with its deposit and credit products and the market need filled through
those products. The FDIC would also consider the convenience and
benefits to the community that would not otherwise occur absent the
creation of the industrial bank with deposit insurance. For instance,
if there is a demonstrated lack of credit availability or competition
(e.g., existing firms have not met the market demand), this may support
a favorable finding on convenience and needs. On the other hand, if
there are existing non-bank captive finance firms serving the proposed
community, the FDIC would evaluate the additional benefits of an
industrial bank in meeting the convenience and needs of the community,
and if the benefits of the insured bank (such as lower cost funds)
accrue primarily the parent rather than to the community, this may
weigh against favorably resolving the convenience and needs statutory
factor. The FDIC also would consider whether there would be any
negative consequences to the community resulting from the ownership of
the industrial bank by the parent company.
In considering the convenience and needs of the community, the FDIC
may require commitments or conditions from a Covered Company when the
FDIC determines it is necessary to address specific elements of a
filing, which may be derived from the business model.
Given the unique nature of industrial banks and the facts and
circumstances of a particular transaction, the FDIC may also consider
whether public hearings would be an appropriate means to obtain further
public input on whether a specific application meets the convenience
and needs of the community.
3. Existing Industrial Banks--Structure and Supervision
As noted previously, the universe of industrial banks is relatively
small, with only 23 existing institutions. Several of the institutions
primarily or entirely provide banking products and services to
customers of affiliated entities within the parent organization (in
general, these industrial banks do not broadly serve the general
public, customers of unaffiliated businesses, or geographic markets
that differ from those of the parent company or its affiliates). These
include, but are not limited to, industrial banks established or
acquired by commercial companies to support the sale or lease of
manufactured products (e.g., postage meters, automobiles or
motorcycles), by retailers to issue general-purpose credit cards, and
by financial companies in order to enable brokerage customer funds to
be swept into insured deposits at the industrial bank.
Some of the existing industrial banks rely to a significant extent
on their parent companies or affiliates for business generation,
operational aspects, and/or a variety of corporate support services.
While many of the industrial banks are closely integrated with their
parent organizations, they typically maintain adequate capital, have
sufficient liquidity, and reflect satisfactory overall risk profiles.
For the most part, the existing industrial banks are seasoned in nature
(all but two were established between 1984 and 2006), and fared
similarly to other types of financial institutions during previous
banking crises.\44\ Additionally, because part 354 was based on the
FDIC's supervisory practice, written agreements are in place for five
industrial banks: two are subject to capital maintenance agreements,
one is subject to a CALMA, and two are subject to both CALMAs and
parent company agreements.\45\
---------------------------------------------------------------------------

\44\ During the 2008-09 Financial Crisis, several parent
companies pursued conversions of an industrial bank to a commercial
bank, which required approval of the parent company to become a BHC
subject to regulation and supervision by the FRB. The conversions
allowed the respective companies to access programs such as the
FDIC's Temporary Liquidity Guarantee Program and the Troubled Asset
Relief Program administered by the Department of the Treasury.
\45\ Previously 10 other industrial banks (that have since
merged, converted, or voluntarily liquidated) were also subject to
CALMAs and/or parent company agreements. The FDIC began imposing
additional prudential requirements in Orders granting Federal
deposit insurance in March 2004. The FDIC described its imposition
of additional prudential requirements in FDIC: The FDIC's
Supervision of Industrial Loan Companies: A Historical Perspective--
Summer 2004 Vol. 1, Issue 1. GAO further described the FDIC's
approach in pages 41-44 of its 2005 audit, Industrial Loan
Corporations: Recent Asset Growth and Commercial Interest Highlight
Differences in Regulatory Authority, available at <a href="https://www.gao.gov/products/gao-05-621">https://www.gao.gov/products/gao-05-621</a>.

---------------------------------------------------------------------------

[[Page 65563]]

Importantly, industrial banks are subject to all of the same
restrictions and requirements, regulatory oversight, and safety-and-
soundness and consumer compliance examinations--including compliance
with fair lending laws and regulations, and the Community Reinvestment
Act--as any other kind of insured state nonmember bank. This includes
examining the industrial bank for compliance with laws and regulations,
including affiliate transaction limits and capital maintenance
requirements. The FDIC also has the authority and capacity to regulate
industrial banks and their parent companies.\46\ This framework of
supervision, coupled with part 354 in its amended form as proposed,\47\
is expected to continue to protect industrial banks and the DIF from
potential risks related to parent company and affiliate relationships.
---------------------------------------------------------------------------

\46\ See, e.g., 12 U.S.C. 1820(b)(4)(A) (in making a bank
examination, an FDIC examiner shall have the power to examine the
affairs of any affiliate of any depository institution as may be
necessary to determine the relationship between such depository
institution and any such affiliate and the effect of such
relationship on the depository institution.); 12 U.S.C. 1831o-1(b).
\47\ Part 354 applies prospectively to Covered Companies and is
not applicable for existing industrial banks, absent any new filing
related to the industrial bank that would be subject to the rule.
---------------------------------------------------------------------------

4. Resolution Considerations
In addition to the supervisory concerns described above, an FDIC-
insured industrial bank with a shell or captive business model presents
the risk of costly and delayed resolution in the event of the
industrial bank's failure.\48\ The proposed amendments to part 354
address the risks that captive or shell business models may present to
the DIF. Addressing these risks will facilitate the FDIC's
accomplishment of its statutory mandates, including as the receiver for
a failed IDI.
---------------------------------------------------------------------------

