Banking and Finance Law Daily Wrap Up, FINANCIAL STABILITY—ICBA white paper calls for closing ‘Industrial Loan Company Loophole’, (Nov 13, 2025)

By George M. Gullo, J.D.

Allowing commercial firms to own banks introduces conflicts of interest, weakens underwriting standards, and amplifies systemic risk, the association maintains.

In recent letters to U.S. Senators, Representatives, and the acting chairman of the Federal Deposit Insurance Corporation (FDIC), the Independent Community Bankers of America (ICBA) shared a white paper, “Closing the Industrial Loan Company Loophole: An Urgent Priority to Prevent Systemic Risk and Consumer Harm,” to urge Congress to permanently close the “Industrial Loan Company (ILC) Loophole,” which allows non-financial firms to own depository institutions insured by the FDIC. According to ICBA, the ILC Loophole poses a serious threat to financial stability and creates the risk of losses to the FDIC Deposit Insurance Fund (DIF).

Loophole risks. The ILC loophole permits non-financial firms to own FDIC-insured depository institutions without being subject to consolidated supervision under the Bank Holding Company Act (BHCA). This exemption, ICBA asserts, poses significant risks to financial stability, consumer protection, and the DIF. ILCs are functionally equivalent to full-service banks, yet their commercial ownership undermines the longstanding U.S. policy of separating banking and commerce. This separation ensures banks function as neutral arbiters of credit, lending based on ability to repay rather than commercial interests.

Weakens standards. ICBA argues that allowing commercial firms to own banks introduces conflicts of interest, weakens underwriting standards, and amplifies systemic risk. In an era dominated by Big Tech, AI, fintech, and crypto, granting these firms banking powers could lead to unprecedented risks, including privacy violations, algorithm-driven price manipulation, and large-scale fraud. ICBA warns that failure to act will open the floodgates for major corporations to exploit the loophole, threatening the integrity of the financial system and the public interest.

Banking and commerce separation. The BHCA of 1956 established the principle that banking and commerce must remain separate to prevent concentrated economic power and conflicts of interest. ILCs, exempt from the BHCA definition of a “bank,” evade this safeguard while enjoying full lending powers and FDIC insurance. Historically, Congress has acted to close loopholes that allowed mixing of banking and commerce, reaffirming this principle through amendments and legislation, such as the Competitive Equality Banking Act (1987), Gramm-Leach-Bliley Act (1999), and Dodd-Frank Act (2010). According to ICBA, the ILC exemption is the most significant remaining loophole, and its exploitation by Big Tech and fintech firms poses heightened risks to financial stability and consumer protection.

Systemic risks. The white paper emphasizes that ILCs create systemic risk because their commercial parents are not subject to consolidated supervision by the Federal Reserve. This regulatory blind spot prevents effective enforcement of the “source of strength” doctrine, which requires parent companies to support struggling subsidiaries. Commercially owned ILCs often lend to customers of their parent firms, creating conflicts of interest and eroding underwriting standards. This increases the likelihood of insolvency and losses to the DIF, which could ultimately burden other banks or taxpayers. The FDIC’s own experience during the 2008–2009 financial crisis underscores the dangers of business models that tie insured banks to commercial parents.

ILC industry growth. Originally small and limited in scope, ILCs have grown dramatically since Utah lifted its moratorium on new charters in 1997. Today, there are 23 active ILCs with combined assets of $247.7 billion, including six institutions with assets over $10 billion and one exceeding $116 billion. This expansion—driven largely by Utah’s aggressive chartering—has transformed ILCs into major players in the financial system. ICBA contends that national financial policy should not be dictated by a quirk in a state law and calls for reinstating the FDIC moratorium on new ILC deposit insurance approvals.

Corporate consolidation. Allowing commercial firms to own banks would accelerate economic concentration, creating mega-conglomerates with vast economic and political influence. ICBA asserts that such integration would distort credit allocation, favoring parent-affiliated customers and disadvantaging competitors and small businesses. Big Tech and crypto firms pose additional risks, including privacy violations, discriminatory lending, and algorithm-driven price manipulation based on consumer data. Moreover, many ILC applicants seek limited-purpose Community Reinvestment Act evaluations, meaning they may not adequately serve low- and moderate-income communities. ICBA recommends the FDIC deny applications that prioritize parent company profits over community needs.

Permanently close. ICBA urges Congress to pass legislation permanently closing the ILC loophole, in the same way Congress has closed past banking loopholes that threatened to undermine consolidated supervision and the separation of banking and commerce. Closing the ILC Loophole would prevent large commercial firms from increasing the level of systemic risk in the banking system. In addition, ICBA calls on the FDIC to use its existing statutory authority under the Federal Deposit Insurance Act to deny the deposit insurance applications currently pending for ILCs and reinstate a moratorium on new approvals. Decisive action, ICBA argues, is essential to protect the financial system, preserve fair competition, and ensure banking serves the public interest rather than commercial conglomerates.

Companies: Independent Community Bankers of America

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