industrial loan companies: where banking and commerce...
TRANSCRIPT
Industrial Loan Companies: Where Bankingand Commerce Meet
BY JAMES R. BARTH, TONG LI, APANARD ANGKINAND,YUAN-HSIN CHIANG AND LI LI
Should commercial firms be prohibited from owning banking institutions? Should theUnited States remain the only G20 country opposed to the “mixing of banking and com-merce”? These questions have assumed new urgency as the Dodd Frank Act of July 2010imposed a moratorium on the commercial ownership of industrial loan companies (ILCs),which was the last remaining entry point for commercial firms into banking. This paperspecifically examines the role of ILCs in America’s financial system from its beginningsin 1910 to the present. Special attention is paid to the performance of commercially ownedILCs prior to, during and after the most recent financial crisis. The examination is basedupon both survey data and Federal Deposit Insurance Corporation (FDIC) data, whichrepresents a database of the ILC industry that is the most comprehensive one availableto date. The paper also reviews the laws and regulations regarding the mixing of bankingand commerce, and discusses the advantages and disadvantages of allowing commercialownership of banks.
JEL Classification : G18, G21, G28.
I. INTRODUCTION
After the financial crisis of 2007–2009, Washington responded (as it always does)by passing legislation that is supposed to prevent the next calamity. The latesteffort, the voluminous Dodd-Frank Wall Street Reform and Consumer ProtectionAct (Dodd-Frank Act), weighs in at more than 2,000 pages—a whopping 20 timeslonger than the law establishing the Federal Reserve System.
Buried within this mammoth piece of legislation, and little noticed by thepublic and the press, are nine specific mentions of “industrial loan companies”or “industrial banks,” financial institutions that are probably a mystery to mostAmericans.
They may not be household names, but industrial loan companies (ILCs), orindustrial banks, have been around for a century; they actually pre-date the estab-lishment of the Federal Reserve in 1913. Their names are a nod to their originalmission, which was lending to industrial workers who had difficulty obtainingcredit elsewhere. Over time, ILCs evolved right along with the financial mar-ketplace, expanding their customer base. Today they are more modern financialinstitutions offering a greater variety of financial services (although some stillcater to a narrower group of customers than the typical commercial bank).
Corresponding author: Tong “Cindy” Li, Ph.D. Economist Milken Institute 1250 Fourth Street, Phone: 310 5704655, Fax: 310 570 4625, [email protected]
C© 2012 New York University Salomon Center and Wiley Periodicals, Inc.
2 James R. Barth et al.
If the term does ring familiar to the public today, it’s likely because they recall aflurry of news coverage back in 2005, when Wal-Mart filed an application to charteran industrial loan company and applied for federal deposit insurance. Other com-mercial firms like BMW, Toyota, General Electric, and Harley-Davidson alreadyowned ILCs, but Wal-Mart’s application aroused a wave of heated opposition. TheFDIC declared a moratorium on new applications in 2006 and held public hear-ings on the Wal-Mart proposal—the first time in the agency’s 78-year history thatsuch proceedings had been held. The controversy was eventually defused whenWal-Mart withdrew its application for federal deposit insurance in 2007, beforethe FDIC ever ruled on its application.
So what does this have to do with the Dodd-Frank Act? For starters, the actplaced another three-year moratorium on new charters for commercially ownedILCs. It also required the Government Accountability Office (GAO) to issue areport assessing the role and regulation of ILCs.
This paper provides our appraisal of the role industrial loan companies haveplayed over time in the U.S. economy, paying particular attention to the ownershipof ILCs by commercial firms. Figure 1 provides a brief timeline of the industry’sdevelopment, which has been shaped by legislation and regulation that will bediscussed in greater detail in the sections that follow. We will also analyze the sizeand performance of ILCs relative to the banking industry, and carefully examine thedifferences between ILCs that are owned by commercial firms versus those ownedby financial firms. The oversight of these institutions, especially as compared tobank regulation, will also be an important part of our evaluation as we considerthe question of whether commercially owned ILCs represent a greater potentialrisk to the financial system than non-commercially owned banks.
II. A CENTURY-OLD INDUSTRY
A BRIEF HISTORY OF ILCs
A century ago, in 1910, a new financial industry was born in Norfolk, VA., whenan entrepreneur by the name of Arthur J. Morris founded an institution called theFidelity Savings & Trust Company. Its basic purpose was to provide loans to low-and moderate-income industrial workers who had stable jobs but little access tobank credit.
At the time, commercial banks primarily catered to businesses, while savingsand loan associations largely focused on home loans. (There were also mutualsavings banks, but these institutions were largely confined to the New Englandstates.) This situation provided an ideal opening for a new type of financial institu-tion geared toward an underserved market. Loans extended by these institutions toworkers, moreover, were not typical of the day; instead of being made on the basisof available collateral, they relied on recommendations from two creditworthyindividuals who knew the workers.1 In addition, the new institutions initially
1Some state laws limited the size of loans by industrial loan companies, unlike those of com-mercial banks and savings and loans. As Saulnier (1940) points out, for example, Arizona and
Industrial Loan Companies 3
Arthur J. Morris opens the first ILC in Norfolk, Virginia (1910)
FDIC insuresthe deposits of 29 ILCs (1934)
1910 1920 1930 1940 1950 1960 1970 19901980 2000 2010
Garn-St Germain Depository Institutions Act makes all ILCs eligible for FDIC insurance, which ends the case-by-case approval process (1982)
ILCs are exempted from the Bank Holding Company Act, which prohibits any affiliation between commercial entities and banks. (1956) The Act imposes anti-tying restrictions on ILCs, their owners and affiliates. (1970)
Competitive Equality Banking Act requires all deposit-taking ILCs to obtain FDIC insurance. An ILC controlled by a non-BHC company can not offer demand deposits unless its assets are less than $100 million or it has not been acquired after August 10, 1987. Also, ILCs with more than $100 million in assets cannot offer commercial checking accounts (1987)
FDIC imposes a six-month moratorium on new ILC applications and acquiring existing ILCs (July 2006). The moratorium is later extended through January 31, 2008
The Dodd-Frank Act imposes another three-year moratorium on commercially owned ILCs. Also, parent companies of ILCs are required to serve as a source of strength (July 2010)
All transactions between ILCs and their affiliates are subject to Sections 23A (1933) and 23B (1987) of the Federal Reserve Act
Gramm-Leach-Bliley Act allows mixing commercial banking with investment banking, securities, and insurance but not commerce. However, ILCs are exempt from this Act (1999)
1930Number: 103Total assets: $143 million
1983Number: 135Total assets:$4 billion
2005Number: 96Total assets: $161 billion
1920Number: 87Total assets: $31 million
1938Number: 142Total assets: $151 million
2000Number: 90Total assets: $93 billion
1960Number: 239Total assets: $198 million
1970Number: 177Total assets: $470 million
1995Number: 55Total assets: $12 billion
Q2 2010*Number: 89Total assets: $132 billion
Note: Sections 23A and 23B of the Federal Reserve Act impose restrictions on variousfinancial transactions between a bank and its subsidiaries with an affiliate. Section 23Aplaces restrictions on the amount of transactions relative to the amount of a bank’s capital,while 23B places restrictions such that the transactions must be based on terms and condi-tions that would be comparable with or involving nonaffiliated companies.Sources: Saulnier (1940), state regulatory authorities, FDIC, Milken Institute.∗Based on available data, there were 39 active depository ILCs and 50 active non-depositoryILCs as of June 2010. “Total assets” in this case refers to the 39 active depository ILCs.
Figure 1: An ILC industry timeline.
funded themselves by issuing investment certificates rather than offering deposits.Since their primary customers were industrial workers, these institutions havebeen known ever since as either “industrial loan companies” or “industrial banks.”
Arthur J. Morris decided at the outset to try to copyright his particular type ofinstitution as a “Morris Plan” company.2 In subsequent years, he busied himselfoverseeing the establishment of these institutions in cities around the country, allwith the words “Morris Plan” in their titles and billed as members of the “MorrisPlan” system. But Morris never obtained that long-sought copyright for his lendingmodel. As a result, similar institutions that did not join his system sprouted upin various states, calling themselves industrial banking companies, industrial loanand thrift companies, and industrial loan associations.
These variations in names largely came about to comply with various statechartering and licensing laws under which financial institutions were allowed
Pennsylvania limited their loans to $1,000, while Colorado and Rhode Island limited the size to$5,000.2It has been reported that the “Morris Plan” was originated by a Mr. Stein as early as 1898. He is saidto have established the first such company, the Merchants-Mechanics Savings Association, in NewportNews, Va., in 1901. There is documentation that a judge held that there are “vital difference” betweenthe Morris and Stein plans; see The Survey (1915) and (1916).
4 James R. Barth et al.
to operate.3 This early confusion has complicated the task of determining theexact number and assets of these institutions over a long period of time. Ofcourse, even though these institutions were quite similar in overall orientation,they sometimes offered a different mix of services to a different mix of customers.To simplify matters, we will refer to them simply as industrial loan companies(ILCs) throughout this paper.4
Throughout their existence, ILCs have always been state-chartered or -licensedinstitutions that make loans and offer their customers deposits, investment cer-tificates, or both. In their early years, some states prohibited ILCs from offeringdeposits, which meant they had little choice but to offer investment certificatesto individuals to obtain funding for making loans. In other states, however, ILCswere allowed to offer either deposits or certificates, or both.
The legal restrictions on the sources of funding available to ILCs in various statesis depicted in Table 1, which provides selected financial information on 142 ILCsoperating in 15 states in 1938. It shows that in some states, these institutions onlyoffered deposits; in others, they only offered investment certificates; and in stillother states, they offered both types of products to their customers. Most tended torely mainly on one type of funding in addition to owner-contributed equity capital.The Table shows, for example, that for ILCs in Nebraska, investment certificateswere virtually the only source of funding besides equity capital. By contrast,ILCs in New York relied almost entirely on deposits in addition to equity capital.Today, there are still non-depository ILCs that do not offer deposit accounts fortheir customers. All depository ILCs, which do offer deposit accounts, are nowFDIC-insured institutions.
The ILC industry has never been very large in terms of either number ofinstitutions or total assets, and it has always been dwarfed by the banking industry,as Figure 2 shows.
In 1920, for example, there were 87 ILCs with $31 million in total assets—but in that same year, there were some 30,000 commercial banks holding nearly$50 billion in total assets. Both the number and total assets of ILCs increasedfor several decades thereafter. During the 1930s, there were more than a hundredin operation. The Great Depression was a pivotal period for ILCs: While bankswere failing in large numbers, ILCs, despite their relatively small role in the creditmarkets, became the leading providers of consumer credit to workers. From 1934to 1938, total assets and loans at ILCs grew by 65% and 81%, respectively, whileassets and loans at commercial banks grew by only 22% and 9%, respectively. Inaddition, loans accounted for 74% of the assets of ILCs over this period, whereasfor commercial banks this figure is 29%.5 (As we will discuss later, ILCs reprisedthis role as an important source of credit during the most recent financial crisis.)
3See Saulnier (1940). Also, in some states like Minnesota, state law prohibited industrial loan compa-nies from using the word “banking” in their titles.4The Dodd-Frank Act of 2010, as noted earlier, refers to these institutions as both industrial loancompanies and industrial banks.5These calculations are based on data from Saulnier (1940).
Industrial Loan Companies 5
Tabl
e1:
ILC
prof
iles
in15
stat
es,1
938
Equ
ity
acco
unt
Dep
osit
san
dce
rtif
icat
esB
orro
win
gE
stim
ates
(cap
ital
,sur
plus
,(%
ofto
tala
sset
s)an
dof
tota
lan
dun
divi
ded
redi
scou
nts
Num
ber
asse
ts(U
S$pr
ofit
s,as
%of
Tim
ean
dde
man
dIn
vest
men
t(%
ofto
tal
ofIL
Cs
thou
sand
s)to
tala
sset
s)de
posi
tsce
rtif
icat
esas
sets
)
Con
nect
icut
125,
549
55.1
033
.83.
2Fl
orid
a6
2,54
328
.665
.50
0.2
Indi
ana
85,
033
18.5
069
.85.
1M
aine
149
133
.20
62.3
0M
aryl
and
12,
344
15.8
74.1
3.5
0M
ichi
gan
723
,550
11.5
820
0N
ebra
ska
51,
343
21.2
071
.61.
1N
ewH
amps
hire
11,
248
5.1
920
0N
ewY
ork
1557
,726
14.2
78.8
00.
3N
orth
Car
olin
a33
13,4
0831
.10
602.
4O
hio
820
,512
15.9
66.4
00
Rho
deIs
land
56,
077
270.
263
.30.
1U
tah
459
954
.428
011
Vir
gini
a19
4,68
249
.41.
837
.46.
3W
estV
irgi
nia
175,
641
53.2
033
.26
Gra
ndto
tal
142
$150
,746
Sour
ce:A
dapt
edfr
omSa
ulni
er(1
940)
.
6 James R. Barth et al.
0
50
100
150
200
250
300
19401954196819821996 Q2 2010
Number of ILCs
0
400
800
1,200
1,600
2,000
2,400
1940 1950 1960 1970 1980
Total assets, 1940 to 1980
US$ millions
0
50
100
150
200
250
300
1980 1990 2000 Q2 2010
US$ billions
Total assets, 1980 to Q2 2010
Sources: State regulatory authorities, Milken Institute.
Figure 2: ILCs by number and total assets, 1940 to Q2 2010.
Figure 2 shows the size of the ILC industry from 1940 to mid-2010, basedon available data from state regulatory authorities.6 ILCs grew rapidly after the1930s, eventually reaching a high of 254 institutions with $408 million in assetsin 1966 (still relatively small when compared to more than 13,000 commercialbanks with $403 billion in assets in that same year). After 1966, the number ofILCs declined steadily to 130 in 1977, before increasing again to 155 in 1983.Once again, the number then declined, falling to 78 ILCs in the second quarter of2010.7
In terms of total assets, as shown in Figure 2, ILCs grew sharply from$3.8 billion in 1983 to $9 billion a decade later and eventually an all-time highof $270 billion in 2007, before declining to $122 billion in the second quarter of2010.8 (This decline was almost entirely due to some fairly large ILCs convertingto bank charters in response to the financial crisis.)
As of mid-2010, there were 39 depository ILCs with $132 billion in total assets.9
These institutions represent about 0.5% of the total number of insured institutionsand roughly 1% of the total deposits as well as the total assets of all the insured
6This data includes both depository and non-depository ILCs. The data for all FDIC-insured depositoryILCs that we could publicly obtain was only available starting in 2000. However, we were able toobtain data for currently active depository ILCs starting in 1992.7This number does not include 11 ILCs in California and Hawaii because those state regulatoryauthorities did not provide data for the second quarter of 2010. However, we were able to include these11 ILCs based upon data from the FDIC.8There is a difference in number and total assets for ILCs when obtaining data from the FDIC ascompared to the state regulatory authorities. These differences are due to 1) the inclusion of non-depository ILCs in data provided by the state regulatory authorities; 2) not all states with ILCssupplying information; and 3) other relatively minor issues involving the time period in which ILCsbecome inactive.9We are unable to obtain any financial information on non-depository ILCs. Almost all of the papertherefore focuses on depository ILCs, which is most appropriate since these are the institutions thathave access to the federal safety net.
Industrial Loan Companies 7
Utah56%
California26%
Nevada10%
Hawaii2%
Indiana2%
Minnesota2%
Total number=39
Utah77%
Nevada15%
California7%
Hawaii1%
Indiana<1%
Minnesota<1%
Total assets=$131.7 billion
Note: This excludes ILCs that do not take deposits.Sources: FDIC, Milken Institute.
Figure 3: State distribution of ILCs by number and assets, Q2 2010.
institutions. Commercial banks are by far the most dominant institutions in termsof number, assets, and deposits. This striking imbalance further helps explain whyso few people are aware of the existence of ILCs as compared to commercialbanks or even savings institutions.
In the early years of the ILC industry, at least 40 states chartered or licenseddepository and/or non-depository ILCs. During the past decade, however, thisnumber declined to seven states. And as of mid-2010, only six states still hadactive FDIC-insured ILCs. This situation is due to the enactment of the CompetitiveEquality Banking Act (CEBA) of 1987. CEBA specifies that only ILCs charteredin states that had in effect or under consideration a statute requiring ILCs to beFDIC-insured as of March 5, 1987, were exempt from the definition of “bank” inthe Bank Holding Company Act (BHCA). This means that only ILCs charteredin “grandfathered” states, as determined by the Federal Reserve, are eligible forthe ILC exemption from the BHCA. Until 2009 there were seven such states, butthe last ILC in Colorado became inactive that year.10 There are currently only sixgrandfathered states with active depository ILCs.
Utah ranks a clear first in both number of institutions and total assets throughoutthe entire decade. California ranks second in number of institutions over theperiod.11 It also ranked second in terms of total assets in the first half of thedecade, but was supplanted by Nevada in the second half.