\48\ In this context, ``resolution'' means not only the initial
phase of the FDIC's receivership process for a failed IDI, but also
the various responsibilities that fall to the FDIC to liquidate
assets that are not purchased by a third party in that receivership
process. This includes necessary bookkeeping, accounting, reporting,
identifying and verifying claims, paying claims, determining whether
to bring actions against parties responsible for the institution's
failure, and monitoring ongoing agreements with asset purchasers,
etc. See FDIC, Crisis and Response--An FDIC History, 2008-2013, 176-
77 (2017) (Crisis and Response). Additionally, resolution is
distinct from ``recovery'' (i.e., the steps the industrial bank and
the Covered Company could take to mitigate the impacts of financial
and operational stress outside of the receivership process), which
is the focus of part 354's provisions regarding contingency
planning. 12 CFR 354.4(b). In addition, the FDIC as receiver of a
state-chartered bank has the rights and powers that a state banking
authority would have under applicable state law. 12 U.S.C.
1821(c)(3)(B).
---------------------------------------------------------------------------

As with any failed IDI, an FDIC-insured industrial bank must be
resolved under the FDI Act.\49\ When the FDIC is appointed as the
receiver for a failed IDI (FDIC-R), it succeeds, by operation of law,
to all of the IDI's rights, titles, powers, and privileges, including
the rights of stockholders, depositors, officers, and directors with
respect to the failed IDI and its assets.\50\ The FDIC-R has the power
to wind up a failed IDI's operations and transfer its assets and
liabilities to third parties.\51\ Once appointed, FDIC-R's objectives
are to (1) ensure that depositors receive access to their insured
deposits as quickly as possible; (2) marshal and sell the IDI's assets;
(3) determine claims; and (4) distribute net recoveries from asset
liquidations by issuing dividends to the FDIC as subrogee to insured
depositors, uninsured depositors, and creditors in accordance with the
priority scheme set out in the FDI Act.\52\
---------------------------------------------------------------------------

\49\ 11 U.S.C. 109(b)(2), (d); 12 U.S.C. 1821(c)(2)(A)(ii).
\50\ 12 U.S.C. 1821(d)(2)(A)(i); (e)(13)(A).
\51\ 12 U.S.C. 1821(d)(2)(B), (G).
\52\ 12 U.S.C. 1821(d)(11)(A).
---------------------------------------------------------------------------

The most common method of resolution is a purchase and assumption
transaction where a significant portion of a failed IDI's assets is
sold to a healthy financial institution in exchange for its assumption
of part or all of the failed IDI's deposit liabilities. Other
resolution methods include direct payouts to depositors, the creation
of a bridge bank that will perform certain functions of the failed bank
and operate as an interim IDI, or the organization of a deposit
insurance national bank. The FDIC-R's resolution options may be limited
by the statutory requirement to use whichever option will be the least
costly to the DIF.\53\ The FDIC's experience in resolving failed IDIs,
including during the 2008-2009 Financial Crisis,\54\ shows that the
franchise value of an IDI has implications for the resolution options
that may be available to the FDIC, as discussed below.
---------------------------------------------------------------------------

\53\ 12 U.S.C. 1823(c)(4).
\54\ Between 2007 and 2013, the FDIC resolved 489 failed IDIs
with total assets over $686 billion. See Crisis and Response at 182-
83.
---------------------------------------------------------------------------

In some industrial bank proposals that the FDIC has received, the
viability and operations of the bank are dependent on ongoing support
from the parent organization. In such cases, financial or operational
stress at the parent company or any of its affiliates reduces the
franchise value of the industrial bank in the event of failure and
complicates its resolution. The underlying value of such an industrial
bank lies in its connection with the parent organization, which may
provide benefits including, but not limited to, name recognition,
clients or referrals, personnel and back-office support, and/or
specific product offerings that complement the parent company's or
affiliates' lines of business. If such connections were to be severed,
the FDIC likely would find it more difficult to facilitate a resolution
with a healthy bank, and it likely would be forced to employ less
efficient resolution methods that are more lengthy, cumbersome, and
costly, such as depositor payouts and piecemeal loan (or other asset)
sales.\55\
---------------------------------------------------------------------------

\55\ See, e.g., Crisis and Response at 185.
---------------------------------------------------------------------------

Similarly, the loss of critical support services previously
provided to the industrial bank by its parent organization or
affiliates would pose a potentially significant challenge in a
resolution scenario, as the parent or affiliated entities may no longer
be able to fulfill their obligations under existing service agreements.
If the parent company or its affiliates remain open and operating, the
FDIC-R would have the authority to enforce the failed IDI's
arrangements in accordance with the contractual terms.\56\ However, if
the parent organization becomes a debtor under the Bankruptcy Code
(either before or after the FDIC-R's appointment), uncertainty likely
would exist with regard to the parent's or the affiliates' willingness
or ability to fulfill such obligations.\57\ If such arrangements are
terminated, the industrial bank's franchise value would be
significantly diminished.\58\ This situation could leave

[[Page 65564]]

the FDIC in a position where it has no choice but to conduct resolution
methods that are more disruptive and expensive.\59\
---------------------------------------------------------------------------

