ILC Loophole Undermines Financial Safety and Market Competition

BPI urges FDIC to pause insurance applications for ILCs until the loophole is closed

Washington, D.C. - The Bank Policy Institute today recommended the FDIC pause all new deposit-insurance approvals for industrial loan companies (ILCs) until Congress eliminates the ILC loophole and rules for ILCs are strengthened. The letter raised the importance of maintaining strict separation between banking and commerce by preventing nonbank commercial firms and big tech from owning insured banks without full Federal Reserve oversight. This supervision helps protect consumer privacy, bolster financial stability and preserve competition.

"Closing the ILC loophole will encourage competition by guaranteeing that all financial institutions follow the same rules of the road. A company that looks like a bank must be regulated like a bank. A regulatory bypass lane exposes consumers and the FDIC insurance fund to unnecessary risk." - Paige Pidano Paridon, Executive Vice President & Co-Head of Regulatory Affairs

How the ILC Loophole Puts the System at Risk

ILCs are banks. They accept deposits, lend, process payments and enjoy the benefit of a federal safety net in the form of FDIC deposit insurance. However, unlike insured banks, they are not subject to Federal Reserve supervision. This regulatory loophole poses risks.

• Threats to the FDIC Insurance Fund. Many banks in America are owned and operated by regulated bank holding companies subject to strict regulatory scrutiny to ensure that poor financial management at the parent company does not jeopardize the bank subsidiary, thus exposing bank customers and the federal deposit insurance fund to risk. ILC parent companies face no comparable oversight.
• Threats to Competition and Consumer Privacy. The Bank Holding Company Act's requirements are intended to maintain the separation of banking and commerce and thereby help prevent concentration of economic power and conflicts of interest, including the potential for one company to misuse consumer financial data for competitive advantage. Allowing big technology or retail firms to own ILCs could let them offer preferential credit to affiliates, disadvantage rivals and exploit consumer information.

BPI Recommendations

• Close the ILC loophole. Banks should be regulated like banks, and that includes parent company oversight. The FDIC should work with Congress to close this loophole.
• Pause new FDIC insurance applications during the request for information review. The FDIC shouldn't take action on ILC applications until it has completed its review and considered all public input.
• Strengthen interim safeguards. Impose bank-like rules for ILC parent companies, including privacy and data requirements, limits on non-financial activities, annual reporting and consolidated capital and liquidity standards.

Historical Context

ILCs originated in the early 20^th century when small financial firms began making modest loans to factory and wage workers unable to access traditional bank credit. These companies remained small and local until 1987, when Congress passed the Competitive Equality Banking Act, which carved ILCs out of the Bank Holding Company Act's definition of "bank." At the time, there were only 11 ILCs with an average asset size of less than $45 million. By March 2025, there were 21 ILCs with aggregate total assets of $247.4 billion. This regulatory carveout has attracted major commercial companies like Walmart, Home Depot and Rakuten seeking to own a bank without full federal oversight.

Additional Resources

• Tangled Up in Technicalities - A Historical Perspective on the Current ILC Debate
• FinTech and Big Tech Companies Want the Benefits of Banking Without the Responsibilities. Loopholes Could Let Them Succeed.
• Is It OK for FinTechs To Use Regulatory Arbitrage To Avoid Consolidated Supervision?
• Industrial Loan Corporation (ILC) Issue Summary
• Financial Services and Consumer Groups Support Senate Bill to Close Industrial Loan Company Loophole
• Banks, Credit Unions and Consumer Groups Support H.R. 5912, The Close the ILC Loophole Act
• Banks, Credit Unions and Consumer Groups Call for Passage of Bipartisan Solution to Close ILC Loophole
• Financial System Integrity Depends on Congressional Action on ILCs

###

About Bank Policy Institute

The Bank Policy Institute is a nonpartisan public policy, research and advocacy group that represents universal banks, regional banks and the major foreign banks doing business in the United States. The Institute produces academic research and analysis on regulatory and monetary policy topics, analyzes and comments on proposed regulations, and represents the financial services industry with respect to cybersecurity, fraud and other information security issues.

Media Contacts

Austin AntonBank Policy [email protected]