Figure 3, which shows the ranking of the states as of the second quarter of2010, illustrates Utah’s dominance in the ILC industry. California is home toapproximately a quarter of ILCs, but accounts for only 7% of the total assets of
10See GAO (2005). In this report, it is noted that at the time of the CEBA exemption, there weresix states that qualified (California, Colorado, Hawaii, Minnesota, Nevada, and Utah). However, anILC that was already in existence prior to the law in Indiana obtained FDIC insurance in 1990 and,apparently, the Federal Reserve considered Indiana to also be a grandfathered state.11Some of these ILCs were quite similar in their operations to finance companies.
8 James R. Barth et al.
General Motors acquires a small
ILC, Horizon Thrift in Utah, and
changes its name to GMAC Capital
Corp. It becomes the first
commercially owned FDIC-
insured ILC (1988)
GMAC Automotive Bank changes name to GMAC Bank (2006)
GMAC Bank is renamed Ally Bank shortly before it converts to
a commercial bank (2009)
GMAC Commercial
Mortgage Bank is established
(2003)
GMAC Automotive Bank is established
(2004)
GMAC Commercial Mortgage Bank becomes a financial ILC after General Motors sells
majority shares to a private equity consortium in April. It then changes its name to Capmark
Bank in May (2006)
Although its parent company, Capmark Financial Group Inc., files for bankruptcy in 2009,
Capmark Bank still is an active financial ILC (2010)
Another GM-owned ILC, Escrow Bank USA, founded in 1999, is voluntarily closed.
GMAC Capital Corp. sells its
ILC to Franklin Templeton Credit
Corp. (1995)
2010500200028891
BMW Bank of North America
(1999)
Target Bank (2004)
Toyota Financial Savings Bank (2004)
EnerBank by CMS Energy (2002)
Volkswagen Bank USA, founded in 2002, is voluntarily closed (2007)
Volvo Commercial Credit Corp. of Utah, established in 2002, changes its name to Proficio Bank and converts to a commercial bank (2007)
Eaglemark Savings Bank by Harley-Davidson (1997)
First Electronic Bank by Fry’s Electronics (2000)
After Gramm-Leach-Bliley Act, commercial entities that still want to engage in financial activities obtain
ILC charters (1999)
GE Capital Financial (1993)
The Pitney Bowes Bank (2000)
Wal-Mart tries to acquire an ILC in California. However, the state passes a law
prohibiting commercial firms from acquiring/opening ILCs (2002)
Wal-Mart tries to open
another ILC in Utah (2005)
Wal-Mart withdraws its
FDIC application
(2007)
Transportation Alliance Bank by Flying J (1998)
Sears acquires an ILC charter but it remains
inactive for years (1991)
AT&T Universal Financial
is founded (1992)
AT&T sells its ILC charter to Citigroup, which uses it to establish a financial ILC
(1998)
Daimler Chrysler applies in 2005 then withdraws
(2009)Ford applies for an ILC, but still pending (2006)
Note: The upper half focuses on General Motors and its ILC subsidiaries. The light greyshade represents currently active commercially owned ILCs as of June 2010.Sources: Various media reports, FDIC, Milken Institute.
Figure 4: A timeline for commercially owned ILCs.
these institutions. In contrast, only 10% of the ILCs are located in Nevada, but itsshare of total assets increased from less than 4% in 2000 to slightly more than 15%in the second quarter of 2010. Utah and Nevada are by far the two most importantstates for the ILC industry today.
TWO OWNERSHIP TYPES: FINANCIALLY OWNED AND COMMERCIALLY OWNED
Throughout the industry’s history, most ILCs were either stand-alone entities ortheir parents were financial firms. In 1988, however, General Motors acquiredan ILC charter. From this point forward, there have been two ownership models:Financially owned ILCs are those owned by financial firms, while commerciallyowned ILCs are those owned by commercial firms. According to the Dodd-FrankAct, a company is a “commercial firm” if “the annual gross revenues derived bythe company and all of its affiliates from activities that are financial in nature and,if applicable, from the ownership or control of one or more insured depositoryinstitutions, represent less than 15% of the consolidated annual gross revenues ofthe company.”
A timeline showing some of the developments in the commercial segment ofthe ILC industry is provided in Figure 4. It shows that there have been entriesand exits from this segment of the industry since the first such institution wasestablished; nine commercially owned ILCs remained active as of June 2010. Thefigure also shows that while there are very few commercially owned ILCs, there
Industrial Loan Companies 9
0102030405060708090
100Colorado
Minnesota
Indiana
Hawaii
Nevada
California
Utah
Percent of total institutions
0102030405060708090
100Colorado
Minnesota
Indiana
Hawaii
California
Nevada
Utah
Percent of total assets
Note: This excludes ILCs that do not take deposits. If an ILC has no parent, it is classifiedas a financially owned ILC.Sources: FDIC, Milken Institute.
Figure 5: State distribution of financially owned ILCs by number and assets,2000 to Q2 2010.
is clearly a variety of commercial parents, ranging from automobile companies toretailers to transportation companies to a motorcycle manufacturer.
From 2000 to the second quarter of 2010, financially owned ILCs have domi-nated commercially owned ILCs with respect to both the number of institutionsand total assets. As of mid-2010, financially owned ILCs accounted for 86% ofthe total assets and commercially owned ILCs accounted for the remaining 14%.In 2008, the commercially owned ILCs accounted for their largest share of assets,at nearly 25%. However, the conversion of GMAC Bank to a commercial bankled to a decline in share of total assets of this type of ILC in the subsequent twoyears. In terms of numbers, the financially owned ILCs also accounted for roughlythree-fourths to four-fifths of all ILCs for nearly the entire decade.
Information on the distribution of financially owned ILCs among the differ-ent states in which they are chartered is provided in Figure 5 with Utah againdominating the list. The total assets of all financially owned ILCs increased from$82 billion in 2000 to a high of $228 billion in 2007, before declining to $113 bil-lion in mid-2010. Almost all of this decrease occurred at financially owned ILCslocated in Utah and was due to the conversion of several ILCs to commercial banksduring the financial crisis, after the parent companies registered as Bank HoldingCompanies (BHCs). The only state in which there was a significant increase inILC assets was Nevada, which saw its share of the total assets of financially ownedILCs increase from less than 4% in 2007 to slightly more than 17% in the secondquarter of 2010. In terms of number of all financially owned ILCs, there was anincrease from 33 institutions to a high of 41 institutions in 2005 and 2006 beforedeclining to 30 institutions in the second quarter of 2010. Colorado was the onlystate among seven that began the decade with some industry representation butended without a single active institution. As of Q2 2010, Utah accounts for roughlythree-quarters of the total assets of financially owned ILCs and half of the numberof all financially owned ILCs. California is second in terms of share of numberand Nevada is second in terms of share of assets of these institutions.
10 James R. Barth et al.
0102030405060708090
100
Nevada
Utah
Percent of total institutions
0102030405060708090
100
Nevada
Utah
Percent of total assets
Note: This excludes ILCs that do not take deposits.Sources: FDIC, Milken Institute.
Figure 6: State distribution of commercially owned ILCs by number and assets,2000 to Q2 2010.
-3
-2
-1
0
1
2
3
4
5
6
7
FinanciallyownedILCs
Commerciallyowned ILCs
Returnon assets, percent
-20
-15
-10
-5
0
5
10
15
20
25
Financially owned ILCs
Commercially owned ILCs
Returnon equity, percent
0
5
10
15
20
25
30
35
40
Commercially owned ILCs
Financially owned ILCs
Equity to asset ratio, percent
Sources: FDIC, Milken Institute.
Figure 7: Financially and commercially owned ILCs: Financial performance,2000 to Q2 2010.
Figure 6 shows that there were only two states in which there were activecommercially owned ILCs over the past decade: Nevada and Utah. The vastmajority (95%) of the assets were held by commercially owned ILCs charteredin Utah as of June 2010. The same is true of the number of commercially ownedILCs, with Utah accounting for just short of 80% of all these institutions. Thetotal assets of commercially owned ILCs increased from $4 billion in 2000 to $19billion in the second quarter of 2010. The biggest jump in assets occurred from2007 to 2008, when the increase was $18 billion, which was accounted for by GECapital Financial Inc. and BMW Bank of North America.
In comparing the financial performance of commercially and financially ownedILCs, Figure 7 shows the return on assets (ROA) and return on equity (ROE), aswell as the equity capital–to–total asset ratio for these two types of institutions.Through almost the entire decade, commercially owned ILCs remained bettercapitalized than financially owned ILCs. In the second quarter of 2010, however,both types had roughly the same equity capital–to–total asset ratio. In addition,
Industrial Loan Companies 11
commercially owned ILCs performed far better in terms of ROA. In the earlypart of the decade, their performance was slightly below that of financially ownedILCs in terms of ROE, but that trend changed after 2007. However, the betterperformance of the financially owned ILCs in terms of ROE in the early part ofthe decade was due to the fact that they held less capital relative to their assets ascompared to their commercially owned counterparts.
Tables 2 and 3 provide additional information about the 30 financially ownedILCs and nine commercially owned ILCs that operated as of the second quarterof 2010. Though they began with a fairly narrow scope of business and customerbase in their formative years, ILCs have evolved over time to become a modernfinancial industry offering a wider range of products and services to a morediverse group of customers. Clearly, however, the individual ILCs differ not onlyin type of ownership but also in terms of the specific products and servicesoffered as well as their customer mix. Financially owned ILCs have $55 million inassets per employee, while commercially owned ILCs have $30 million in assetsper employee (by contrast, all FDIC-insured institutions have $6.5 million inassets per employee). The three largest ILCs are all financially owned (AmericanExpress Centurion Bank, UBS Bank USA, and USAA Savings Bank).12 Thesethree institutions account for slightly more than half of the total assets of the ILCindustry. It is also interesting to note it’s not readily apparent from the names ofthese institutions that they are ILCs.
III. REGULATION OF ILCS
LEGISLATIVE DEVELOPMENTS
ILCs essentially operated like local consumer finance companies during their earlyyears; they were not deemed important competitors for banks. But things startedto change when the FDIC was established in 1934 in response to numerous bankruns and associated failures. The FDIC decided to insure the thrift certificates of29 industrial loan companies that year and later added ILCs to the ranks of insuredfinancial institutions on a case-by-case basis. The Banking Act of 1935 also madeILCs eligible for membership in the Federal Reserve System. As a result, fourILCs located in Illinois, Michigan, North Carolina, and Ohio were members asof 1940.13 Over time, more states began allowing ILCs to offer both demand andtime deposits. Then, with the passage of the Garn-St Germain Act in 1982, alldeposit-taking ILCs became eligible for federal deposit insurance. And five years
12We were told that American Express established its ILC in Utah due to the fact that there were manymissionaries who spoke a variety of languages that were useful to the firm given its worldwideoperations. We were also told that USAA Savings Bank was established in Nevada because itsimmediate parent was a savings and loan operating in Texas and therefore subject to interest rateceilings that became binding in a high inflationary period. These ceilings were not applicable for itsILC in Nevada.13See Saulnier (1940).
12 James R. Barth et al.
Tabl
e2:
Sele
cted
info
rmat
ion
oncu
rren
tly
acti
vefi
nanc
ially
owne
dIL
Cs,
Q2
2010
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Am
eric
anE
xpre
ssU
T3/
203/
2074
29,9
92A
broa
dra
nge
ofA
mer
ican
Exp
ress
Am
eric
anE
xpre
ssC
entu
rion
Ban
k19
8919
89fi
nanc
ialp
rodu
cts,
incl
udin
gcr
edit
card
san
dco
nsum
ertr
avel
serv
ices
Tra
velR
elat
edSe
rvic
esC
ompa
nyIn
c.
Com
pany
UB
SB
ank
USA
UT
9/15
9/15
5228
,979
Abr
oad
rang
eof
UB
SA
mer
ica
Inc.
UB
SA
G20
0320
03fi
nanc
ials
ervi
ces
USA
ASa
ving
sN
V10
/19/
276
13,7
64Fi
nanc
ials
ervi
ces,
USA
AFe
dera
lU
nite
dSe
rvic
esB
ank
1997
∗19
96pr
imar
ilyse
rvin
gth
em
ilita
ry,v
eter
ans,
and
thei
rfa
mili
es
Savi
ngs
Ban
kA
utom
obile
Ass
ocia
tion
(USA
A)
Cap
mar
kB
ank∗
∗U
T4/
14/
113
79,
533
Fina
ncia
lser
vice
sto
Cap
mar
kFi
nanc
ial
Gen
eral
Mot
ors
2003
2003
inve
stor
sin
com
mer
cial
real
esta
te–r
elat
edas
sets
Gro
upIn
c.C
o.,p
riva
teeq
uity
cons
ortiu
mSa
llie
Mae
Ban
kU
T11
/28
11/2
831
7,37
3E
duca
tion
loan
sto
SLM
Cor
p.SL
MC
orp.
2005
2005
stud
ents
and
thei
rfa
mili
es
(Con
tinu
ed)
Industrial Loan Companies 13
Tabl
e2:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Cap
italS
ourc
eB
ank
CA
7/25
7/25
340
5,77
8Fi
nanc
ials
ervi
ces
Cap
italS
ourc
eIn
c.C
apita
lSou
rce
Inc.
2008
2008
Bea
lBan
kN
evad
aN
V8/
28/
278
5,54
4Fi
nanc
ials
ervi
ces
with
Bea
lFin
anci
alC
orp.
Bea
lFin
anci
al20
0420
04sp
ecia
lizat
ion
inpu
rcha
sing
loan
san
dpo
rtfo
lios
oflo
ans
inth
ese
cond
ary
mar
ket
Cor
p.
Woo
dlan
dsU
T8/
248/
2427
3,21
3C
omm
erci
al/in
dust
rial
Leh
man
Bro
ther
sL
ehm
anB
roth
ers
Com
mer
cial
Ban
k20
0520
05lo
ans,
com
mer
cial
real
esta
telo
ans,
and
war
ehou
selin
esof
cred
it.
Ban
corp
Inc.
Hol
ding
s
Opt
umH
ealth
Ban
kU
T7/
217/
2188
1,44
1Fi
nanc
ialp
rodu
cts
and
Opt
umFi
nanc
ial
Uni
tedH
ealth
Inc.
2003
2003
serv
ices
toin
divi
dual
san
dfa
mili
esto
pay
for
heal
thca
re
Serv
ices
Inc.
Gro
upIn
c.
(Con
tinu
ed)
14 James R. Barth et al.
Tabl
e2:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Mer
rick
Ban
kU
T9/
229/
2213
21,
038
Loa
nsfo
rbo
atan
dR
VC
ardW
orks
Inc
Car
dWor
ksL
PC
orpo
ratio
n19
9719
97cu
stom
ers
Wri
ghtE
xpre
ssU
T6/
16/
132
968
Paym
entp
roce
ssin
gW
righ
tExp
ress
Cor
p.W
righ
tExp
ress
Fina
ncia
lSe
rvic
esC
orp.
1998
1998
and
flee
tand
corp
orat
ech
arge
card
sto
the
U.S
.co
mm
erci
alan
dgo
vern
men
tveh
icle
flee
tind
ustr
y
Cor
p.
Cen
tenn
ialB
ank
CA
10/2
511
/321
812
Mul
tifam
ilyO
rang
eC
ount
yL
andA
mer
ica
1979
1998
HU
D/F
HA
223(
f)lo
anpr
oduc
tB
anco
rpFi
nanc
ialG
roup
Inc.
Fire
side
Ban
kC
A12
/31
10/5
400
787
Non
-pri
me
auto
mob
ileU
nitr
inIn
c.an
dU
nitr
inIn
c.19
5019
84lo
ans
Fire
side
Secu
ritie
sC
orp.
Fina
nce
Fact
ors
HI
5/14
6/4
129
620
Fina
ncia
lser
vice
sto
Fina
nce
Ent
erpr
ises
Fina
nce
Ent
erpr
ises
Ltd
.H
I19
5219
84lo
calc
omm
uniti
esL
td.
Ltd
.
(Con
tinu
ed)
Industrial Loan Companies 15
Tabl
e2:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Med
allio
nB
ank
UT
12/2
212
/22
2952
7R
ecre
atio
n,he
alth
Med
allio
nFi
nanc
ial
Med
allio
n20
0320
03ca
re,a
ndta
xim
edal
lion
loan
sC
orp.
Fina
ncia
lCor
p.
Wor
ldFi
nanc
ial
UT
12/1
12/1
847
7C
redi
tcar
dan
dbi
lling
Alli
ance
Dat
aSy
stem
sA
llian
ceD
ata
Cap
italB
ank
2003
2003
billi
ngac
coun
tst
atem
ents
and
com
mer
cial
lend
ing
for
busi
ness
es
Cor
p.Sy
stem
sC
orp.
Com
mun
ityC
A10
/19/
1051
383
Aw
ide
rang
eof
loan
TE
LA
CU
TE
LA
CU
Com
mer
ceB
ank
1976
1985
prod
ucts
and
depo
sit
acco
unts
Firs
tSec
urity
CA
3/31
6/28
1434
7L
oans
secu
red
byFi
rstA
mer
ican
Firs
tAm
eric
anB
usin
ess
Ban
k19
8819
89co
mm
erci
alpr
oper
tyin
Sout
hern
Cal
ifor
nia
Fina
ncia
lCor
p.Fi
nanc
ialC
orp.