\56\ 12 U.S.C. 1821(e)(13)(A).
\57\ 11 U.S.C. 365(a), (g)(1). This uncertainty exists because a
bankruptcy debtor has the power to ``reject'' executory contracts, a
process that amounts to a pre-bankruptcy breach of the contract
where the debtor no longer performs and the counterparty is left
with only a claim for damages. The Bankruptcy Courts apply a
business judgment standard when determining whether to approve the
rejection of an executory contract. See, e.g., In re Klein Sleep
Prods., Inc., 78 F.3d 18 (2d Cir. 1996). See also FDIC Office of
Inspector General, Material Loss Review of Advanta Bank Corp.,
Draper, Utah (Oct. 2010), <a href="https://www.fdicoig.gov/sites/default/files/reports/2022-08/11-002.pdf">https://www.fdicoig.gov/sites/default/files/reports/2022-08/11-002.pdf</a>. The bank failed in March 2010.
Advanta's parent company, Advanta Corp., filed for Chapter 11
Bankruptcy protection in November 2009 and refused to provide
capital support to Advanta.
\58\ The 2008 bankruptcy of Lehman Brothers Holdings Inc. (LBHI)
illustrates diminished franchise value concerns. As described in the
debtor's Chapter 11 plan, LBHI's two IDI subsidiaries, Woodlands
Commercial Bank and Aurora Bank, FSB, both fell to less than well
capitalized status and were vulnerable to failure because of their
dependence on LBHI. The LBHI organization provided the IDIs with
operational services, as well as credit, market, and foreign
exchange risk protection provided by a Master Forward Agreement with
LBHI. The agreements were repudiated as a result of the bankruptcy
filings. Consequently, the IDIs' earnings and capital were fully
exposed to changes in credit spreads, interest rates, foreign
exchange rates, commodity prices, and equity prices. Market value
losses based on mark-to-market accounting depleted the capital base.
While the bankrupt parent, LBHI, received court approval to support
the two IDIs, notwithstanding the capital support, the two IDIs
ultimately voluntarily liquidated. See Debtors' Disclosure Statement
for Joint Chapter 11 Plan of Lehman Brothers Holdings Inc. and Its
Affiliated Debtors Pursuant to Section 1125 of the Bankruptcy Code
at 71-71, In re: Lehman Bros. Holdings Inc., et al, Ch. 11 Case No.
08-13555 (Bankr. S.D.N.Y. 2010), <a href="https://www.sec.gov/Archives/edgar/data/806085/000110465910020165/a10-8193_1ex99d1.htm">https://www.sec.gov/Archives/edgar/data/806085/000110465910020165/a10-8193_1ex99d1.htm</a>.
\59\ The failure of NextBank, N.A., Phoenix, Arizona (NextBank)
in 2002 illustrates some of these concerns. In this case, an IDI was
dependent on its parent because its role was gathering deposits and
booking credit card receivables marketed, screened, originated, and
securitized by its sole owner and parent company. NextBank had
virtually no staff or facilities at the time of its failure; all
bank functions were performed by parent company employees in parent
company facilities. The FDIC needed to negotiate with the parent
company to continue critical credit card servicing functions for
NextBank and to delay its bankruptcy filing so that staff who were
knowledgeable about the IDI's operations could assist with the
resolution. If NextBank had operated on a standalone basis, it may
have been resolved more quickly and at a lower cost.
---------------------------------------------------------------------------

Importantly, under part 354, the FDIC may require a Covered Company
and industrial bank to commit to provide, and thereafter implement and
adhere to, a contingency plan.\60\ Contingency plans may include one or
more strategies for the orderly disposition or dissolution of the
industrial bank without the need for the appointment of a receiver or
conservator. One objective of such a plan would be to mitigate the
disruption and damage the IDI may suffer from significant financial or
operational stresses within the parent organization. Such concerns, if
not appropriately addressed, could jeopardize the safe and sound
operation of the industrial bank.
---------------------------------------------------------------------------

\60\ 12 CFR 354.4(b).
---------------------------------------------------------------------------

Question 3: What features or aspects of a shell or captive bank
business model (not already discussed above) should affect the FDIC's
evaluation of industrial bank filings?
Question 4: Should the FDIC assess the potential risks posed to
safety and soundness, consumer protection, and the DIF differently for
shell or captive bank business models involving significant or material
reliance on the parent organization?
Question 5: Are there other issues or facts that the FDIC should
consider in determining whether to strengthen its supervisory framework
with respect to industrial banks and in how the FDIC evaluates
potential risks and concerns presented in an industrial bank filing?
Question 6: How should the FDIC assess the ``convenience'' and
``needs'' of the ``community'' served by dependent bank business
models?

