Banking and Finance Law Daily Wrap Up, DEPOSIT INSURANCE—Groups urge FDIC to deny PayPal’s application for bank deposit insurance, (Feb 3, 2026)

By Nora Macaluso

Letters say granting the company’s request could hurt competition and pose systemic risk.

The Bank Policy Institute (BPI), Independent Community Bankers of America (ICBA), National Community Reinvestment Coalition (NCRC), and Community Bankers Association of Illinois (CBAI) have urged the Federal Deposit Insurance Corporation to deny an application from PayPal Holdings seeking deposit insurance for its proposed industrial bank, PayPal Bank.

“If approved, PayPal Bank would have a large and complex parent, not subject to consolidated supervision," BPI and ICBA wrote in a letter to FDIC Regional Director Paul Worthing. "Because of PayPal’s large scale and existing customer base, it has the potential to quickly grow if it is granted deposit insurance.”

The new bank also would have “disparate regulatory and supervisory treatment,” which could pose a risk to the Deposit Insurance Fund and “create unnecessary systemic risk,” the groups said. “In addition to these risks, PayPal Bank could leverage its parent company’s relationship with consumers and small businesses to gain an unfair competitive advantage to attract customers” and draw deposits away from regulated banks, they said.

The “loophole” exempting holding companies with industrial loan subsidiaries from Bank Holding Company Act requirements should be closed, BPI and ICBA said.

“Should the FDIC proceed with considering applications for deposit insurance from ILCs, such as PayPal Bank, we respectfully request that the FDIC pause such consideration until it has issued rules or otherwise provided greater transparency regarding the ‘FDIC’s policy approach to industrial bank filings,’ as the FDIC has represented it would do,” the groups wrote.

The NCRC said it had previously voiced its opposition to ILC charters because of “significant safety and soundness risks, inadequate Community Reinvestment Act expectations, and untested fair lending models that allow evasion of consumer protection laws.” Those first two points—safety and soundness risks and CRA obligations—“would be particularly acute for PayPal Bank as a Utah chartered industrial bank,” the coalition wrote in a letter to FDIC Acting Chairman Travis Hill, PayPal Inc. President and CEO Alex Chriss, and the Utah Department of Financial Institutions.

PayPal’s proposed charter would highlight “structural weaknesses” in supervision, the NCRC said.

“Without consolidated Federal Reserve supervision, regulators would lack complete insight into how PayPal’s commercial operations, payment processing business, international activities, and various financial product offerings might affect the safety and soundness of the insured bank subsidiary,” the letter said. “The potential for affiliate transactions, shared operational infrastructure, reputational risk transmission, and capital migration between the commercial parent and the bank creates supervisory challenges that the current ILC framework is ill-equipped to address. The absence of a federal regulator with visibility into the entire corporate structure leaves blind spots that can threaten both individual institutions and systemic stability.”

And since ILCs have “minimal” CRA requirements, PayPal Bank would be able to avoid “the comprehensive community reinvestment duties that Congress intended for institutions serving the public at such scale,” the NCRC said. “The combination of the ILC structure’s inherent limitations and PayPal’s inadequate strategic plan would result in community reinvestment obligations wholly disproportionate to PayPal’s size, scope, and national significance,” the letter said.

CBAI said it has “been a staunch supporter of closing the … loophole” that allows holding companies to “escape consolidated supervision.”

“CBAI has consistently opposed the mixing of banking and commerce, which Industrial FIs represent, because of the risks they pose to the financial system, our economy and American taxpayers,” the organization said in a letter to Worthing. “The repeal of these prohibitions was largely responsible for the housing meltdown and the Great Financial Crisis, and there is ample evidence to believe that, unless diligence is maintained, another financial crisis may be caused by the failures of one or more Industrial FIs.”

“Closing this loophole is particularly important now as large and technology companies are eyeing these types of charters as a way to enter the banking industry and enjoy its many benefits without their holding companies being subject to Federal Reserve supervision,” CBAI said.

Companies: Bank Policy Institute; Community Bankers Association of Illinois; Independent Community Bankers of America; National Community Reinvestment Coalition; PayPal Holdings

RegulatoryActivity: BankingOperations BankHolding CommunityDevelopment DepositInsurance FinancialStability StateBankingLaws