Cir
cle
Ban
kC
A1/
221/
2255
307
Pers
onal
and
Cir
cle
Ban
corp
Cir
cle
Ban
corp
1990
1990
com
mer
cial
fina
ncia
lser
vice
s
(Con
tinu
ed)
16 James R. Barth et al.
Tabl
e2:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Cel
ticB
ank
UT
3/1
3/1
4722
8B
usin
ess
loan
s,re
alC
eltic
Inve
stm
entI
nc.
Cel
ticIn
vest
men
t20
0120
01es
tate
loan
s,as
set-
base
dle
ndin
g,an
deq
uip-
men
t/con
stru
ctio
nfi
nanc
ing
Inc.
Bal
boa
Thr
ifta
ndC
A12
/11
7/3
7619
8Fi
nanc
ials
ervi
ces,
Haf
ifB
anco
rpIn
c.H
afif
Ban
corp
Inc.
Loa
nA
ssoc
iatio
n19
8019
86in
clud
ing
savi
ngs
and
inve
stm
ent
prod
ucts
,res
iden
tial
loan
s,co
mm
erci
allo
ans,
auto
mob
ilefi
nanc
ing,
and
mor
eG
olde
nSe
curi
tyC
A12
/92/
2520
165
Fina
ncia
lser
vice
sN
oaf
filia
tion
No
affi
liatio
nB
ank
1982
1986
incl
udin
gsa
ving
san
din
vest
men
tpr
oduc
ts,r
esid
entia
llo
ans,
cons
truc
tion
loan
s,an
dm
ore.
(Con
tinu
ed)
Industrial Loan Companies 17
Tabl
e2:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Fina
nce
&T
hrif
tC
A7/
912
/17
105
120
Pers
onal
loan
san
dF&
TFi
nanc
ial
F&T
Fina
ncia
lC
ompa
ny19
2519
84au
tolo
ans
Serv
ices
Inc.
Serv
ices
Inc.
Web
Ban
k∗∗∗
UT
5/15
5/15
2068
Loa
nsan
dcr
edit
card
sSt
eelP
artn
ers
IIL
PSt
eelP
artn
ers
1997
1997
Loa
nsan
dcr
edit
card
sSt
eelP
artn
ers
IIL
PH
oldi
ngs
LP
The
Mor
ris
Plan
IN7/
273/
2321
64C
onsu
mer
lend
ing
Firs
tFin
anci
alC
orp.
Firs
tFin
anci
alC
ompa
nyof
Terr
eH
aute
Inc.
1962
1990
Cor
p.
LC
AB
ank
Cor
p.U
T1/
261/
267
53Fu
llse
rvic
ele
asin
gL
ease
Cor
pora
tion
ofL
ease
Cor
pora
tion
2006
2006
com
pany
Am
eric
aof
Am
eric
aA
DB
Ban
kU
T8/
18/
115
49Fi
nanc
ein
sura
nce
Lea
vitt
Gro
upA
genc
yL
eavi
ttG
roup
2005
2005
prem
ium
sA
ssoc
iatio
nL
LC
Ent
erpr
ises
AR
CU
SB
ank
UT
9/9
9/9
440
Fina
ncia
ladv
isor
y,A
RC
US
Fina
ncia
lW
ellP
oint
Inc.
2008
2008
pers
onal
cred
it,H
SAac
coun
tsH
oldi
ngC
orp.
(Con
tinu
ed)
18 James R. Barth et al.
Tabl
e2:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
hold
ing
Dat
eF
DIC
-N
umbe
rof
asse
tsD
escr
ipti
onof
com
pany
:U
ltim
ate
Nam
eSt
ate
foun
ded
insu
red
empl
oyee
s(U
S$M
)bu
sine
sslin
eim
med
iate
pare
ntpa
rent
Ran
cho
Sant
aFe
CA
1/2
12/1
715
36C
onsu
mer
lend
ing
Sem
perv
erde
Hol
ding
Sem
perv
erde
Thr
ift&
Loa
nA
ssoc
iatio
n19
8219
84C
o.In
c.H
oldi
ngC
ompa
nyIn
c.M
inne
sota
Firs
tM
N1/
18/
714
29C
onsu
mer
loan
san
dM
inne
sota
Thr
iftC
o.M
inne
sota
Thr
ift
Cre
dit&
Savi
ngs
Inc.
1956
1986
hom
em
ortg
age
Com
pany
Sour
ces:
FDIC
,com
pany
web
site
s,M
ilken
Inst
itute
.∗ U
SAA
Savi
ngs
Ban
kw
ases
tabl
ishe
das
acr
edit
card
bank
and
licen
sed
asan
indu
stri
allo
anco
mpa
nyin
1997
acco
rdin
gto
stat
ere
gula
tory
auth
oriti
es.
∗∗C
apm
ark
Ban
kis
cate
gori
zed
asa
fina
ncia
llyow
ned
ILC
afte
r20
06.
Cur
rent
lyits
imm
edia
tepa
rent
,C
apm
ark
Fina
ncia
lG
roup
Inc.
,is
inba
nkru
ptcy
proc
eedi
ngs.
∗∗∗ W
ebB
ank
info
rmed
usth
atit
shou
ldbe
cons
ider
eda
com
mer
cial
lyow
ned
ILC
rath
erth
ana
fina
ncia
llyow
ned
ILC
beca
use
itspa
rent
isa
cong
lom
erat
ew
ithco
ntro
lling
busi
ness
inte
rest
sin
anu
mbe
rof
diff
eren
tin
dust
ries
,in
clud
ing
fina
ncia
l,in
dust
rial
,an
dot
hers
.H
owev
er,
sinc
ein
suff
icie
ntda
taw
ere
avai
labl
eto
usre
gard
ing
diff
eren
tsou
rces
ofre
venu
e,an
dot
hers
have
clas
sifi
edW
ebB
ank
asa
fina
ncia
llyow
ned
ILC
,we
have
also
done
soin
this
pape
r.
Industrial Loan Companies 19
Tabl
e3:
Sele
cted
info
rmat
ion
oncu
rren
tly
acti
veco
mm
erci
ally
owne
dIL
Cs,
Q2
2010
Dat
eTo
tal
Reg
iste
red
FD
IC-
Num
ber
ofas
sets
Des
crip
tion
ofho
ldin
gco
mpa
ny-
Nam
eSt
ate
Dat
ein
sure
dem
ploy
ees
(US$
M.)
busi
ness
line
imm
edia
tepa
rent
Ult
imat
epa
rent
BM
WB
ank
ofU
T11
/12
11/1
233
8,17
0Fi
nanc
ials
ervi
ces
for
BM
WFi
nanc
ial
BM
WA
GN
orth
Am
eric
a19
9919
99B
MW
cust
omer
sSe
rvic
esN
AL
LC
GE
Cap
ital
UT
2/12
2/12
100
8,02
8C
omm
erci
alle
ndin
gG
EC
onsu
mer
Gen
eral
Ele
ctri
cC
o.Fi
nanc
ialI
nc.
1993
1993
and
leas
ing
tom
id-m
arke
tcu
stom
ers
Fina
nce
Inc.
Toyo
taFi
nanc
ial
NV
8/16
8/16
3782
2Fi
nanc
ials
ervi
ces
Toyo
taFi
nanc
ial
Toyo
taM
otor
Cor
p.Sa
ving
sB
ank
2004
2004
Toyo
tade
aler
san
dcu
stom
ers
Serv
ices
Am
eric
asC
orp.
The
Pitn
eyU
T1/
161/
1615
722
Smal
lbus
ines
scr
edit
Pitn
eyB
owes
Pitn
eyB
owes
Inc.
Ban
kIn
c.19
9819
98ca
rds
Glo
balF
inan
cial
Serv
ices
LL
CT
rans
port
atio
nU
T10
/110
/121
051
2Fu
elpu
rcha
seca
rds,
Flyi
ngJ
Inc.
Flyi
ngJ
Inc.
Alli
ance
Ban
kIn
c.19
9819
98sm
allb
usin
ess
lend
ing,
and
truc
king
fina
ncin
g
(Con
tinu
ed)
20 James R. Barth et al.
Tabl
e3:
(Con
tinu
ed)
Dat
eTo
tal
Reg
iste
red
FD
IC-
Num
ber
ofas
sets
Des
crip
tion
ofho
ldin
gco
mpa
ny-
Nam
eSt
ate
Dat
ein
sure
dem
ploy
ees
(US$
M.)
busi
ness
line
imm
edia
tepa
rent
Ult
imat
epa
rent
Ene
rBan
kU
SAU
T6/
36/
378
313
Hom
eim
prov
emen
tC
MS
Cap
italL
LC
CM
SE
nerg
yC
orp.
2002
2002
and
cons
umer
ener
gypr
oduc
tfi
nanc
ing
Targ
etB
ank
UT
9/27
9/27
1811
2C
redi
tcar
dan
dTa
rget
Cor
p.Ta
rget
Cor
p.20
0420
04pa
ymen
tser
vice
sE
agle
mar
kSa
ving
sN
V9/
278/
2591
40Fi
nanc
ials
ervi
ces
for
Har
ley-
Dav
idso
nH
arle
y-D
avid
son
Ban
k20
0119
97H
arle
y-D
avid
son
cust
omer
sFi
nanc
ial
Serv
ices
Inc.
Firs
tEle
ctro
nic
UT
10/5
10/5
437
Fina
ncia
land
priv
ate
Fry’
sE
lect
roni
csFr
y’s
Ele
ctro
nics
Ban
k20
0020
00la
belc
redi
tcar
dse
rvic
esIn
c.In
c.
∗ Eag
lem
ark
Savi
ngs
Ban
kw
ases
tabl
ishe
din
1997
but
chan
ged
orga
niza
tion
type
tobe
com
ean
indu
stri
allo
anco
mpa
nyin
2001
.So
urce
s:FD
IC,c
ompa
nyw
ebsi
tes,
Milk
enIn
stitu
te.
Industrial Loan Companies 21
later, the Competitive Equality Banking Act required all depository ILCs to obtainFDIC insurance.14 Today, as noted earlier, there are two types of ILCs: depositoryand non-depository institutions. As of mid-2010, there were 39 depository ILCsand 50 non-depository ILCs.15
From the outset, ILCs, being state-chartered financial institutions, have alwaysbeen regulated by the states in which they are chartered. After the establishmentof the FDIC, however, depository ILCs that acquired FDIC insurance also cameunder the supervision of the FDIC. As a result, the FDIC has the authority toexamine any affiliate of any insured depository institution, including the parentcompany. This authority applies to ILCs, so that the FDIC is able to determinethe relationship between the ILC and its parent as well as the effect of such arelationship on the ILC.16 Moreover, regulatory authorities in California, Nevada,and Utah have the authority to conduct examinations of both the parents andaffiliates of ILCs.
In addition, ILCs are subject to Sections 23A and 23B of the Federal ReserveAct, which restrict transactions among ILCs, affiliates, and parents. More specif-ically, ILCs are prohibited from extending significant loans to their parent oraffiliates or from offering them on preferential or non-market terms. Lastly, Utahand the FDIC require a majority of ILC board members to be outside directorsunaffiliated with the parent companies.
The parents of ILCs are not subject to Federal Reserve oversight because theyare not bank holding companies. In particular, the parent of an ILC is exemptfrom the definition of a bank holding company in the Bank Holding CompanyAct (BHCA) so long as the ILC satisfies at least one of the following conditions:(1) the institution does not accept demand deposits, (2) the institution’s total assetsare less than $100,000,000, or (3) control of the institution has not been acquiredby any company after August 10, 1987. Of the 39 active ILCs as of mid-2010,nine of these institutions had less that $100 million in total assets. This includestwo of the commercially owned ILCs (see Tables 2 and 3).17
14However, that act did bar ILCs from offering demand deposits unless their assets were less than $100million or an ILC had been acquired before the law was enacted.15The FDIC only provides information on depository ILCs, but the data is quite difficult to obtainfrom the FDIC website; only for a limited number of recent years are shown. A list of ILCs is also notavailable from the FDIC website.16West (2004).17According to the Section 2(c)(2)(H) of the Bank Holding Company Act:(H) An industrial loan company, industrial bank, or other similar institution which is–(i) an institution organized under the laws of a State which, on March 5, 1987, had in effect or had underconsideration in such State’s legislature a statute which required or would require such institution toobtain insurance under the Federal Deposit Insurance Act–(I) which does not accept demand deposits that the depositor may withdraw by check or similar meansfor payment to third parties;(II) which has total assets of less than $100,000,000; or(III) the control of which is not acquired by any company after the date of the enactment of theCompetitive Equality Amendments of 1987; or(ii) an institution which does not, directly, indirectly, or through an affiliate, engage in any activity inwhich it was not lawfully engaged as of March 5, 1987, except that this subparagraph shall cease to
22 James R. Barth et al.
REGULATORY BARRIERS TO COMMERCIAL COMPANIES OWNING BANKING INSTITUTIONS
Banks did not seem very concerned about competition from ILCs for a long time—not even in 1988, when the first commercial firm acquired an ILC charter.18 Fromthen on, a variety of different types of commercial firms acquired or formed ILCs,including such companies as BMW, General Electric, Target, Pitney Bowes andHarley-Davidson, without generating a controversy.
The banking industry began to focus on competition from ILCs when thoseILCs owned by Merrill Lynch and Morgan Stanley began to grow dramaticallyby providing insured deposits to their customers. This led to a controversy overinterest-bearing business checking accounts and proposals to prevent ILCs fromoffering such accounts. But it was Wal-Mart’s attempt to enter this market thatcreated a real storm.
Wal-Mart made its first move in this arena in 1999, when it tried to acquire asmall savings and loan in Oklahoma. But the Gramm-Leach-Bliley Act, whichprohibited the mixing of banking and commerce, took effect that year, and Wal-Mart missed the deadline for such an acquisition. In 2001, it then tried to partnerwith Toronto-Dominion Bank USA to buy a thrift institution, but the Office ofThrift Supervision (OTS) denied its application. A year later, Wal-Mart tried yetagain to purchase an ILC, this time in California, but the state quickly passed alaw prohibiting such an acquisition.
Finally, in 2005, Wal-Mart filed an application with the Utah Department ofFinancial Institutions and the FDIC to establish a federally insured ILC. The stateof Utah approved the application for a charter, but the FDIC did not approve the ap-plication for deposit insurance. Instead, the FDIC placed a six-month moratoriumon all industrial loan company applications in July 2006.19 In January 2007 themoratorium was extended by the FDIC for an additional year for ILCs that wouldbe owned or controlled by commercial companies.20,21 Prior to the moratorium,
apply to any institution which permits any overdraft (including any intraday overdraft), or which incursany such overdraft in such institution’s account at a Federal Reserve bank, on behalf of an affiliateif such overdraft is not the result of an inadvertent computer or accounting error that is beyond thecontrol of both the institution and the affiliate.18It might be noted that ILCs had an advantage over commercial banks because they were not subjectto Regulation Q; thus the ownership of ILCs provided an option when competing with money marketfunds after 1975, when interest rates rose. An additional advantage was that ILCs, unlike bank holdingcompanies, were not blocked from going nationwide with their operations.19In November 2007, the FDIC granted an exception to the moratorium when it approved an applicationby a consortium of investors to acquire GMAC Automotive Bank, an ILC in Utah. At the same time,Utah approved the change of control and name change of this ILC to GMAC Bank. According to FDICchairman Sheila C. Bair, “The FDIC Board decided to act on this notice during the moratorium to avoidthe potential for substantial interference with a major restructuring by General Motors Corporation.”See http://www.fdic.gov/news/news/press/2006/pr06103.html, last accessed on December 27, 2010.20According to Bovenzi (2007), “At the time that the initial moratorium expired on January 31, 2007,eight ILC deposit insurance applications and one change in bank control notice were pending beforethe FDIC.”21Subsequent to the moratorium, JC Flowers in December 2007 withdrew its application to acquireSallie Mae Bank, Home Depot in January 2008 withdrew its application to acquire EnerBank USA,and Chrysler Financial in June 2009 withdrew its application for FDIC insurance.
Industrial Loan Companies 23
2010000209910891
Colorado, Hawaii, Iowa, Nebraska and Utah establish state-level private insurance funds to insure deposits of ILCs in order to compete with commercial banks. However, after CEBA requires federal insurance for ILCs, these funds suffer multi-million-dollar deficiencies due to a rapid loss of memberships and consequently fail. Also, many privately-insured ILCs are unable to obtain FDIC insurance and subsequently fail during 1986-1989.