V. Expected Effects

A. Overview of Industrial Banks

As of March 31, 2024, the FDIC supervised 2,920 IDIs, with combined
assets of $4.2 trillion.\61\ Of these, 24 institutions were industrial
banks, comprising 0.8 percent of all FDIC-supervised institutions.\62\
The industrial banks held combined assets of $234 billion, comprising
approximately 5.6 percent of the combined assets of FDIC-supervised
institutions.\63\
---------------------------------------------------------------------------

\61\ Data provided by the Division of Insurance and Research.
\62\ One industrial bank was acquired by an institution
supervised by the Office of the Comptroller of the Currency in a
voluntary merger on June 1, 2024.
\63\ FDIC Call Report Data as of March 31, 2024.
---------------------------------------------------------------------------

The proposed rule would apply prospectively to deposit insurance,
change in control, merger, and conversion filings, and other situations
as may be determined by the FDIC that result in an industrial bank that
is controlled by a Covered Company. It is difficult to estimate the
number of potential Covered Companies that would seek to establish,
acquire, or convert a Federal savings association to an industrial
bank, as such an estimate would depend on considerations that affect
Covered Companies' decisions. These considerations, and how they affect
decision making, are difficult for the FDIC to forecast, estimate, or
model, as the considerations include external parties' evaluations of
potential business strategies for the industrial bank as well as future
financial conditions, rates of return on capital, and innovations in
the provision of financial services, among others.
According to FDIC administrative data on application submissions,
one industrial bank submitted a change in control application and three
industrial banks submitted de novo bank applications between April 1,
2021, and December 31, 2023, for a total of four applications, or
approximately one-and-a-half applications per year. None of these
applications have resulted in an industrial bank being controlled by a
Covered Company. For purposes of this analysis, the FDIC assumes that
part 354 would apply to two filings per year seeking to establish,
acquire, or convert to an industrial bank.
The FDIC anticipates that the proposed rule would benefit the
public and the DIF by promoting the safe and sound operation of
industrial banks controlled by companies that are not subject to
consolidated supervision by the FRB. These public benefits cannot be
reliably quantified. Specific proposed requirements and potential costs
to filers of complying with these requirements are discussed below.
One amendment in the proposed rule would expand the scope of
Covered Companies under part 354. Specifically, the proposed amendment
would apply part 354 to HOLA conversion applications as well as any
other situation where an industrial bank would become a subsidiary of a
company that is not subject to Federal consolidated supervision. The
industrial bank and Covered Company in such situations would be
required to enter into certain agreements. These agreements include
commitments by the Covered Company to comply with each paragraph (a)(1)
through (8) in Sec. 354.4, and such other written agreements,
commitments or restrictions the FDIC deems appropriate when approving
or non-objecting to certain filings involving industrial banks. Section
354.4(b) also includes an optional contingency plan requirement that
the FDIC may impose depending on the filer's business plan and other
factors.\64\
---------------------------------------------------------------------------

\64\ See 12 CFR 354.4.
---------------------------------------------------------------------------

As discussed in the final rule that established part 354,\65\ the
FDIC historically has imposed prudential conditions and CALMAs and
other written agreements between the FDIC and controlling parties of
industrial banks in connection with approving or not objecting to
certain industrial bank filings. Further, Sec. 354.6 makes clear that
the FDIC may impose some or all of the requirements of part 354 on a
given industrial bank or parent company as warranted. Therefore, the
FDIC does not believe that the proposed amendment to expand the
definition of Covered Company would substantially increase the burden
for newly affected industrial banks and Covered Companies. In addition,
regarding the number of entities subject to the rule, HOLA conversion
applications occur infrequently so the proposed expanded definition of
Covered Company would

[[Page 65565]]

not substantially increase the number of filings subject to part
354.\66\
---------------------------------------------------------------------------

\65\ See 86 FR 10703 (Feb. 23, 2021).
\66\ For purposes of estimating Paperwork Reduction Act burden,
the FDIC assumes that the change in scope in this proposed rule
increases the estimated respondent counts for certain information
collections by one. See section VII.B of this document.
---------------------------------------------------------------------------

As part of the amendment to expand the definition of Covered
Company, the proposed rule would allow any company subject to a
determination that a situation would result in the application of part
354 to present its views in writing. The FDIC believes that this
proposed amendment would not affect the costs incurred by filers and
that this proposed amendment will only serve to provide clarity by
codifying existing practice.
Another provision in the proposed rule would amend Sec. 354.4 to
expressly address and make clear, consistent with long-standing
applications processing policy, that written agreements shall not be
used as a means to favorably resolve statutory factors or circumstances
on which the FDIC would otherwise make an unfavorable finding. This
proposed amendment would mitigate uncertainty and prevent
misunderstandings among prospective filers subject to part 354. This
improved clarity may reduce the time that the FDIC and a Covered
Company may spend discussing and resolving issues with its filing.
While the FDIC cannot quantify the time saved, the FDIC believes that
an affected entity would not incur a significant cost as a result of
this amendment.
As discussed above, the proposed rule would include considerations
to be applied in identifying shell or captive structures, and
presumptions that the FDIC will apply as a consequence of such
identification. The proposed rule would also incorporate additional
considerations that the FDIC will undertake to determine the degree of
risk presented to the industrial bank from the parent company and its
affiliates. The existing part 354 already addresses some of the risks
that captive or shell industrial bank business models may present to
the DIF. For example, under both the current part 354 and the proposed
rule, the FDIC may require a Covered Company and industrial bank to
commit to provide to the FDIC, and thereafter adhere to, a contingency
plan that sets forth recovery actions to address significant financial
or operational stress that could threaten the safe and sound operation
of the industrial bank and strategies for the orderly disposition of
such industrial bank without the need for the appointment of a receiver
or conservator.\67\ Filers that are covered under the expanded scope of
part 354, as proposed, that commit to providing a contingency plan
could therefore incur preparation and submission costs. The FDIC does
not have data to estimate these costs, but believes that these costs
would be outweighed by the expected benefits to the safety and
soundness of the industrial bank and the DIF.
---------------------------------------------------------------------------

\67\ 12 CFR 354.4(b).
---------------------------------------------------------------------------

As part of the amendment aimed at identifying shell or captive
structures and resulting presumptions, the proposed rule would afford
any company seeking to rebut a presumption an opportunity to present
its views in writing. While there may be costs incurred in the
preparation of such a rebuttal, the FDIC believes that this burden
would not be substantially greater than the costs incurred by filers in
existing practice, absent this amendment, to respond to and allay FDIC
concerns about the characteristics of their structures. Furthermore,
filers who opt to prepare a rebuttal likely would believe that the
costs of preparation would be outweighed by the expected benefits.
The proposed rule could indirectly affect subsidiaries of Covered
Companies. Such Covered Companies operate through a variety of
structures that include a range of subsidiaries and affiliates.
Further, the proposed rule includes the FDIC's reservation of authority
to require any industrial bank and its parent company, if not otherwise
subject to part 354, to enter into written agreements, provide
commitments, or abide by restrictions, as appropriate. Therefore, it is
difficult to estimate the number of subsidiaries and affiliates of
prospective Covered Companies, based on information currently available
to the FDIC. However, given the FDIC's experience as the primary
Federal regulator of industrial banks,\68\ the FDIC believes that the
number of subsidiaries of the prospective Covered Companies affected by
the proposed rule is likely to be small. For these affected
subsidiaries, the FDIC believes that the proposed amendments would
clarify, provide transparency, and prevent misinterpretation of part
354. To that end, the proposed rule would reduce the time spent by
affected subsidiaries discussing and resolving issues related to their
affiliated industrial banks and Covered Companies.
---------------------------------------------------------------------------

\68\ Historically, industrial banks have elected not to become
members of the Federal Reserve System. The FDIC is the primary
Federal regulator for State nonmember banks and the insurer for all
IDIs.
---------------------------------------------------------------------------

VI. Request for Comment

The FDIC is inviting comment on all aspects of the proposed
amendments to part 354, in addition to the questions above.

VII. Regulatory Analysis

A. Regulatory Flexibility Act

The Regulatory Flexibility Act (RFA) generally requires an agency,
in connection with a proposed rule, to prepare and make available for
public comment an initial regulatory flexibility analysis that
describes the impact of the proposed rule on small entities.\69\
However, an initial regulatory flexibility analysis is not required if
the agency certifies that the proposed rule will not, if promulgated,
have a significant economic impact on a substantial number of small
entities. The Small Business Administration (SBA) has defined ``small
entities'' to include banking organizations with total assets of less
than or equal to $850 million.\70\ Generally, the FDIC considers a
significant economic impact to be a quantified effect in excess of 5
percent of total annual salaries and benefits or 2.5 percent of total
noninterest expenses. The FDIC believes that effects in excess of one
or more of these thresholds typically represent significant economic
impacts for FDIC-supervised institutions.
---------------------------------------------------------------------------

\69\ 5 U.S.C. 601 et seq.
\70\ The SBA defines a small banking organization as having $850
million or less in assets, where an organization's ``assets are
determined by averaging the assets reported on its four quarterly
financial statements for the preceding year.'' See 13 CFR 121.201
(as amended by 87 FR 69118, effective December 19, 2022). In its
determination, the ``SBA counts the receipts, employees, or other
measure of size of the concern whose size is at issue and all of its
domestic and foreign affiliates.'' See 13 CFR 121.103. Following
these regulations, the FDIC uses an IDI's affiliated and acquired
assets, averaged over the preceding four quarters, to determine
whether the IDI is ``small'' for the purposes of the RFA.
---------------------------------------------------------------------------

The FDIC has considered the potential impact of the proposed rule
on small entities in accordance with the RFA. For the reasons stated
below, the FDIC certifies that the proposed rule will not, if
promulgated, have a significant economic impact on a substantial number
of small entities.
---------------------------------------------------------------------------

\71\ FDIC Call Report Data as of March 31, 2024.
\72\ As mentioned previously, one industrial bank was acquired
in a voluntary merger on June 1, 2024. This industrial bank was not
considered a ``small entity'' for purposes of the RFA as of March
31, 2024.
---------------------------------------------------------------------------

As of March 31, 2024, the FDIC supervised 2,920 institutions, of
which 2,198 are considered small entities for purposes of the RFA.\71\
Of these 2,920 institutions, 24 were industrial banks,\72\ and the FDIC
estimates that no more than 10 of these industrial banks would

[[Page 65566]]

be considered small industrial banks for purposes of the RFA.\73\
---------------------------------------------------------------------------

\73\ The FDIC uses the assets of an IDI's affiliated and
acquired financial institutions to determine whether the IDI is
``small'' for the purposes of RFA. This methodology may over-count
the number of industrial banks that are small entities because it
does not take into account the size of non-financial institutions
that are affiliated with the industrial bank. For purposes of RFA
certification, this methodology results in a conservative over-
estimate of the number of affected small entities.
---------------------------------------------------------------------------