Utah imposes a moratorium on de novo ILC charters (1986-1997) Utah changes the
name of ILCs to industrial banks
(2004)
Wal-Mart’s ILC application is granted in Utah, though it will later be withdrawn in 2007 due to the FDIC moratorium (2005) Advanta Bank fails
and Utah’s bank regulator appoints the FDIC as receiver (2010)
Nevada starts to license ILCs, which are classified under the thrift charter (1997) By 2007, California, Colorado, Illinois, Iowa,
Kansas, Maine, Maryland, Missouri, Oklahoma, Texas, Wisconsin, Virginia, andVermont have passed laws restricting the operation of ILCs to various degrees
California The Department of Financial Institutions is
established, and the authority to license ILCs is transferred
from the Department of Corporations (1997)
California Deposit-taking ILCs are now called industrial banks, which
are permitted to engage in all activities of commercial banks,
except accepting demand deposits (2000)
Wal-Mart tries to acquire an ILC in California. In response, the state prohibits commercial firms from acquiring or opening ILCs (2002)
The last ILC in Colorado ceases operation (2009)
Iowa no longer has active depository ILCs (2005)
The last ILC in Michigan ceases operation (1984)
Nebraska discontinues chartering ILCs (2003)
The last ILC in North Carolina is acquired by a bank (1997)
West Virginia discontinues chartering ILCs (1996)
Other
States
Utah and
California
Fremont Investment & Loan, an ILC
located in California, closes voluntarily and
liquidates its assets (2008)
Sources: State regulatory authorities, Milken Institute.
Figure 8: A timeline of recent state-level events regarding ILCs.
the FDIC held two public hearings in April 2006 on Wal-Mart’s deposit insuranceapplication. In response to its request for public comments, the FDIC receivedmore than 12,600 comment letters, mostly opposing the approval of Wal-Mart’srequest.
Many banks opposed Wal-Mart’s entry into this market, fearing that such abehemoth would use the ILC to establish branches in all its stores throughout thecountry and eventually offer a full line of banking services. They were not placatedby Wal-Mart’s statement that it only wanted to own such an institution to reducethe transaction costs it was incurring by paying banks to process credit card, debitcard, and electronic check transactions in its stores. Wal-Mart eventually withdrewits application in March 2007, before the end of the moratorium and before anydecision had been made by the FDIC. But we find that by 2007, California,Colorado, Illinois, Iowa, Kansas, Maine, Maryland, Missouri, Oklahoma, Texas,Wisconsin, Virginia, and Vermont had passed legislation restricting to variousdegrees the operation of ILCs.22 (See Figure 8 for information on state-levelindustry developments during the past three decades.)
At the time of the moratoriums, the FDIC acknowledged that commerciallyowned ILCs had not caused serious problems to date but pledged to closely monitorthe existing ones. It further stated that “ . . . the FDIC determined that it is appro-priate to provide Congress with a reasonable period to consider the developments
22Wal-Mart Watch, “Wal-Mart’s Industrial Loan Company Talking Points,” http://walmartwatch.com/img/documents/ILC.pdf. This article refers to six states that prohibited commercial firms from owningILCs in 2006. Two states had prohibited such ownership before 2006. Also, see Falanga (2007).
24 James R. Barth et al.
Box 1: The Dodd-Frank Wall Street Reform and Consumer Protection Act
Impact on ILCs in three areas:1. Three-year moratorium and study of exemption to BHC Act2. Requires a parent company to serve as a source of strength for ILCs3. Subject to deposit concentration cap on interstate mergers and acquisitionsinvolving all insured depository institutions
The Dodd-Frank reform bill requires the GAO to provide information on ILCs inthe following areas:1. Identify the types and number of institutions2. Generally describe the size and geographic locations of the institutions3. Determine the extent to which the institutions are held by holding companiesthat are commercial firms4. Determine whether the institutions have any affiliates that are commercial firms5. Identify the federal banking agency responsible for the supervision of theinstitutions6. Determine the adequacy of the federal bank regulatory framework, includingany restrictions (including limitations on affiliate transactions or cross-marketing)that apply to transactions between an institution, the holding company of theinstitution, and any other affiliate of the institution7. Evaluate the potential consequences of subjecting the institutions to therequirements of the BHC Act, including the availability and allocation of credit,the stability of the financial system and the economy, safe and sound operation,and the impact on the types of activities in which such institutions and the holdingcompanies of such institutions may engage.
in the ILC industry and, if necessary, to make revisions to existing statutory author-ity. Even though the FDIC has authority to act on any particular application, notice,or request involving an ILC, the FDIC . . . believes that congressional resolutionof these issues is preferable.”23
Since the Dodd-Frank Act requires a GAO study of the ILC industry, Congresswill have an opportunity once this study is completed to decide whether it wishesto take any legislative action that would change the nature of the industry. Theexact requirements for the study are summarized in box 1.
The opposition by some banks to ILCs has largely been focused on commercialownership. It should be emphasized that not all banks are opposed to ILCs, whethercommercially owned or not. In addition to some of the banks, other critics areopposed to commercial firms owning any federally insured depository institutions(not just ILCs).
Given such opposition, it is instructive to note that throughout most of U.S.history, commercial firms could own any type of banking institution, be it acommercial bank, savings and loan association, or an industrial loan company.
23See Bovenzi (2007).
Industrial Loan Companies 25
As far back as 1799, New York State allowed Aaron Burr to use the surpluscapital in a water company that he owned to establish a bank—which ultimatelybecame JPMorgan Chase. During the Great Depression, moreover, the federalgovernment asked Henry Ford to convert a portion of his car company’s depositsat Manufacturers National Bank of Detroit into stock to prevent its collapse. Herefused, but his son Edsel subsequently recapitalized the bank with his own funds.General Motors, for its part, injected capital into the National Bank of Detroit tosave it from insolvency during this turbulent period.24
It is also interesting to know that Marriner Stoddard Eccles, who became the firstchairman of the re-organized Federal Reserve Board during the 1930s, was, priorto his appointment, “president and owner of 26 banks and one trust company, vicepresident of one of the largest sugar companies in the country, president of a mul-tistate diary concern, president of the large Intermountain construction companyand one of the builders of the Boulder Dam, among many other enterprises.”25
The BHCA of 1956, however, started to change ownership flexibility by pro-hibiting commercial firms from owning more than one bank. The first federallaw restricting ownership of a bank, it prohibited any entity directly or indi-rectly engaged in any activity other than banking (and closely related prod-ucts and services) from owning more than one bank. According to the FDIC(1987):
“[T]he primary purpose underlying [BHCA]’s passage was fear of monopolistic controlin the banking industry. Federal regulators and independent bankers lobbied Congressfor over twenty years to pass more restrictive bank holding company legislation, but itwasn’t until the Transamerica case was lost by the Federal Reserve Board that legislationwas approved. . . . Transamerica controlled 46 banks, in addition to owning a largepercentage of Bank of America. The Federal Reserve Board charged that Transamericawas in violation of the Clayton Antitrust Act by monopolizing commercial banking inthe states of California, Oregon, Nevada, Washington and Arizona. In 1952, the Boardordered Transamerica to divest itself of all its bank stock, except for Bank of America,within two years.”
As a result of the prohibition on establishing multi-bank holding companies, thenumber of one-bank holding companies increased dramatically until 1970, asshown in Table 4. Before 1956, there were only 83 one-bank holding companies.But between 1956 and 1970, an additional 1,235 one-bank holding companieswere established. In the latter year, the BHCA was amended to bar commercialfirms from owning even one bank.
The story does not end here, however, because commercial firms could stillown savings and loans. But around the same time, the Savings and Loan HoldingCompany Act of 1967 imposed restrictions on commercial firm ownership of thistype of banking institution, too. Similar to the BHCA of 1956, the act prohibited
24Time (1933).25“How Marriner Eccles Saved America,” The Salt Lake Tribune, January 17, 2011.
26 James R. Barth et al.
Tabl
e4:
Num
ber
ofon
e-ba
nkho
ldin
gco
mpa
nyfo
rmat
ions
By
date
offo
rmat
ion
for
orga
niza
tions
regi
ster
edas
ofD
ecem
ber
31,1
970∗
Typ
eof
Bef
ore
1956
to19
60to
1966
toJu
ne19
68to
Num
ber
ofTo
tala
sset
sof
all
com
pany
∗∗19
5619
6019
66Ju
ne19
68D
ec.1
970
com
pani
esco
mpa
nies
(US$
mill
ions
)
Ban
king
only
1112
3534
160
252
$929
Clo
sely
rela
ted
108
7955
173
325
$2,9
02N
otcl
osel
yre
late
d58
3217
210
934
471
5$4
2,31
9Fo
reig
n3
14
27
17$3
2,80
0N
otcl
assi
fiab
le∗∗
∗1
-1
16
9$4
55To
tal
8353
291
201
690
1,31
8$7
9,40
4
Sour
ce:F
eder
alR
eser
ve(1
972)
.∗ E
xclu
des
34ho
ldin
gco
mpa
nies
that
subm
itted
late
regi
stra
tion
stat
emen
ts.
∗∗C
lass
ific
atio
nsar
ede
fine
das
follo
ws:
i)ba
nkin
gon
ly:c
ompa
nyis
enga
ged
only
inba
nkin
gac
tiviti
es;i
i)cl
osel
yre
late
d:co
mpa
nyis
enga
ged
inba
nkin
gan
dac
tiviti
esde
term
ined
byth
eFe
dera
lR
eser
veB
oard
ascl
osel
yre
late
dto
bank
ing;
iii)
not
clos
ely
rela
ted:
com
pany
isen
gage
din
activ
ities
othe
rth
anba
nkin
gan
dac
tiviti
esso
lely
rela
ted
toba
nkin
g;iv
)fo
reig
n:co
mpa
nyis
char
tere
din
afo
reig
nco
untr
yan
dde
rive
sat
leas
thal
fof
itsco
nsol
idat
edre
venu
eor
has
atle
asth
alf
ofits
cons
olid
ated
asse
tsou
tsid
eth
eU
nite
dSt
ates
.∗∗
∗ Mai
nly
trus
ts.
Industrial Loan Companies 27
the commercial ownership of multiple savings and loans through the establishmentof multi-thrift holding companies.
Despite these legislative attempts to block commercial firms’ entry into bank-ing, the door was not entirely closed, since the BHCA defined a bank to be afinancial institution that offered demand deposits and made commercial loans.Based on this definition, a commercial firm could acquire a bank but then ceaseto offer either demand deposits or commercial loans. This indeed happened; suchfederally insured depository institutions became known as “nonbank banks.” Asthe U.S. Treasury Department (1991) stated, “these nonbank banks were attractiveto a wide range of business organizations seeking to capitalize on the efficienciesand ‘synergies’ that come with offering largely complementary services.” By themid-1980s, firms such as General Electric, Textron, ITT, Gulf & Western, JohnHancock, Prudential Bache, American Express, Merrill Lynch, Dreyfus, House-hold, Beneficial, Sears Roebuck, J.C. Penney, McMahan Valley Stores, BankersTrust Corp., Bank of Boston Corp., and others had established nonbank banks.26
In response, Congress passed the Competitive Equality Banking Act (CEBA) in1987. It grandfathered existing nonbank banks (but limited their growth) and pro-hibited the formation of new nonbank banks by expanding the definition of a bankto include any depository institution covered by FDIC insurance.
Table 5 provides a list of nonbank banks as of June 1987 and their status afterbeing grandfathered. Of the 17 nonbank banks that existed in 1987, only two stillexisted as of June 2010. This suggests that once a type of institution is grandfa-thered, the result seems to be the eventual shrinkage, if not total disappearance, ofthat type of institution.
The other track that a commercial firm could take to gain entry into banking wasto become a unitary thrift holding company that only owned a single savings andloan. Given the prohibition on commercial ownership of multiple thrift holdingcompanies, it’s not surprising that there were far more unitary thrift holdingcompanies controlling many more savings and loans than multiple thrift holdingcompanies in 1996 (as Table 6 shows). The Gramm-Leach-Bliley Act of 1999further blocked entry by prohibiting commercial firms from ownership of unitarythrift holding companies. It did, however, grandfather existing companies.
Table 7 shows a list of unitary thrift holding companies as of June 1996 andtheir status as of June 2010. Of the 28 companies, 16 still existed as of June 2010.The largest such company is USAA, the parent of USAA Federal Savings Bank,which in turn is the parent of an ILC.
As Table 8 shows, legislative actions taken by the federal government overthe past 50 years have steadily and consistently blocked entry into banking bycommercial firms. Commercial firms after 1987 and before 1999 had only twochoices: become a unitary thrift holding company or own an ILC. If a commercialfirm became a unitary thrift holding company, however, its subsidiary was subjectto the Qualified Thrift Lender Test, which meant the savings and loan institution
26U.S. Treasury Department (1991).
28 James R. Barth et al.Ta
ble
5:Se
lect
edF
DIC
-ins
ured
“non
bank
bank
s”
FD
IC-i
nsur
edA
sset
sas
ofJu
ne30
,A
sset
sas
ofJu
ne30
,“n
onba
nkba
nk”
1987
(US$
mill
ions
)20
10(U
S$m
illio
ns)
Par
ent
com
pany
Mer
rill
Lync
hB
ank
&T
rust
115
Mer
ged
into
Ban
kof
Am
eric
aon
11/2
/200
9M
erri
llLy
nch
&C
o.In
c.
Cus
todi
alT
rust
Co.
306
358
Bea
rSt
earn
s&
Co.
Dre
yfus
Con
sum
erB
ank
61C
lose
dvo
lunt
arily
on3/
16/1
993
Dre
yfus
Cor
p.H
arbo
rT
rust
Co.
12D
isso
lved
in10
/199
0D
rexe
lBur
nham
Lam
bert
Inve
stor
sFi
duci
ary
Tru
st34
0A
cqui
red
bySt
ate
Stre
etB
ank
on01
/31/
1995
Kem
per
Cor
p.
Lib
erty
Ban
k&
Tru
st24
Mer
ged
into
Com
mer
cial
Fede
ralB
ank
on2/
13/1
998
Aet
na
Firs
tSig
natu
reB
ank
&T
rust
38M
erge
din
toFi
rstR
epub
licB
ank
on1/
31/2
006
John
Han
cock
Prud
entia
lBan
k&
Tru
st88
1,95
7Pr
uden
tialI
nsur
ance
Co.
Bos
ton
Safe
Dep
osit
&T
rust
10,2
98A
cqui
red
byM
ello
nFi
nanc
ialC
orp.
in19
93Sh
ears
on/A
mer
ican
Exp
ress
Am
eric
anE
xpre
ssC
entu
rion
Ban
k61
429
,992
(bec
ame
anFD
IC-i
nsur
edIL
Cin
1989
)A
mer
ican
Exp
ress
Co.
Gre
enw
ood
Tru
stC
o.2,
287
59,5
01(n
owD
isco
ver
Ban
k)Se
ars
Roe
buck
&C
o.H
urle
ySt
ate
Ban
k7
Acq
uire
dby
Citi
bank
USA
in01
/200
2Se
ars
Roe
buck
&C
o.C
layt
onB
ank
&T
rust
24M
erge
din
toPN
CB
ank
on8/
21/2
009
Mob
ilC
orp.
City
Loa
nB
ank
598
n.a.
Con
trol
Dat
aC
orp.
Hic
kory
Poin
tBan
k&
Tru
st45
866
(cur
rent
lya
FSB
)A
rche
rD
anie
lsM
idla
nd
Fire
side
Thr
iftC
o.31
776
7(n
owFi
resi
deB
ank,
owne
dby
Uni
trin
)Te
ledy
neIn
c.G
EC
CFi
nanc
ialC
orp.
357
Dep
osits
acce
pted
byFi
rstH
awai
ian
Ban
kon
6/26
/199
5G
ener
alE
lect
ric
Co.
Sour
ces:
FDIC
,Milk
enIn
stitu
te,c
ompa
nyw
ebsi
tes.
Industrial Loan Companies 29
Table 6: Holding companies that own OTS-regulated thrifts, as ofDecember 31, 1996
Holding Number of Number of Thrift assetscompany type holding companies thrifts owned (US$ billions)
Unitary thrift holdingcompanies
704 515 $467
Multiple thrift holdingcompanies
40 39 $94
Bank holdingcompanies owningthrifts
131 97 $71
Total 875 651 $632
Note: The total does not include 685 independent thrifts, which held $137 billion in assets.Source: Office of Thrift Supervision (1997).
had to hold a relatively high percentage of its loan portfolio in housing-relatedassets. It should not be surprising, then, that not all commercial firms wouldconsider this option desirable. Some, therefore, like General Motors, decided toacquire an ILC. When General Motors did this in 1988, it subsequently changedthe ILC’s name to GMAC Capital Corp.
By 1999, there was only one remaining point of entry: the acquisition orformation of an industrial loan company.27 As already noted, there are cur-rently nine commercially owned and 30 financially owned ILCs. The nine com-mercially owned institutions now account for 14% of the total assets of theILC industry—and this segment could presumably account for even more, ifand when the moratorium on newly chartered commercially owned ILCs islifted.