As previously discussed, the requirements under part 354 apply to
industrial banks organized on or after April 1, 2021, and industrial
banks coming under the control of a Covered Company as a result of a
transaction pursuant to either section 7(j) or 18(c) of the FDI Act.
The proposed rule would amend the definition of Covered Companies to
include prospective conversions \74\ pursuant to section 5(i)(5) of the
HOLA or any other type of transaction where an industrial bank would
become a subsidiary of a company that is not subject to Federal
consolidated supervision, as determined by the FDIC.\75\ Since
September 2019, the FDIC has received only two conversion filings
related to HOLA and estimates one or fewer such filing per year going
forward. Not all of these filings would involve small entities; for
context, only 10 out of 24 existing industrial banks are small entities
for purposes of the RFA. Therefore, the FDIC expects the proposed
amendment to the definition of Covered Company to affect one or fewer
small entities per year. Given this limited number of anticipated
filings, the FDIC believes the proposed amendment is unlikely to affect
a substantial number of small entities.
---------------------------------------------------------------------------

\74\ The proposed amended definition would only apply to filings
involving an industrial bank or Covered Company after the effective
date of the proposed rule.
\75\ The proposed amendment would also allow any company subject
to a determination that a transaction would result in the
application of part 354 to present its views in writing.
---------------------------------------------------------------------------

Notwithstanding the effect due to the change in the scope of
affected entities described above, the FDIC also examined whether the
other changes reflected in the proposed rule would have a significant
effect on affected small entities. As discussed above, these amendments
clarify certain provisions in part 354, provide increased transparency
regarding how the FDIC evaluates potential risks and concerns, and
serve to prevent any misinterpretation of part 354 that would be
inconsistent with the FDIC's long-standing applications processing
policy. The proposed rule affords any company seeking to rebut a
presumption of a shell or captive institution an opportunity to present
its views in writing--such filings should comport with the FDIC's
existing rules regarding filing procedures. These amendments may reduce
the time that the FDIC and a filer would spend discussing and resolving
issues with its filing. While the FDIC cannot quantify the time saved,
the FDIC believes that an affected entity would not incur a significant
economic effect as a result of these amendments.
Based on the preceding information, the FDIC certifies that the
proposed rule does not significantly affect a substantial number of
small entities. The FDIC invites comments on all aspects of the
supporting information provided in this RFA section. In particular,
would this proposed rule have any significant effects on a substantial
number of small entities that the FDIC has not identified?

B. Paperwork Reduction Act

Certain provisions of the proposed rule contain ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act (PRA).\76\ In accordance with the requirements of the
PRA, the FDIC may not conduct or sponsor, and the respondent is not
required to respond to, an information collection unless it displays a
currently valid Office of Management and Budget (OMB) control number.
The FDIC's OMB control number associated with this proposed rule is
3064-0213 and is titled ``Industrial Banks and Industrial Loan
Companies.''
---------------------------------------------------------------------------

\76\ 44 U.S.C. 3501 et seq.
---------------------------------------------------------------------------

As stated above, the proposed rule would change the scope of the
existing regulations by revising the definition of ``Covered Company''
to include conversions involving a proposed industrial bank or
industrial loan company under section 5 of the HOLA, or other
situations as determined by the FDIC; clarifying the relationship
between written commitments and the FDIC's evaluation of the relevant
statutory factors; and setting forth additional criteria that the FDIC
would consider when assessing the risks presented to an industrial bank
by its parent company and any affiliates, and evaluating the industrial
bank's ability to function independently of the parent company and any
affiliates.
For these reasons, the information collection requirements
contained in this proposed rulemaking will be submitted by the FDIC to
OMB for review and approval under section 3507(d) of the PRA (44 U.S.C.
3507(d)) and Sec. 1320.11 of the OMB's implementing regulations (5 CFR
part 1320). Given the change in scope in the proposed rule, the FDIC
has increased the estimated respondent count by one in information
collections 1-4. Comments are invited on:
(a) Whether the collection of information is necessary for the
proper performance of the FDIC's functions, including whether the
information has practical utility;
(b) The accuracy of the estimate of the burden of the information
collection, including the validity of the methodology and assumptions
used;
(c) Ways to enhance the quality, utility, and clarity of the
information to be collected;
(d) Ways to minimize the burden of the information collection on
respondents, including through the use of automated collection
techniques or other forms of information technology; and
(e) Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
All comments will become a matter of public record. Comments on the
collection of information should be sent to the address listed in the
ADDRESSES section of this document. Written comments and
recommendations for the proposed information collection(s) should also
be sent within 30 days of publication of this notice to
<a href="http://www.reginfo.gov/public/do/PRAMain">www.reginfo.gov/public/do/PRAMain</a>. Find this particular information
collection by selecting ``Currently under 30-day Review--Open for
Public Comments'' or by using the search function.
Information Collection.
Title: Industrial Banks and Industrial Loan Companies.
OMB Number: 3064-0213.
Affected Public: Prospective parent companies of industrial banks
and industrial loan companies.

[[Page 65567]]

Table 1--Summary of Estimated Annual Burden
[OMB No. 3064-0213]
----------------------------------------------------------------------------------------------------------------
Number of Time per Annual
Information collection (obligation Type of burden Number of responses per response burden
to respond) (frequency of response) respondents respondent (HH:MM) (hours)
----------------------------------------------------------------------------------------------------------------
1. Initial Listing of Subsidiaries, Reporting (On Occasion) 3 1 04:00 12
12 CFR 354.4(a)(1) (Mandatory).
2. Annual Update of Subsidiaries Reporting (Annual)..... 3 1 04:00 12
List, 12 CFR 354.4(a)(1)
(Mandatory).
3. Annual Report of Covered Company Reporting (Annual)..... 3 1 10:00 30
and Subsidiaries and Other Reports
as the FDIC may require, 12 CFR
354.4(a)(3) (Mandatory).
4. Recordkeeping requirements in Recordkeeping (Annual). 3 1 10:00 30
written agreement, 12 CFR
354.4(a)(4) (Mandatory).
5. Contingency Plan, 12 CFR 354.4(b) Reporting (Annual)..... 1 1 345:00 345
(Mandatory).
--------------------------------------------------
Total Annual Burden (Hours):.... ....................... ........... .............. ......... 429
----------------------------------------------------------------------------------------------------------------
Source: FDIC.
Note: The annual burden estimate for a given collection is calculated in two steps. First, the total number of
annual responses is calculated as the whole number closest to the product of the annual number of respondents
and the annual number of responses per respondent. Then, the total number of annual responses is multiplied by
the time per response and rounded to the nearest hour to obtain the estimated annual burden for that
collection. This rounding ensures the annual burden hours in the table are consistent with the values recorded
in the OMB's regulatory tracking system. The FDIC has increased the estimated respondent count by one in
Information Collections 1-4 to account for the effect in the change in scope in this proposed rule.

C. Plain Language

Section 722 of the Gramm-Leach-Bliley Act \77\ requires each
Federal banking agency to use plain language in all of its proposed and
final rules published after January 1, 2000. The FDIC sought to present
the proposed rule in a simple and straightforward manner.
---------------------------------------------------------------------------

\77\ 12 U.S.C. 4809.
---------------------------------------------------------------------------

<bullet> Has the FDIC organized the material to suit your needs? If
not, how could it present the proposed rule more clearly?
<bullet> Has the FDIC clearly stated the requirements of the
proposed rule? If not, how could the proposed rule be more clearly
stated?
<bullet> Does the proposed rule contain technical jargon that is
not clear? If so, which language requires clarification?
<bullet> Would a different format (grouping and order of sections,
use of headings, paragraphing) make the proposed rule easier to
understand? If so, what changes would make the proposed rule easier to
understand?
<bullet> What else could the FDIC do to make the proposed rule
easier to understand?

D. Riegle Community Development and Regulatory Improvement Act of 1994

Pursuant to section 302(a) of the Riegle Community Development and
Regulatory Improvement Act of 1994 \78\ (RCDRIA), in determining the
effective date and administrative compliance requirements for new
regulations that impose additional reporting, disclosure, or other
requirements on IDIs, each Federal banking agency must consider,
consistent with principles of safety and soundness and the public
interest, any administrative burdens that such regulations would place
on affected depository institutions, including small depository
institutions, and customers of depository institutions, as well as the
benefits of such regulations. In addition, section 302(b) of the RCDRIA
requires new regulations and amendments to regulations that impose
additional reporting, disclosures, or other new requirements on IDIs
generally to take effect on the first day of a calendar quarter that
begins on or after the date on which the regulations are published in
final form.\79\ The FDIC invites comments that further will inform its
consideration of RCDRIA.
---------------------------------------------------------------------------

\78\ 12 U.S.C. 4802(a).
\79\ 12 U.S.C. 4802(b).
---------------------------------------------------------------------------

E. Providing Accountability Through Transparency Act of 2023

The Providing Accountability Through Transparency Act of 2023 \80\
requires that a notice of proposed rulemaking include the internet
address of a summary of not more than 100 words in length of a proposed
rule, in plain language, that shall be posted on the internet.
---------------------------------------------------------------------------

\80\ 12 U.S.C. 553(b)(4).
---------------------------------------------------------------------------

The FDIC proposes to modify the regulations governing the parent
companies of industrial banks in 12 CFR part 354. The amendments would
revise the regulation's scope to include conversions involving proposed
industrial banks under section 5 of the Home Owners' Loan Act and other
situations as determined by the FDIC; clarify the relationship between
written commitments and the FDIC's evaluation of relevant statutory
factors; and set forth additional criteria the FDIC would consider when
assessing the risks presented to an industrial bank by its parent
company and affiliates and evaluating the institution's ability to
function independently of its parent company and affiliates.
The proposal and the required summary can be found at <a href="https://www.fdic.gov/resources/regulations/federal-register-publications/index.html">https://www.fdic.gov/resources/regulations/federal-register-publications/index.html</a>.

List of Subjects in 12 CFR Part 354

Bank deposit insurance, Banks, Banking, Finance, Holding companies,
Industrial banks, Industrial loan companies, Insurance, Parent company,
Reporting and recordkeeping requirements, Savings associations.

Authority and Issuance

For the reasons stated in the preamble, the Federal Deposit
Insurance Corporation proposes to amend 12 CFR part 354 as follows:

PART 354--INDUSTRIAL BANKS

0
1. The authority citation for part 354 is revised to read as follows:

Authority: 12 U.S.C. 1464, 1811, 1815, 1816, 1817, 1818,
1819(a) (Seventh) and (Tenth), 1820(g), 1831o 1, 3108, 3207.