The concern over commercial firms owning banking institutions presents somestriking contradictions. After all, Bill Gates can own a bank, but Microsoft cannot.Members of the Walton family, moreover, do own a commercial bank (the ArvestBank, with some 200 branches in Arkansas, Oklahoma, Missouri, and Kansas),but Wal-Mart cannot. The company does, however, operate a full-service bankin Mexico and could own banks in most of the foreign jurisdictions in which itoperates. It seems rather paradoxical that an individual can own a bank and acompany, and yet that company itself cannot invest in a bank.
Furthermore, the United States is out of step with most countries around theworld. According to World Bank data, only four of 142 countries surveyed prohibitthe ownership of banks by commercial firms. Most importantly, this restrictsthe ability of the U.S. banking industry to draw upon the substantial equity ofcommercial firms. With options for enlarging its capital base narrowed, the U.S.
27There was also the ownership of a limited, credit-card-only bank charter.
30 James R. Barth et al.
Tabl
e7:
Div
ersi
fied
unit
ary
thri
ftho
ldin
gco
mpa
nies
and
sele
cted
info
rmat
ion
ofth
eir
thri
ftsu
bsid
iari
es
Thr
ift
asse
ts(U
S$m
illio
ns)
Hol
ding
com
pany
Typ
eof
busi
ness
Thr
ift
nam
eJu
ne19
96Ju
ne20
10N
ote
Aca
cia
Mut
ualL
ife
Insu
ranc
eC
o.In
sura
nce
Aca
cia
Fede
ralS
avin
gsB
ank
516
1,31
4
Am
eric
anM
utua
lH
oldi
ngC
o.L
ife
insu
ranc
eA
mer
usB
ank
1,19
8n.
a.In
activ
e,7/
31/1
998
B.A
.T.I
ndus
trie
sTo
bacc
o,ci
gare
ttes
Firs
tFS&
LA
ofR
oche
ster
7,34
1n.
a.In
activ
e,3/
20/1
997
Car
pent
ers
Pens
ion
Tru
stFu
ndSo
uthe
rnC
alif
orni
aPe
nsio
ntr
ust
Uni
ted
Lab
orB
ank
FSB
7126
0
Clu
bC
orp.
Inte
rnat
iona
lR
esor
tsFr
ankl
inFe
dera
lB
anco
rpFS
B90
0n.
a.In
activ
e,1/
1/19
97
Equ
ityH
oldi
ngs
Ltd
.R
eale
stat
eFi
rsta
teFi
nanc
ialF
A10
3n.
a.In
activ
e,4/
18/1
997
Est
ate
ofB
erni
cePa
uahi
Bis
hop
Non
prof
ited
ucat
ion
Sout
hern
Cal
.FS&
LA
1,69
5n.
a.In
activ
e,11
/13/
2001
Firs
tPac
ific
Inve
stm
ent
Num
erou
sho
ldin
gsU
nite
dSa
ving
sB
ank
1,52
710
,895
Nam
eis
now
Uni
ted
Ltd
.and
Ltd
.II
Com
mer
cial
Ban
kH
awai
ian
Ele
ctri
cIn
dust
ries
Inc.
Publ
icel
ectr
icA
mer
ican
Savi
ngs
Ban
kFS
B3,
413
4,87
5
Her
itage
Mut
ual
Insu
ranc
eW
estla
ndSa
ving
sB
ank
91n.
a.H
erita
geM
utua
lIns
u-In
sura
nce
Co.
SAra
nce
isno
wA
cuity
Hy-
Vee
Food
Stor
esG
roce
ryM
idw
estH
erita
geB
ank
FSB
9714
9
(Con
tinu
ed)
Industrial Loan Companies 31
Tabl
e7:
(Con
tinu
ed)
Thr
ift
asse
ts(U
S$m
illio
ns)
Hol
ding
com
pany
Typ
eof
busi
ness
Thr
ift
nam
eJu
ne19
96Ju
ne20
10N
ote
Illin
ois
Mut
ualL
ife
&C
asua
ltyC
o.In
sura
nce
Ban
kplu
sFS
B19
0n.
a.In
activ
e,7/
31/2
007
Kra
use
Gen
tleC
orp.
Gas
and
food
Lib
erty
Savi
ngs
Ban
kFS
B77
152
The
Lan
gdal
eC
o.M
anuf
actu
ring
-fo
rest
base
dpr
oduc
ts
Com
mer
cial
Ban
king
Co.
3419
8
Mas
sach
uset
tsSt
ate
Car
pent
ers
Pens
ion
Fund
,Gur
ante
edA
nnui
tyFu
nd
Pens
ion
trus
t/tru
stFi
rstT
rade
Uni
onSa
ving
sB
ank
FSB
286
636
McM
orga
n&
Co.
Man
ages
unio
npe
nsio
nfu
nds
Uni
ted
Lab
orB
ank
FSB
7126
0
The
Mon
ticel
loC
os.,
Inc.
Med
icin
esa
les
Mon
ticel
loB
ank
24n.
a.In
activ
e,9/
15/2
007
PH
MC
orp.
Hom
ebu
ildin
gFi
rstH
eigh
tsB
ank
FSB
252
n.a.
Inac
tive,
9/9/
2005
Paci
fic
Ele
ctri
cW
ire
&C
able
Man
ufac
ture
rPa
cifi
cSo
uthw
estB
ank
1,33
7n.
a.In
activ
e,3/
19/2
001
Prud
entia
lIns
uran
ceC
o.In
sura
nce
The
Prud
entia
lSav
ings
Ban
kFS
B20
41,
957
(Con
tinu
ed)
32 James R. Barth et al.
Tabl
e7:
(Con
tinu
ed)
Thr
ift
asse
ts(U
S$m
illio
ns)
Hol
ding
com
pany
Typ
eof
busi
ness
Thr
ift
nam
eJu
ne19
96Ju
ne20
10N
ote
Ray
mon
dJa
mes
Fina
ncia
lIn
c.Se
curi
tybr
oker
age
Ray
mon
dJa
mes
Ban
kFS
B19
07,
465
Sout
hwes
tGas
Cor
p.G
astr
ansm
issi
onPr
imer
itB
ank
FSB
1,70
51,
608
Sun
Lif
eA
ssur
ance
Co.
Insu
ranc
eN
ewL
ondo
nT
rust
FSB
289
n.a.
Inac
tive,
10/3
0/19
99Te
mpl
eIn
land
Inc.
Pape
rG
uara
nty
Fede
ralB
ank
FSB
9,15
373
1
USA
AIn
sura
nce
USA
AFe
dera
lSav
ings
Ban
k5,
806
41,7
49
Wat
tsH
ealth
Syst
ems
Inc.
Hea
lthpl
ans
Fam
ilySa
ving
sB
ank
FSB
167
n.a.
Inac
tive,
12/3
1/20
02
Stat
eFa
rmM
utua
lAut
oIn
sura
nce
Co.
∗M
ortg
age
lend
ing
spec
ializ
atio
nSt
ate
Farm
Ban
kFS
B-
15,6
63
Nor
dstr
omIn
c.∗
Cre
dit-
card
spec
ializ
atio
nN
ords
trom
FSB
n.a.
196
Not
e:A
sof
July
9,19
96,t
heO
TS
repo
rted
the
follo
win
gnu
mbe
rof
firs
t-tie
rth
rift
hold
ing
com
pani
es:2
8di
vers
ifie
dun
itary
hold
ing
com
pani
esan
d65
0no
ndiv
ersi
fied
unita
ryho
ldin
gco
mpa
nies
.The
rew
ere
nodi
vers
ifie
dm
ultip
leho
ldin
gco
mpa
nies
and
44no
ndiv
ersi
fied
mul
tiple
hold
ing
com
pani
es.A
dive
rsif
ied
thri
ftho
ldin
gco
mpa
nyis
defi
ned
byst
atut
eas
one
inw
hich
the
subs
idia
rysa
ving
sas
soci
atio
nan
dce
rtai
not
her
fina
ncia
lac
tiviti
esre
pres
entl
ess
than
50%
ofco
nsol
idat
edne
twor
than
dco
nsol
idat
edne
tear
ning
s.So
urce
s:O
CC
,FD
IC,M
ilken
Inst
itute
.∗ N
on-d
iver
sifi
edth
rift
hold
ing
com
pani
es.
Industrial Loan Companies 33
Tabl
e8:
Leg
isla
tion
proh
ibit
ing
com
mer
cial
owne
rshi
pof
fede
rally
insu
red
depo
sito
ryin
stit
utio
ns
Leg
isla
tion
and
year
proh
ibit
ing
Typ
esof
fede
rally
insu
red
Typ
eof
fede
rally
insu
red
com
mer
cial
owne
rshi
pof
spec
ific
type
sof
inst
itut
ions
that
legi
slat
ion
proh
ibit
sin
stit
utio
nth
atca
nbe
owne
dby
fede
rally
insu
red
depo
sito
ryin
stit
utio
nsco
mm
erci
alfi
rms
toow
na
com
mer
cial
firm
Prio
rto
1956
–A
nyty
peof
depo
sito
ryin
stitu
tion
Ban
kH
oldi
ngC
ompa
nyA
ctof
1956
Indi
vidu
alba
nks
and
mul
tiple
-ban
kho
ldin
g1.
One
-ban
kho
ldin
gco
mpa
nies
com
pani
es2.
Non
bank
bank
s3.
Mul
tiple
thri
ftho
ldin
gco
mpa
nies
4.U
nita
ryth
rift
hold
ing
com
pani
es5.
ILC
sSa
ving
san
dL
oan
Hol
ding
Com
pany
Act
Mul
tiple
thri
ftho
ldin
gco
mpa
nies
1.O
ne-b
ank
hold
ing
com
pani
es(S
LH
CA
)of
1967
2.N
onba
nkba
nks
3.U
nita
ryth
rift
hold
ing
com
pani
es4.
ILC
sB
ank
Hol
ding
Com
pany
Act
Am
endm
ents
ofO
ne-b
ank
hold
ing
com
pani
es(e
xist
ing
1.N
onba
nkba
nks
1970
com
mer
cial
owne
rshi
pgr
andf
athe
red)
2.U
nita
ryth
rift
hold
ing
com
pani
es3.
ILC
sC
ompe
titiv
eE
qual
ityB
anki
ngA
ctof
1987
Non
bank
bank
s(e
xist
ing
com
mer
cial
owne
rshi
p1.
Uni
tary
thri
ftho
ldin
gco
mpa
nies
gran
dfat
here
d)2.
ILC
sG
ram
m-L
each
-Blil
eyA
ctof
1999
Uni
tary
thri
ftho
ldin
gco
mpa
nies
(exi
stin
gco
mm
erci
alow
ners
hip
gran
dfat
here
d)IL
Cs
Dod
d-Fr
ank
Wal
lStr
eetR
efor
man
dC
onsu
mer
Prot
ectio
nA
ctof
2010
Mor
ator
ium
and
GA
Ost
udy
ILC
s
Not
e:U
nles
sa
law
spec
ific
ally
proh
ibits
aco
mm
erci
alfi
rmfr
omow
ning
ade
posi
tory
inst
itutio
n,it
isas
sum
edhe
reth
atsu
chow
ners
hip
isal
low
ed.C
redi
tuni
ons
and
mut
uals
avin
gsan
dlo
ans
are
excl
uded
.So
urce
:Milk
enIn
stitu
te.
34 James R. Barth et al.
banking industry will find it more challenging to remain a major player in theincreasingly competitive global arena.
Those who have cautioned against allowing commercial firms to own ILCs,or banks more generally, frequently focus on the systemic risks posed by suchentities. They have also raised questions about oversight and the potential forparent companies to use their ILCs for anti-competitive practices. But regulationthat is already in place appears to be adequate to address these concerns.
For example, some observers fear that ILCs may endanger community banks iftheir commercial parents have the size, resources, and will to use predatory pricingto drive local bank competitors out of business. Others have expressed concernsthat ILCs may have incentives to deny credit to their parents’ competitors or theircompetitors’ customers, to provide funds on preferential terms to their commercialparents, and to tie loans inappropriately to purchases of the parents’ products.However, unfair competition and conflicts of interest are prohibited under existingfederal law, giving regulators the authority and the tools to address these issueswithout eliminating an entire industry.
While the sheer size of some of the corporations that might wish to enter thismarket has been a flashpoint in the debate, the Dodd-Frank Act also provides ameans to limit the growth of any company that might pose a systemic risk to theeconomy. And in times of systemic crisis, commercial firms do not gain directaccess to the federal safety net (meaning FDIC insurance and access to the FederalReserve discount window) merely by owning an ILC.
Is systemic risk heightened by the fact that ILCs and their parents are regulatedby the states and the FDIC, rather than the Federal Reserve? Recent history wouldseem to indicate that is not the case; there is no evidence that the Federal Reservehas done or will do a better job than state regulators or the FDIC. (Indeed, inthe most recent financial crisis, the Fed did not do a particularly good job ofoverseeing bank holding companies, while none of the state- and FDIC-regulatedcommercially owned ILCs failed.)
It is also important to consider the potential impact of a parent company fail-ure. If this occurs and the ILC subsidiary is largely in the business of financingpurchases from the parent, would the ILC be forced into insolvency? The recordshows this has not been a problem in the past. ILCs, as separately chartered andcapitalized subsidiaries, can continue to operate. In a worst-case scenario, an ILCwith a failing parent would undergo a controlled liquidation with the goals ofpaying depositors (no losses to the FDIC), paying all other creditors in full, andpaying a liquidating dividend to the parent. For instance, when Conseco filedfor bankruptcy, its ILC subsidiary self-liquidated, paid all depositors and otherdebts, and then paid a large dividend to the bankruptcy trustee to pay the par-ent’s creditors. The ILC owned by Lehman Brothers also remained solvent andis self-liquidating despite the bankruptcy of its parent. (According to the latestquarterly reports, in the past two years, it has shrunk from over $6.4 billion inassets to $2.8 billion, has a 26.6% capital ratio, and is earning about 2.4% ROAin the third quarter of 2010.) In two other instances, ILCs owned by companies
Industrial Loan Companies 35
that were reorganizing under bankruptcy laws continued operating normally underclose regulatory oversight to ensure that the bank’s assets were not used to helprescue the parent. More generally, these examples show that prudent regulationand supervision can prevent (and has prevented) any exploitation of the insuredsubsidiary by the parent when the parent faces financial difficulties.
Given the range of concerns that have been expressed about this little-knowncorner of the banking industry, it is essential to understand exactly how ILCs areregulated. Table 9 compares the powers, ownership forms, and regulatory oversightof ILCs vs. state commercial banks. It shows that ILCs have more restrictions onthe types of deposits they are able to offer, though in most other respects, bothare subject to similar restrictions and oversight. More generally, both ILCs andtheir parent companies are subject to regulation by the bank’s regulators. They areexamined and required to provide reports and other information specified by theregulators. The regulators can issue cease and desist orders, orders of prohibition,and civil money penalties to the parent company and every affiliate that hastransactions with the bank or otherwise influences its operations, all individualsserving as officers or representatives of an affiliate, outside auditors, consultantsand legal counsel, and anyone else that qualifies as an “institution affiliated party”as defined in the Federal Deposit Insurance Act. These powers are comparableto the Federal Reserve’s authority over bank holding companies and financialholding companies.
The primary differences between the regulation of an ILC holding company anda bank holding company is that ILC affiliates can engage in any lawful activitythat does not pose a risk to the bank; ILC regulators do not govern the activitiesof a diversified parent that have no relevance to the bank, such as manufacturingand retail sales operations. The parents of commercially owned ILCs are also nowsubject to serving as sources of strength as a result of the Dodd-Frank Act.
It is important to point out the relative importance of parent companies to theirILCs. Tables 10 and 11 provide information on the ILCs’ assets and equity capitalas a percentage of the parents’ assets and equity capital, respectively, as well asthe ROA and ROE for both the ILCs and their parents. Table 10 shows that theassets of ILCs as a percent of the parents’ assets range from a low of 0.3 to a highof 29.1%, while the ILCs’ equity capital as a percent of the parents’ equity capitalranges from a low of 0.1 to a high of 28.4%. In general, these figures indicate thatto the extent that the parents are financially healthy, they can serve as a source ofstrength for their subsidiary ILCs.
Moreover, parent firms serve as an important source of governance over theirILCs. Commercial firms like BMW, Target, and Toyota clearly do not wish to havetheir brands damaged by inappropriate behavior on the part of their subsidiaryILCs, given their overriding dependency on the products produced by the parents.
While ILCs tend to be dwarfed by their parent companies in terms of assetsand equity capital, the bank subsidiaries of bank holding companies are generallyvital to the overall enterprise. Table 12 shows that the bank subsidiaries of bankholding companies generally account for a relatively large share of the total assets
36 James R. Barth et al.
Table 9: ILCs vs. state commercial banks: Differences in powers, ownershipform and regulatory oversight
Statecommercial banks ILCs
Ability to offer full range of depositsand loans
Yes Yes∗
Ability to export interest rates Yes YesAbility to branch interstate Yes YesExamination, supervision, and
regulation by FDICYes Yes
FDIC may conduct limited scope examof affiliates
Yes Yes
Federal Reserve Act 23A & 23B,Reg. O, CRA apply (see note)
Yes Yes
Anti-tying restrictions apply Yes YesFull range of enforcement actions can
be applied to the subsidiarydepository institutions if parent failsto maintain adequate capitalization
Yes Yes
Ability to accept demand deposits andcommercial checking accounts
Yes No∗∗
Parent subject to umbrella federaloversight
Yes No∗∗∗
Parent activities generally limited tobanking and financial activities
Yes No
Parent serves as a source of strength Yes Yes,Dodd-Frank Act
makes explicitChartered as a national institution Yes NoChartered as a state institution Yes YesGolden Parachute restrictions apply Yes YesParent could be prohibited from
commencing new activities if asubsidiary depository institution hasa CRA rating that falls belowsatisfactory
Yes No
Parent could be ordered by a federalbanking agency to divest of adepository institution subsidiary ifthe subsidiary become less then wellcapitalized
Yes No
(Continued)
Industrial Loan Companies 37
Table 9: (Continued)
Statecommercial banks ILCs
Control owners who have caused a lossto a failed institution may be subjectto personal liability
Yes Yes
Cross-guarantee requirement foraffiliates
Yes No
Note: Federal Reserve Act Sections 23A and 23B limit bank transactions with affiliatesand the parent company. Regulation O limits loans to bank insiders and applies to allFDIC-insured institutions. CRA denotes the Community Reinvestment Act.Sources: Adapted from West (2004); Milken Institute.∗Including NOW (negotiable order of withdrawal) accounts. However, ILCs with morethan $100 million in assets cannot accept demand deposits or offer commercial checkingaccounts.∗∗Except those ILCs that have assets of less than $100 million or ILCs that were notacquired after August 10, 1987.∗∗∗Publicly traded parent companies are subject to SEC oversight.
of their parents. In most cases, the reputation of the bank holding companies ishighly dependent upon the reputation of the subsidiary bank, while the reverse istrue for commercially owned ILCs and their parents.
In short, for most bank holding companies, as the financial performance of thebank goes, so goes the parent. This is not the case for commercial firms like BMW,Toyota, and Target that own ILCs.
IV. THE CAPITALIZATION AND PERFORMANCE OF ILCS
It’s clear that ILCs were not responsible for the financial crisis of 2007–2010.After all, these institutions accounted for only a very small portion of the numberand total assets of all financial firms during these years.
Furthermore, most of the FDIC’s deposit insurance protects deposits of non-ILCinstitutions. ILCs accounted for 4.1% or less of all FDIC-insured deposits over thepast decade. As of mid-2010, they accounted for less than 2%. Most of the insureddeposits, moreover, are held by financially owned ILCs, not commercially ownedILCs. If the FDIC had to write a check to all insured depositors to cover losses,the sum going to ILC depositors would be at most $87 billion (assuming all ILCdeposits are FDIC-insured) while the check going to all other depositors wouldbe a daunting sum indeed, at more than $5 trillion. In short, ILCs do not pose aserious threat to the FDIC insurance fund at the present time or in the foreseeablefuture.
38 James R. Barth et al.
Tabl
e10
:Im
port
ance
ofco
rpor
ate
pare
nts
for
fina
ncia
llyow
ned
ILC
s,Q
220
10
Par
ent
com
pany
ILC
Tota
lE
quit
yIL
Cas
sets
ILC
equi
tyE
quit
yTo
tal
equi
tyca
pita
las
%of
its
as%
ofit
sca
pita
las
sets
capi
tal
toto
tal
RO
AR
OE
Fin
anci
ally
pare
nt’s
pare
nt’s
toto
tal
RO
AR
OE
Par
ent
com
pany
(US$
B)
(US$
B)
asse
ts(%
)(%
)(%
)ow
ned
ILC
Stat
eas
sets
equi
tyas
sets
(%)
(%)
(%)
Lea
vitt
Gro
upn.
a.n.
a.n.
a.n.
a.n.
a.A
DB
Ban
kU
Tn.
a.n.
a.15
.60.
53.
1A
mer
ican
Exp
ress
Co.
143.
814
.510
.12.
523
.3A
mer
ican
Exp
ress
Cen
turi
onB
ank
UT
20.9
35.6
17.2
4.5
24.8
Wel
lPoi
nt50
.223
.847
.410
.222
.0A
RC
US
Ban
kU
T0.
10.
290
.42.
49.
5H
afif
Ban
corp
n.a.
n.a.
n.a.
n.a.
n.a.
Bal
boa
Thr
ifta
ndL
oan
Ass
ocia
tion
CA
n.a.
n.a.
10.1
0.6
6.1
Bea
lFin
anci
alC
orp.
n.a.
n.a.
n.a.
n.a.
n.a.
Bea
lBan
kN
evad
aN
Vn.
a.n.
a.35
.39.
125
.4C
apita
lSou
rce
10.7
2.0
18.4
−5.5
−31.
1C
apita
lSou
rce
Ban
kC
A54
.044
.615
.2−0
.1−0
.5
Gen
eral
Mot
ors
Co.
,pr
ivat
eeq
uity
cons
ortiu
m
n.a.
n.a.
n.a.
n.a.
n.a.
Cap
mar
kB
ank
UT
n.a.
n.a.
19.0
−6.9
−37.
6
Cel
ticIn
vest
men
tn.
a.n.
a.n.
a.n.
a.n.
a.C
eltic
Ban
kU
Tn.
a.n.
a.11
.21.
412
.9L
andA
mer
ica
Fina
ncia
lGro
up∗
3.3
0.5
14.7
∗n.
a.n.
a.C
ente
nnia
lBan
kC
A24
.417
.110
.30.
65.
9
Cir
cle
Ban
corp
0.3
n.a.
n.a.
n.a.
n.a.
Cir
cle
Ban
kC
A99
.7n.
a.7.
50.
810
.2T
EL
AC
U0.
4n.
a.n.
a.n.
a.n.
a.C
omm
unity
Com
mer
ceB
ank
CA
95.8
n.a.
9.3
−0.4
−4.4
(Con
tinu
ed)
Industrial Loan Companies 39
Tabl
e10
:(C
onti
nued
)
Par
ent
com
pany
ILC
Tota
lE
quit
yIL
Cas
sets
ILC
equi
tyE
quit
yTo
tal
equi
tyca
pita
las
%of
its
as%
ofit
sca
pita
las
sets
capi
tal
toto
tal
RO
AR
OE
Fin
anci
ally
pare
nt’s
pare
nt’s
toto
tal
RO
AR
OE
Par
ent
com
pany
(US$
B)
(US$
B)
asse
ts(%
)(%
)(%
)ow
ned
ILC
Stat
eas
sets
equi
tyas
sets
(%)
(%)
(%)
F&T
Fina
ncia
lSe
rvic
es0.
10.
0n.
a.n.
a.n.
a.Fi
nanc
e&
Thr
ift
Co.
CA
92.4
81.9
21.7
1.5
6.8
Fina
nce
Ent
erpr
ises
n.a.
n.a.
n.a.
n.a.
n.a.
Fina
nce
Fact
ors
Ltd
.H
In.
a.n.
a.9.
7−1
.2−1
1.9
Uni
trin
8.5
2.1
24.3
2.5
11.4
Fire
side
Ban
kC
A9.
311
.630
.51.
24.
5Fi
rstA
mer
ican
Fina
ncia
lCor
p.5.
51.
934
.3n.
a.n.
a.Fi
rstS
ecur
ityB
usin
ess
Ban
kC
A6.
31.
910
.31.
514
.4
No
affi
liatio
nG
olde
nSe
curi
tyB
ank
CA
n.a.
n.a.
6.69
−1.0
7−1
5.7
Lea
seC
orp.
ofA
mer
ica
n.a.
n.a.
n.a.
n.a.
n.a.
LC
AB
ank
Cor
p.U
Tn.
a.n.
a.11
.92.
015
.6
Med
allio
nFi
nanc
ial
0.6
0.2
29.2
0 .1
0.2
Med
allio
nB
ank
UT
87.8
45.7
17.4
n.a.
n.a.
Car
dWor
ksL
Pn.
a.n.
a.n.
a.n.
a.n.
a.M
erri
ckB
ank
Cor
p.U
Tn.
a.n.
a.21
.42.
612
.9
Min
neso
taT
hrif
tCo.
n.a.
n.a.
n.a.
n.a.
n.a.
Min
neso
taFi
rst
Cre
dit&
Savi
ngs
Inc.
MN
n.a.
n.a.
11.2
0.6
5.3
Firs
tFin
anci
alC
orp.
2.5
0.3
12.6
1.1
8.8
The
Mor
ris
Plan
Com
pany
ofTe
rre
Hau
teIn
c.
IN2.
52.
914
.63.
322
.8
Uni
tedH
ealth
Gro
up60
.424
.841
.17.
418
.5O
ptum
Hea
lthB
ank
Inc.
UT
2.4
0.7
11.9
3.1
26.3
(Con
tinu
ed)
40 James R. Barth et al.
Tabl
e10
:(C
onti
nued
)
Par
ent
com
pany
ILC
Tota
lE
quit
yIL
Cas
sets
ILC
equi
tyE
quit
yTo
tal
equi
tyca
pita
las
%of
its
as%
ofit
sca
pita
las
sets
capi
tal
toto
tal
RO
AR
OE
Fin
anci
ally
pare
nt’s
pare
nt’s
toto
tal
RO
AR
OE
Par
ent
com
pany
(US$
B)
(US$
B)
asse
ts(%
)(%
)(%
)ow
ned
ILC
Stat
eas
sets
equi
tyas
sets
(%)
(%)
(%)
Sem
perv
erde
Hol
ding
Co.
n.a.
n.a.
n.a.
n.a.
n.a.
Ran
cho
Sant
aFe
Thr
ift&
Loa
nA
ssoc
.
CA
n.a.
n.a.
71.9
3.0
4.9
SLM
Cor
p.20
7.3
3.7
2.5
0.5
26.7
Salli
eM
aeB
ank
UT
3.6
35.3
17.8
1.7
10.1
UB
SA
G1,
353.
142
.73.
70.
312
.2U
BS
Ban
kU
SAU
T2.
16.
39.
30.
88.
5U
SAA
n.a.
n.a.
n.a.
n.a.
n.a.
USA
ASa
ving
sB
ank
NV
n.a.
n.a.
20.1
2.9
13.7
Stee
lPar
tner
sH
oldi
ngs
LP
n.a.
n.a.
n.a.
n.a.
n.a.
Web
Ban
kU
Tn.
a.n.
a.24
.25.
024
.1
Leh
man
Bro
ther
sH
oldi
ngs∗∗
639.
419
.33.
0∗∗n.
a.n.
a.W
oodl
ands
Com
mer
cial
Ban
k
UT
0.5
3.8
23.1
3.4
15.4
Alli
ance
Dat
aSy
stem
s8.
10.
00.
42.
912
2.9
Wor
ldFi
nanc
ial
Cap
italB
ank
UT
5.9
n.a.
14.1
2.1
14.7
Wri
ghtE
xpre
ss1.
60.
530
.15.
218
.7W
righ
tExp
ress
Fina
ncia
lSe
rvic
esC
orp.
UT
60.5
25.1
13.0
8.4
64.8
∗ Dat
ais
asof
Q3
2008
;Lan
dAm
eric
aFi
nanc
ialG
roup
,Inc
.file
dba
nkru
ptcy
onN
ovem
ber
26,2
008.
∗∗D
ata
isas
ofQ
220
08;L
ehm
anB
roth
ers
file
dba
nkru
ptcy
inSe
ptem
ber
2008
.So
urce
s:FD
IC;B
loom
berg
;Milk
enIn
stitu
te.
Industrial Loan Companies 41
Tabl
e11
:Im
port
ance
ofco
rpor
ate
pare
nts
toco
mm
erci
ally
owne
dIL
Cs,
Q2
2010
Par
ent
com
pany
ILC
Tota
lE
quit
yIL
Cas
sets
ILC
equi
tyE
quit
yTo
tal
equi
tyca
pita
las
%of
its
as%
ofit
sca
pita
lP
aren
tas
sets
capi
tal
toto
tal
RO
AR
OE
Com
mer
cial
lypa
rent
’spa
rent
’sto
tota
lR
OA
RO
Eco
mpa
ny(U
S$B
)(U
S$B
)as
sets
(%)
(%)
(%)
owne
dIL
CSt
ate
asse
tseq
uity
asse
ts(%
)(%
)(%
)
BM
WA
G13
3.1
24.8
18.6
1.3
6.9
BM
WB
ank
ofN
orth
Am
eric
aU
T6.
13.
19.
42.
931
.7
Har
ley-
Dav
idso
n10
.22.
120
.6−0
.9−4
.0E
agle
mar
kSa
ving
sB
ank
NV
0.4
0.3
17.6
10.5
47.9
CM
SE
nerg
y15
.13.
019
.91.
69.
2E
nerB
ank
USA
UT
2.1
0.9
9.0
2.5
27.9
Fry’
sE
lect
roni
csn.
a.n.
a.n.
a.n.
a.n.
a.Fi
rstE
lect
roni
cB
ank
UT
n.a.
n.a.
69.4
−11.
4−2
8.9
GE
749.
912
0.7
16.1
1.3
9.1
GE
Cap
ital
Fina
ncia
lInc
.U
T1 .
11.
522
.12.
49.
9
Pitn
eyB
owes
8.3
0.2
2.4
4.1
n.a.
The
Pitn
eyB
owes
Ban
kIn
c.U
T8.
728
.47.
911
.514
7.8
Targ
etC
orp.
43.7
15.3
35.0
6.2
18.2
Targ
etB
ank
UT
0.3
0.1
11.8
2.0
17.2
Toyo
ta32
4.8
110.
934
.10.
72.
1To
yota
Fina
ncia
lSa
ving
sB
ank
NV
0.3
0.1
14.1
1.8
15.7
Flyi
ngJ∗
1.8
0.5
29.7
18.9
63.5
Tra
nspo
rtat
ion
Alli
ance
Ban
kIn
c.
UT
29.1
13.5
13.2
1.8
13.2
Tota
lass
ets
ofU
.S.n
onfi
nanc
ialc
orpo
rate
busi
ness
:$2
7tr
illio
nTo
taln
etw
orth
ofU
.S.n
onfi
nanc
ialc
orpo
rate
busi
ness
:$1
3tr
illio
n
∗ The
owne
rof
Tra
nspo
rtat
ion
Alli
ance
Ban
kIn
c.ch
ange
dfr
omFl
ying
Jto
FJM
anag
emen
tInc
.in
July
2010
.So
urce
s:Fl
owof
Fund
s,Fe
dera
lRes
erve
,FD
IC,B
loom
berg
,Milk
enIn
stitu
te.
42 James R. Barth et al.Ta
ble
12:
Tota
lass
ets
and
equi
tyof
sele
cted
bank
hold
ing
com
pani
esan
dth
eir
subs
idia
ries
,Q2
2010
Hol
ding
com
pany
FD
IC-i
nsur
edsu
bsid
iari
es%
hold
ing
com
pany
Tota
lN
o.of
Com
bine
dC
ombi
ned
tota
lTo
tal
Ban
kho
ldin
gTo
tal
equi
tyba
nkto
tal
bank
equi
tyTo
tal
equi
tyco
mpa
nyna
me
Loc
atio
nas
sets
capi
tal
subs
idia
ries
asse
ts(U
S$B
)ca
pita
l(U
S$B
)as
sets
capi
tal
Ban
kof
Am
eric
aC
orp.
Cha
rlot
te,N
C2,
366
235.
05
1,78
821
8.9
75.6
93.2
JPM
orga
nC
hase
&C
o.N
ewY
ork,
NY
2,01
417
1.4
51,
717
156.
585
.391
.3C
itigr
oup
Inc.
New
Yor
k,N
Y1,
938
157.
35
1,32
114
6.1
68.2
92.8
Wel
lsFa
rgo
&C
o.Sa
nFr
anci
sco,
CA
1,22
612
1.4
61,
133
129.
292
.410
6.4
Gol
dman
Sach
sG
roup
Inc.
New
Yor
k,N
Y88
474
.81
9618
.310
.824
.4M
orga
nSt
anle
yN
ewY
ork,
NY
809
59.2
273
8.6
9.0
14.6
Met
Lif
eIn
c.N
ewY
ork,
NY
574
39.7
115
1.1
2.5
2.7
Bar
clay
sG
roup
US
Inc.
Wilm
ingt
on,D
E35
69.
81
131.
73.
817
.1Ta
unus
Cor
p.N
ewY
ork,
NY
349
5.7
243
9.3
12.3
162.
7H
SBC
Nor
thA
mer
ica
Hol
ding
sIn
c.N
ewY
ork,
NY
334
29.3
318
618
.555
.663
.2U
.S.B
anco
rpM
inne
apol
is,M
N28
328
.92
284
27.0
100.
393
.4PN
CFi
nanc
ialS
ervi
ces
Gro
upIn
c.Pi
ttsbu
rgh,
PA26
231
. 01
251
31.0
95.9
100.