0
2. Amend Sec. 354.2 by revising the definition for Covered Company to
read as follows:

Sec. 354.2 Definitions.

* * * * *
Covered Company means.
(a) In each case on or after April 1, 2021, any company that is not
subject to

[[Page 65568]]

Federal consolidated supervision by the FRB and that controls an
industrial bank:
(1) As a result of a change in bank control pursuant to section
7(j) of the FDI Act;
(2) As a result of a merger transaction pursuant to section 18(c)
of the FDI Act;
(3) As a result of a conversion pursuant to section 5(i)(5) of the
Home Owners' Loan Act;
(4) That is granted deposit insurance by the FDIC pursuant to
section 6 of the FDI Act; or
(5) As determined by the FDIC after providing the company an
opportunity to present its views in writing as to why the provisions of
this part should not apply; or
(b) A company that controls an industrial bank, if, on or after
[the effective date of the final rule]:
(1) The control of such company changes, requiring a notice subject
to section 7(j) of the FDI Act; or
(2) The company is the resultant entity following a merger
transaction.
* * * * *
0
3. Amend Sec. 354.4 by revising paragraph (a) introductory text and
adding paragraph (c) to read as follows:

Sec. 354.4 Required commitments and provisions of written agreement.

(a) The commitments required to be made in the written agreements
referenced in Sec. 354.3 are set forth in paragraphs (a)(1) through
(8) of this section. In addition, with respect to an industrial bank
subject to this part, the FDIC will condition each grant of deposit
insurance, each issuance of a non-objection to a change in control,
each approval of a merger, each approval of a conversion, and each
determination of Covered Company status on compliance with paragraphs
(a)(1) through (8) of this section by the parties to the written
agreement. As required, each Covered Company must:
* * * * *
(c) For each type of filing through which an industrial bank would
become subject to this part, the FDIC must evaluate the appropriate
statutory factors pursuant to applicable law. The required commitments,
written agreement provisions, and industrial bank subsidiary
restrictions, as described in this part, will be taken into account as
part of the FDIC's consideration of the underlying filing, but do not
replace any statutory factor applicable to an underlying filing and
will not necessarily lead to the favorable resolution of any statutory
factor where the facts and circumstances are otherwise unfavorable.
0
4. Redesignate Sec. 354.6 as Sec. 354.7, and add a new Sec. 354.6 to
read as follows:

Sec. 354.6 Additional considerations.

(a) Parent company. The FDIC will consider the degree of risk
presented to the industrial bank from the parent company and its
affiliates. In assessing the degree of risk presented from the parent
company and its affiliates, the FDIC will consider the following
elements:
(1) The parent company's business purpose for establishing or
acquiring control of the industrial bank;
(2) The existing and proposed relationships among the parent
company and its affiliates;
(3) The parent company's history of regulatory and consumer
compliance, including the status of any significant pending or
outstanding enforcement actions, investigations, administrative
matters, or contingent liabilities;
(4) The supervisory record of the parent company and any affiliates
regulated by the Federal banking agencies;
(5) The novelty of the parent company's primary businesses, and the
extent to which new or innovative processes are being implemented or
utilized;
(6) The accessibility of information, including the books and
records of the parent company and any affiliated domestic or foreign
entities; and
(7) Any plans or processes that mitigate risks presented by the
parent company.
(b) Industrial bank. In every case, the FDIC will also consider the
degree to which the industrial bank will have:
(1) An independent board and management team; and
(2) A business model that is viable on a standalone basis and that
has franchise value independent of the parent organization. A business
model is viable on a standalone basis and has franchise value if the
main business functions of the industrial bank will not be reliant on
the parent organization, including the industrial bank's operations,
loans and investments, deposits and other funding sources, client
sourcing, and any other primary business activities.
(c) Rebuttable presumptions regarding shell or captive industrial
banks--(1) Presumptions. Any proposal for an industrial bank that
presents the following characteristics will be presumed to be a shell
or captive industrial bank. The industrial bank--
(i) Could not function independently of the parent company;
(ii) Would be significantly or materially reliant on the parent
company or its affiliates; or
(iii) Would serve only as a funding channel for an existing parent
company or affiliate business line.
(2) Impact of the presumptions. The FDIC will presume that the
shell or captive nature of an industrial bank involved in a filing
weighs heavily against favorably resolving one or more applicable
statutory factors.
(3) Rebuttal of presumptions. The FDIC will afford any company
seeking to rebut a presumption in this paragraph (c) an opportunity to
present its views in writing. While the FDIC is considering any such
materials, the FDIC will suspend consideration of any related filings,
time periods will be tolled, and transactions will not be consummated.

Federal Deposit Insurance Corporation.

By order of the Board of Directors.

Dated at Washington, DC, on July 30, 2024.
James P. Sheesley,
Assistant Executive Secretary.
[FR Doc. 2024-17637 Filed 8-9-24; 8:45 am]
BILLING CODE 6714-01-P

</pre><script data-cfasync="false" src="/cdn-cgi/scripts/5c5dd728/cloudflare-static/email-decode.min.js"></script></body>
</html>

View on FederalRegister.gov →Plain-text source

Indexed from Federal Register on August 12, 2024.

This is legal information, not legal advice. Laws vary by jurisdiction and change frequently. Always verify current law with official sources and consult a licensed attorney in your jurisdiction for advice on your specific situation.