0B
ank
ofN
ewY
ork
Mel
lon
Cor
p.N
ewY
ork,
NY
236
31.1
419
018
.980
.360
.7C
apita
lOne
Fina
ncia
lCor
p.M
cLea
n,V
A19
725
.32
195
29.9
98.7
118.
4A
llyFi
nanc
ialI
nc.
Det
roit,
MI
177
20.8
162
8.3
34.9
40.2
SunT
rust
Ban
ksIn
c.A
tlant
a,G
A17
123
.01
161
19.5
94.1
84.5
Stat
eSt
reet
Cor
p.B
osto
n,M
A16
116
.11
157
16.4
98.0
101.
9T
DB
ank
US
Hol
ding
Co.
Port
land
,ME
159
17.1
216
425
.610
2.9
150.
0B
B&
TC
orp.
Win
ston
-Sal
em,N
C15
516
.72
152
17.5
97.8
104.
6A
mer
ican
Exp
ress
Co.
New
Yor
k,N
Y14
314
.52
6310
.444
.171
.8R
egio
nsFi
nanc
ialC
orp.
Bir
min
gham
,AL
135
17.7
113
115
.996
.889
.8Fi
fth
Thi
rdB
anco
rpC
inci
nnat
i,O
H11
213
.71
110
16.7
98.2
121.
9
(Con
tinu
ed)
Industrial Loan Companies 43
Tabl
e12
:(C
onti
nued
)
Hol
ding
com
pany
FD
IC-i
nsur
edsu
bsid
iari
es%
hold
ing
com
pany
Tota
lN
o.of
Com
bine
dC
ombi
ned
tota
lTo
tal
Ban
kho
ldin
gTo
tal
equi
tyba
nkto
tal
bank
equi
tyTo
tal
equi
tyco
mpa
nyna
me
Loc
atio
nas
sets
capi
tal
subs
idia
ries
asse
ts(U
S$B
)ca
pita
l(U
S$B
)as
sets
capi
tal
Key
Cor
pC
leve
land
,OH
9411
.11
918.
996
.280
.7N
orth
ern
Tru
stC
orp.
Chi
cago
,Il
806.
63
806.
310
0.2
95.8
Dis
cove
rFi
nanc
ialS
ervi
ces
Riv
erw
oods
,IL
616.
12
605.
698
.092
.1C
omer
ica
Inc.
Dal
las,
TX
565.
82
565.
999
.710
2.0
CIT
Gro
upIn
c.N
ewY
ork,
NY
558.
61
81.
713
.819
.9M
arsh
all&
Ilsl
eyC
orp.
Milw
auke
e,W
I54
6.8
455
5.9
101.
087
.4Z
ions
Ban
corp
orat
ion
Salt
Lak
eC
ity,U
T52
6.4
852
6.9
100.
010
6.7
Hun
tingt
onB
ancs
hare
sIn
c.C
olum
bus,
OH
525.
51
513.
398
.960
.0Po
pula
rIn
c.Sa
nJu
an,P
R42
3.6
242
3.9
98.5
108.
1N
ewY
ork
Com
mun
ityB
anco
rpIn
c.W
estb
ury,
NY
425.
52
425.
810
0.7
106.
1Sy
novu
sFi
nanc
ialC
orp.
Col
umbu
s,G
A32
3.4
132
3.1
98.8
90.7
Firs
tHor
izon
Nat
iona
lCor
p.M
emph
is,T
N26
3.3
126
3.5
99.2
105.
5B
okFi
nanc
ialC
orp.
Tul
sa,O
K24
2.5
726
2.3
109.
494
.2A
ssoc
iate
dB
anc-
Cor
pG
reen
Bay
,WI
233.
21
222.
898
.788
.3C
ityN
atio
nalC
orp.
Los
Ang
eles
,CA
211.
91
212.
098
.410
5.5
Firs
tCiti
zens
Ban
csha
res
Inc.
Ral
eigh
,NC
211.
72
211.
899
.410
8.1
Firs
tNia
gara
Fina
ncia
lGro
upIn
c.B
uffa
lo,N
Y21
2.8
120
2.5
99.6
90.9
Eas
tWes
tBan
corp
Inc.
Pasa
dena
,CA
202.
31
202.
399
.796
.5C
omm
erce
Ban
csha
res
Inc.
Kan
sas
City
,MO
182.
01
181.
899
.089
.3Fi
rstB
anco
rpSa
nJu
an,P
R18
1.4
118
1.6
99.9
111.
0
Not
e:A
sset
san
deq
uity
capi
talo
fsu
bsid
iari
esso
met
imes
exce
edth
ose
ofth
epa
rent
due
toa
lack
ofco
nsol
idat
ion
ofaf
filia
tes
and
the
incl
usio
nof
reta
ined
earn
ings
,res
pect
ivel
y.So
urce
s:N
atio
nalI
nfor
mat
ion
Cen
ter,
Fede
ralR
eser
ve,F
DIC
,Milk
enIn
stitu
te.
44 James R. Barth et al.
Table 13: Losses incurred by the FDIC’s deposit insurance fund from failedinstitutions: ILCs vs. all other FDIC-insured institutions, 1986 to 2009
All other ILCs as% of allFDIC-insured other FDIC-
depository insured depositoryILCs institutions institutions
1986–2003Number of failed institutions 21 2,065 1.0%Total assets of failed institutions
(US$ millions)$1,470 $642,575 0.2%
Total loss to the FDIC (US$millions)
$212 $105,309 0.2%
Total loss to total assets of failedinstitutions (%)
14.4% 16.4% –
2004–2009Number of failed institutions 0 172 0%Total assets of failed institutions
(US$ millions)$0 $544,440 0%
Total loss to the FDIC (US$millions)
$0 $57,431 0%
Total loss to total assets of failedinstitutions (%)
– 10.5% –
1986–2009Number of failed institutions 21 2,237 0.9%Total assets of failed institutions
(US$ millions)$1,470 $1,187,104 0.1%
Total loss to the FDIC (US$millions)
$212 $162,740 0.1%
Total loss to total assets of failedinstitutions (%)
14.4% 13.7% –
Sources: FDIC, Milken Institute.
Of course, there have been some failures of ILCs over time. Since 1986, 21ILCs have failed, costing the FDIC $212 million to resolve. But no ILC failedfrom 2004 to 2009, which encompasses the recent financial crisis. Furthermore,none of the failures involved commercially owned ILCs. The two biggest ILCsaccounted for 43% of the total FDIC resolution cost for all failed ILCs over thistime period.
The 21 failed ILCs accounted for 1% of all FDIC-insured depository institutionfailures during this time period, as shown in Table 13. The other 2,237 institutionsthat failed cost the FDIC $163 billion to resolve, while the 21 ILCs cost $212million. In terms of losses relative to assets, the ILCs’ ratio was 14.4% overthe period, as compared to 13.7% for the other institutions. From 2004 to 2009,
Industrial Loan Companies 45
-60
-40
-20
0
20
40
60
2001 2002 2003 2004 2005 2006 2007 2008 2009 Q2 2010
ILCs
Currently active ILCs
FDIC-insured institutions
Percent change from previous year
Note: Q2 2010 data represents percent change from year-end 2009.Sources: Federal Reserve, FDIC, Milken Institute.
Figure 9: Asset growth for all and only currently active ILCs and FDIC-insuredinstitutions, 2001 to Q2 2010.
however, the ratio for ILCs was 0 because there were no failures, while the ratiofor the other 172 failed institutions was 10.5%.
During the crisis years, some ILCs closed and others were converted to com-mercial banks. Table 14 provides a list of these institutions and shows that after2009, only one ILC failed. This institution, Advanta Bank Corp., was a financiallyowned ILC that provided loans to small businesses; it failed in March 2010 as itsclients suffered the effects of the Great Recession. This institution, like so manyothers, became a victim of the crisis, as its income and capital plummeted. OtherILCs closed or converted to commercial bank charters, contributing to substantialchanges in the assets and loans of the ILC industry during the past several years. Itshould be noted that the charter conversions during the recent crisis were, in mostcases, driven by the parent companies’ conversion to bank holding companies.
Two failures and 20 closings and conversions occurred in the ILC industryduring the past decade. Despite these changes, Figures 9 and 10 show that the assetsand loans of ILCs grew in every year except 2008 and 2009. (For comparison, wealso include the growth of assets and loans for all FDIC-insured institutions aswell as for the currently active ILCs.) It therefore follows that these institutionsdid not contribute to the recent credit crunch, in contrast to the other FDIC-insuredinstitutions. The lack of growth in assets and loans for all ILCs in 2008 and 2009is almost entirely due to the conversion of a few large ILCs to commercial banks.
Real estate lending was a major factor in the crisis. Using a simple bivari-ate regression model, Figure 11 shows that there is a statistically significantand negative relationship between ROA (and ROE) and the percentage of anILC’s total assets that are accounted for by real estate loans. It is therefore use-ful to compare the percentage of total loans that were real estate–related for all
46 James R. Barth et al.
Table 14: Closed and converted ILCs, 2007 to 2010
Year-endassets as of the
Industrial loan Inactive inactive date Inactivecompanies State date (US$ millions) type Parent company
Financially owned ILCsMerrill Lynch Bank
USAUT 7/1/2009 67,995 M&A Merrill Lynch
Morgan Stanley Bank UT 9/23/2008 38,530 CB Morgan StanleyGoldman Sachs Bank
USAUT 9/26/2008 21,630 CB Goldman Sachs
Fremont Investment &Loan
CA 7/25/2008 5,657 VC Fremont General Corp.
CIT Bank UT 12/22/2008 3,117 CB CIT GroupAdvanta Bank Corp. UT 3/19/2010 1,526 Failed AdvantaTrust Industrial Bank CO 12/1/2009 798 VC FISERVTamalpais Bank CA 1/30/2009 702 CB Tamalpais BancorpRepublic Bank Inc. UT 5/28/2009 554 CB No affiliationSilvergate Bank CA 2/28/2009 327 CB Silvergate CapitalSecurity Savings Bank NV 2/27/2009 238 M&A Srampede Capital LLC5 Star Bank CO 5/1/2009 157 CB Armed Forces Benefit
AssociationFirst Financial Bank CO 9/19/2007 152 VC First Data Corp.Home Bank of
CaliforniaCA 7/11/2008 148 CB La Jolla Savers and
Mortgage FundMarlin Business Bank UT 1/31/2009 84 CB Marlin Business ServicesHome Loan Industrial
BankCO 6/1/2008 41 CB Home Loan Investment
Co.
Commercially owned ILCsAlly Bank (GMAC
Bank)∗UT 10/1/2009 52,513 CB GM
Volkswagen Bank USA UT 10/26/2007 288 VC Volkswagen AGEscrow Bank USA UT 6/30/2009 2 VC GMVolvo Commercial
Credit Corp. of UtahUT 1/16/2007 3 CB Volvo
∗Ally Bank originally was established on 8/2/2004 as GMAC Automotive Bank; CapmarkBank was originally established on 4/1/2003 as GMAC Commercial Mortgage Bank.Note: VC: Voluntarily closed; CB: Converted to commercial bank. M&A: Merged with oracquired by other institutions.Source: FDIC.
FDIC-insured institutions vs. the percentage for ILCs. Real estate loans accountedfor 61% of total loans for FDIC-insured institutions before the crisis and declinedslightly to 59% after the crisis. But for financially owned ILCs, real estate loansmade up slightly less than one-third of total loans before the crisis, dropping to17% after the crisis, as shown in Figure 12. This decline was mainly due to the clo-sure or conversion of several large financially owned ILCs. Commercially ownedILCs, however, had a very small percentage of real estate loans. Figure 13 shows
Industrial Loan Companies 47
-50
-40
-30
-20
-10
0
10
20
30
40
2001 2002 2003 2004 2005 2006 2007 2008 2009 Q2 2010
ILCs
Currently active ILCs
FDIC-insured institutions
Percent change from previous year
Note: Q2 2010 data represents percent change from year-end 2009.Sources: Federal Reserve, FDIC, Milken Institute.
Figure 10: Loan growth for all and only currently active ILCs and FDIC-insuredinstitutions, 2001 to Q2 2010.
-15
-10
-5
0
5
10
15
0 50 100RO
A (%
)
Real estate loans to total assets (%)-60
-40
-20
0
20
40
60
80
0 50 100
RO
E (%
)
Real estate loans to total assets (%)
Note: The estimated beta coefficient from a bivariate regression (ROA = α + β Realestate/total assets) is statistically significant at the 5% level for the ROA regression, and atthe 1% level for the ROE regression. The RHS figure does not include the data for the PitneyBowes Bank Inc (its ROE = 148%); excluding this bank does not affect the significancelevel of the estimated coefficient.Sources: FDIC; Milken Institute.
Figure 11: ILCs: Correlation between real estate loans to total assetsand performance, Q2 2010.
that prior to the crisis, only 5% of total loans were real estate loans, while afterthe crisis, the percentage increased to 10%.
General Motors owned three ILCs during the past decade: GMAC Bank (nowAlly Bank), Capmark Bank, and Escrow Bank. The latter was voluntarily closed
48 James R. Barth et al.
Real estate loans 30%
Commercial and
industrial loans 29%
Consumer loans35%
Other loans6%
Financially owned ILCs: Pre-financial crisis period (2007)
Real estate loans 17%
Commercial and
industrial loans 17%
Consumer loans64%
Other loans2%
Financially owned ILCs: Current period (Q2 2010)
Notes: The data are for aggregate loan compositions of all financially owned ILCs. Thepre-financial crisis period is as of the end of 2007. The data include all active ILCs in agiven year; some of them were closed or became inactive before Q2 2010.Sources: FDIC, Milken Institute.
Figure 12: Financially owned ILCs focused more on consumerand commercial/industrial loans, not real estate.
Real estate loans 5%
Commercial and
industrial loans 52%
Consumer loans43%
Other loans<1%
Commercially owned ILCs: Pre-financial crisis period (2007)
Real estate loans 10%
Commercial and
industrial loans 32%Consumer
loans53%
Other loans5%
Commercially owned ILCs: Current period (Q2 2010)
Note: The data are for the aggregate loan composition of all ILCs. The pre-financial crisisperiod is as of the end of 2007. Based on nine commercially owned ILCs (BMW Bank ofNorth America, GE Capital Financial Inc., Target Bank, Toyota Financial Savings Bank,Eaglemark Savings Bank, EnerBank USA, First Electronic Bank, The Pitney Bowes BankInc., and Transportation Alliance Bank Inc.)Sources: FDIC, Milken Institute.
Figure 13: Commercially owned ILCs largely avoided real estate loans both pre-and post-crisis.
in the summer of 2009. GMAC Bank converted to a commercial bank in late2009, while Capmark was sold in 2006 and is still an active ILC. Both GMACand Capmark Bank became and still remain heavily involved in real estate assets,especially as compared to all the other ILCs.
Of the five major investment banks that existed prior to the financial crisis, twoare still active, two were acquired, and one failed. The one that failed, Lehman
Industrial Loan Companies 49
Brothers, owned an ILC: Woodlands Commercial Bank in Utah.28 This ILCdid not cause the failure of Lehman Brothers. Furthermore, it was reported thatLehman Brothers transferred $75 million in cash and $200 million in other noncashconsideration to its ILC in December 2010, with plans to sell or liquidate thisinstitution in 2012.29 To this degree, it would appear that the parent of the ILChas been able to serve as a source of strength for its subsidiary, not the otherway around. However, Julie Boyle, CEO of the ILC, stated in a conversation forthis paper that such a transfer of funds would not have been necessary if not foran earlier inappropriate seizure of some of Woodlands’ assets. Furthermore, sheindicated that the ILC relied on mark-to-market accounting, which contributedto a significant decline in the value of the institution’s assets in 2008 but hasbeen subsequently reversed; as markets have improved, the institution is now wellcapitalized.
Some may argue that if Lehman Brothers, the parent of Woodlands, had beensupervised by the Federal Reserve rather than the Securities and Exchange Com-mission (SEC), things would have turned out much better for the subsidiaryILC. However, there is no evidence that granting the Federal Reserve supervisoryauthority over all holding companies that owned a FDIC-insured depository insti-tution would have averted the financial crisis or resulted in fewer bank failures.The SEC, the supervisor of investment banking firms, and the Federal Reservealike supervised institutions that failed during the crisis.
In any event, the Dodd-Frank Act provides greater authority for the FederalReserve to deal with systemically important financial institutions. In addition, theact requires parents of all FDIC-insured depository institutions to serve as a sourceof strength.
As a result of the crisis, there was a change in the composition of the list of thelargest ILCs in the industry. As Table 15 shows, the three largest ILCs in 2007were all converted to commercial banks; by the second quarter of 2010, the threelargest ILCs were much smaller in terms of total assets. However, the five largestinstitutions in 2007 accounted for 73% of the total assets of all ILCs, and in mid-2010, they accounted for a slightly smaller 69%. Although these percentages arequite close to one another, the total assets of the industry declined to $132 billionfrom $264 billion over this period. Lastly, the three largest institutions are allfinancially owned ILCs and account for 55% of the total assets of the industry.
V. IS THE ILC BUSINESS MODEL A GOOD ONE?
The ILC industry has survived for more than a century, so clearly ILCs have beenaccepted in the financial marketplace. As discussed in previous sections, no ILCsfailed during the recent crisis. Moreover, no commercially owned ILC has everfailed.
28Lehman Brothers filed for bankruptcy in December 2008.29Reuters, “Lehman Units’ Refinancing Deals Go Through,” December 3, 2010, http://www.reuters.com/article/idUSN0329600320101203
50 James R. Barth et al.
Tabl
e15
:B
igge
stIL
Cs:
Pre
-an
dpo
st-f
inan
cial
cris
is20
07Q
220
10
Com
mer
cial
Com
mer
cial
All
real
and
Gro
ssTo
tal
All
real
and
Gro
ssTo
tal
Tota
les
tate
indu
stri
allo
ans
toot
her
Tota
les
tate
indu
stri
allo
ans
toot
her
asse
tsTo
tal
loan
slo
ans
indi
vidu
als
loan
sas
sets
Tota
llo
ans
loan
sin
divi
dual
slo
ans
(US$
B)
empl
oyee
s(U
S$B
)(U
S$B
)(U
S$B
)(U
S$B
)(U
S$B
)em
ploy
ees
(US$
B)
(US$
B)
(US$
B)
(US$
B)
1M
erri
llLy
nch
Ban
k78
.11,
419
10.7
18.0
6.5
1.1
1A
mer
ican
Exp
ress
30.0
740
<0.
113
.1<
0.1
USA
∗C
entu
rion
Ban
k2
Mor
gan
Stan
ley
Ban
k∗35
.175
1.7
10.5
0.7
3.8
2U
BS
Ban
kU
SA29
.052
0.4
7.5
7.9
0.4
3A
llyB
ank
∗ (fo
rmer
ly28
.451
318
.20.
83.
21.
23
USA
ASa
ving
sB
ank
13.8
60
013
.90
GM
AC
Ban
k)4
Am
eric
anE
xpre
ss26
.061
0<
0.1
22.2
0.8
4C
apm
ark
Ban
k9.
513
76.
30
00.
1C
entu
rion
Ban
k5
UB
SB
ank
USA
25.0
42<
0.1
5.2
5.6
0.1
5B
MW
Ban
kof
8.2
330
06.
80
Nor
thA
mer
ica
Sum
ofth
ebi
gges
tfiv
e19
2.7
2,11
030
.634
.538
.36.
9Su
mof
the
bigg
estf
ive
90.4
302
6.8
7.5
41.7
0.5
All
othe
rIL
Cs
71.1
5,83
414
.99.
113
.51.
7A
llot
her
ILC
s41
.22,
371
8.1
8.4
6.9
1.3
Gra
ndto
tal
263.
87,
944
45.5
43.6
51.9
8.6
Gra
ndto
tal
131.
72,
673
14.8
15.8
48.6
1.8
Big
gest
five
(%to
tal)
73.0
26.6
67.3
79.1
73.9
80.0
Big
gest
five
(%to
tal)
68.7
11.3
45.5
47.2
85.8
27.4
Not
e:∗ T
hese
ILC
sar
ecu
rren
tlyin
activ
ebe
caus
eth
eyw
ere
conv
erte
dto
com
mer
cial
bank
s.So
urce
:FD
IC.
Industrial Loan Companies 51
0
5
10
15
20
25
30
35
40Commercially owned ILCs
Financially owned ILCs
AllFDIC-insured institutions
Equity to asset ratio, percent
Financially owned ILCs (exclude Merrill Lynch Bank USA) -3
-2
-1
0
1
2
3
4
5
6
7
FinanciallyownedILCs
Commerciallyowned ILCs
AllFDIC-insured institutions
Returnon assets, percent
Financially owned ILCs (exclude Merrill Lynch
Bank USA)
-20
-15
-10
-5
0
5
10
15
20
25
Financially ownedILCs
Commerciallyowned ILCs
AllFDIC-insured institutions
Returnon equity, percent
Financially ownedILCs (exclude Merrill Lynch Bank USA)
Sources: FDIC, Milken Institute.
Figure 14: Equity-to-asset ratio and performance ratios of ILCs and allFDIC-insured institutions.
-40
-20
0
20
40
60
80
100
0 5 10 15 20 25
Number of branches
Brokered deposits to total deposits ratio (%)
Note: The estimated Beta coefficient from a regression (brokered deposits to total depositsratio = α + β number of branches) is statistically significant at the 5% level. The figuredoes not include the data for ARCUS Bank, since we cannot access its information on theFDIC website due to expiration of its charter.Sources: FDIC; Milken Institute.
Figure 15: Correlation between number of branches and brokereddeposits–to–total deposits ratio (%), Q2 2010.
It is useful to measure the capitalization and performance of ILCs against allFDIC-insured institutions. Figure 14 shows that over the past decade, both finan-cially and commercially owned ILCs have been better capitalized and performedbetter in terms of ROA and ROE as compared to all FDIC-insured institutions,with the exception of financially owned ILCs in 2008 (and that poor performancewas due to a single ILC, Merrill Lynch Bank USA). The figure shows that withoutthe inclusion of this institution, the remaining financially owned ILCs performedbetter than all FDIC-insured institutions in 2008.
One can also compare ILCs to FDIC-insured institutions based upon more thanjust ROA, ROE, and equity capital–to-asset ratios. This is done in Table 16. The
52 James R. Barth et al.
Tabl
e16
:D
iffe
rent
perf
orm
ance
mea
sure
sfo
rIL
Cs
and
FD
IC-i
nsur
edin
stit
utio
ns,Q
220
10
Equ
ity
Net
Non
-L
oss
Net
The
num
ber
capi
tal
Eff
icie
ncy
inte
rest
curr
ent
allo
wan
ceto
char
ge-
offs
ofIL
Cs
RO
AR
OE
toas
sets
rati
om
argi
nlo
ans
tono
ncur
rent
tolo
ans
unde
rea
ch(%
)(%
)(%
)(%
)(%
)lo
ans
(%)∗
(%)∗
(%)∗
cate
gory
Perc
enta
geof
ILC
sha
ving
bette
rpe
rfor
man
ceth
an:
All
FDIC
-ins
ured
inst
itutio
ns82
.174
.466
.764
.169
.276
.372
.263
.239
Stat
e-ch
arte
red
inst
itutio
ns84
.684
.666
.769
.274
.469
.266
.756
.439
Com
mer
cial
bank
sA
sset
sle
ssth
an$1
00M
87.5
75.0
75.0
62.5
87.5
75.0
83.3
50.0
8A
sset
s$1
00M
to$3
00M
87.5
87.5
50.0
75.0
62.5
71.4
85.7
28.6
8A
sset
s$3
00M
to$5
00M
80.0
80.0
80.0
80.0
80.0
80.0
80.0
60.0
5A
sset
s$5
00M
to$1
B83
.383
.366
.766
.766
.766
.766
.716
.76
Ass
ets
$1B
to$1
0B77
.877
.888
.910
0.0
44.4
44.4
55.6
66.7
9A
sset
sgr
eate
rth
an$1
0B10
0.0
100.
066
.710
0.0
66.7
100.
010
0.0
33.3
3
Sour
ces:
FDIC
;Milk
enIn
stitu
te.
∗ Dat
afo
rno
ncur
rent
loan
sto
loan
s,lo
ssal
low
ance
tono
ncur
rent
loan
s,an
dne
tch
arge
-off
sto
loan
sar
eon
lyav
aila
ble
for
38,3
6,an
d38
ILC
s,re
spec
tivel
y.
Industrial Loan Companies 53
Table 17: Safety and soundness measures for ILCs and FDIC-insured insti-tutions, Q2 2010
Capital ratiosProfitability ratios
Equity capital Tier 1 risk-basedto assets capital ratio ROA ROE
Financially ownedILCs
16.5% 20.2% 1.9% 11.2%
Commerciallyowned ILCs
15.1% 14.8% 2.9% 17.6%
All FDIC-insuredinstitutions
11.0% 12.4% 0.6% 5.5%
Sources: FDIC, Milken Institute.
table shows that in terms of ROA, 82% of the ILCs performed better than theaverage of all FDIC-insured institutions; 85% outperformed the average of allstate-chartered institutions. When the ILCs are compared to commercial bankswithin the same size categories, nearly 80% or more of the ILCs came out aheadof their respective FDIC-insured institution size group in terms of ROA. Based onall the other measures, more than half the ILCs performed better than all FDIC-insured institutions and state-chartered institutions. This is not always the casewhen ILCs are compared to commercial banks by size group. In particular, for netinterest margin, noncurrent loans to loans, and charge-offs to loans, ILCs performbetter than commercial banks (except for one size group with respect to net interestmargin and noncurrent loans to loans, and three other size groups with respect tocharge-offs to loans).
Table 17 shows that as of the second quarter of 2010, both types of ILCs werebetter capitalized and had better profitability ratios than FDIC-insured institutions.In particular, commercially owned ILCs had an ROA that was nearly five timesthat of FDIC-insured institutions.
In terms of individual institutions, based on data for the second quarter of2010, more than half of all ILCs ranked in the top 10% of the 7,152 FDIC-insuredinstitutions for return on assets (ROA). Among the nine commercially owned ILCs,eight ranked in the top 10%. The worst-performing ILC was First Electronic Bank,a small institution with $7.1 million in assets. However, it had an equity-to-assetratio of approximately 70% as of mid-2010.
Among all ILCs, only nine of them have 60% or more of their total loans in realestate, while the rest of ILCs either concentrate more heavily on commercial andindustrial loans or consumer loans. However, most of the 39 depository ILCs haveno branches whatsoever. Of the nine institutions with branches, CapitalSourceBank has the largest number of branches, with 23. None of the commerciallyowned ILCs operated with any branches as of mid-2010—so in this way, they donot directly compete with community banks.
54 James R. Barth et al.Ta
ble
18:
Res
pons
esof
ILC
exec
utiv
esto
our
ques
tion
nair
ere
gard
ing
the
adva
ntag
esof
com
mer
cial
owne
rshi
pof
ILC
s
Res
pond
ent
Adv
anta
ges
ofco
mm
erci
alow
ners
hip
ofIL
Cs
BM
WB
ank
ofN
orth
Am
eric
aIn
stal
lmen
tLoa
nIn
cent
ive
prog
ram
s,fu
ndin
g/liq
uidi
tyop
tions
,com
plet
eco
ntro
lof
loan
unde
rwri
ting,
bran
ding
,cus
tom
erse
rvic
e.E
nerB
ank
USA
We
dono
tper
form
orpr
ovid
ean
yse
rvic
esfo
ror
toth
epa
rent
oran
yot
her
affi
liate
.Our
spec
ializ
edfi
nanc
ial
serv
ices
prod
ucts
(uns
ecur
edco
nsum
erin
stal
lmen
t,sa
me-
as-c
ash
loan
sfo
rho
me
impr
ovem
entp
urpo
ses)
are
rare
lyav
aila
ble
thro
ugh
com
mun
ityor
com
mer
cial
bank
s.O
urho
me
impr
ovem
entl
oans
have
the
follo
win
gde
sira
ble
feat
ures
for
borr
ower
san
dho
me
impr
ovem
entc
ontr
acto
rs:
Bor
row
erad
vant
ages
:Loa
nam
ount
sup
to$5
5,00
0;lo
ans
are
unse
cure
d;pa
ymen
tdef
erra
lper
iods
ofup
to18
mon
ths;
noin
tere
stif
paid
infu
lldu
ring
paym
entd
efer
ralp
erio
d;up
to10
-yea
rre
paym
entt
erm
s;qu
ick
and
easy
loan
byph
one
appl
icat
ion
proc
ess
dire
ctly
with
bank
;qui
cklo
anap
prov
als
–ty
pica
lly10
min
utes
;no
fees
(oth
erth
anla
tepa
ymen
tfee
s);n
opr
epay
men
tpen
alty
;no
defa
ulti
nter
estr
ate;
inte
rest
rate
fixe
dfo
rte
rmof
loan
;100
%fi
nanc
ing
ofho
me
impr
ovem
entp
roje
cts.
Hom
eim
prov
emen
tcon
trac
tor
adva
ntag
es:P
rove
nsa
les
and
mar
ketin
gto
olth
atre
sults
inm
ore
lead
s,hi
gher
clos
era
tes,
and
larg
erpr
ojec
tsiz
es;g
reat
way
todi
ffer
entia
teco
ntra
ctor
from
com
petit
ors;
noad
min
istr
ativ
ebu
rden
–cu
stom
erde
als
dire
ctly
with
bank
;qui
cklo
anby
phon
eap
plic
atio
npr
oces
sfo
rcu
stom
er,d
irec
tlyw
ithba
nk-
typi
cally
10m
inut
es;a
sour
ceof
unse
cure
dw
orki
ngca
pita
lfor
cont
ract
ors
–sm
allf
amily
-ow
ned
busi
ness
es(5
0%of
loan
amou
ntca
nbe
adva
nced
toco
ntra
ctor
upfr
ont)
;hig
hap
plic
atio
nap
prov
alan
dcu
stom
ersa
tisfa
ctio
nra
tes;
cont
ract
orkn
ows
the
cust
omer
has
aw
ayto
pay.
Firs
tEle
ctro
nic
Ban
kT
hepr
ivat
e-la
belc
redi
tcar
dpr
ogra
mFi
rstE
lect
roni
cB
ank
runs
for
itspa
rent
coul
dbe
run
byot
her
bank
s.H
owev
er,b
anks
have
ahi
stor
yof
aggr
essi
vely
ente
ring
and
then
rapi
dly
exiti
ng,o
rdr
amat
ical
lysc
alin
gba
ckon
,cer
tain
busi
ness
es,i
nclu
ding
priv
ate-
labe
lcre
ditc
ards
.Unf
ortu
nate
lyth
eyha
vea
habi
tof
exiti
ngor
scal
ing
back
atth
ew
orst
poss
ible
time
–w
hen
cred
itis
need
edm
ost.
Thi
sis
just
wha
twe
have
witn
esse
ddu
ring
this
fina
ncia
lcri
sis.
Indu
stri
alba
nks
inge
nera
l,an
dFi
rstE
lect
roni
cB
ank
inpa
rtic
ular
,hav
ehi
stor
ical
lybe
enth
ere
topr
ovid
efi
nanc
ing
for
our
pare
nts’
cust
omer
sw
hen
trad
ition
alba
nks
have
(Con
tinu
ed)
Industrial Loan Companies 55
Tabl
e18
:(C
onti
nued
)
Res
pond
ent
Adv
anta
ges
ofco
mm
erci
alow
ners
hip
ofIL
Cs
retr
ench
ed.W
ehe
lpke
epth
eec
onom
ygo
ing
bypr
ovid
ing
cred
itw
hen
othe
rsca
n’to
rw
on’t
.Ibe
lieve
that
,be
side
sbe
ing
seen
asa
sour
ceof
prof
it,in
dust
rial
bank
sca
nbe
view
edas
anin
sura
nce
play
onth
epa
rtof
thei
rco
rpor
ate
pare
nts
–in
sura
nce
that
cred
itw
illbe
avai
labl
eso
that
thei
rcu
stom
ers
can
purc
hase
the
pare
nts’
prod
ucts
even
iftr
aditi
onal
bank
sw
on’t
lend
.G
EC
apita
lFin
anci
alIn
c.G
EC
apita
lFin
anci
alIn
c.is
anal
tern
ativ
eso
urce
ofco
mm
erci
alle
ndin
gan
dle
asin
gfi
nanc
ing
tom
id-m
arke
tcu
stom
ers;
prim
arily
infr
anch
ise
fina
ncin
g,eq
uipm
entf
inan
cing
,and
corp
orat
ele
ndin
gto
mid
-siz
edbu
sine
sses
.M
edal
lion
Ban
kT
heIL
Cch
arte
ral
low
sth
epa
rent
flex
ibili
tyin
havi
ngso
me
nonf
inan
cial
activ
ityan
dst
illow
na
bank
.The
ycu
rren
tlyw
ould
qual
ify
asa
fina
ncia
llyow
ned
ILC
pare
ntbu
tals
oow
nan
adve
rtis
ing
agen
cy.
Opt
umH
ealth
Ban
kIn
c.O
ptum
Hea
lthB
ank
isa
who
llyow
ned
subs
idia
ryof
Uni
ted
Hea
lthG
roup
that
prov
ides
heal
thsa
ving
sac
coun
tsan
dot
her
heal
th-r
elat
edba
nkin
gse
rvic
esto
mor
eth
an1
mill
ion
indi
vidu
als.
The
indu
stri
alba
nkch
arte
ral
low
sth
eba
nkto
bepa
rtof
the
fina
ncia
lser
vice
sdi
visi
onof
Opt
umH
ealth
,ahe
alth
and
wel
lnes
sco
mpa
nyse
rvic
ing
mor
eth
an60
mill
ion
peop
le.I
nad
ditio
nto
help
ing
indi
vidu
als
and
fam
ilies
save
for
thei
rou
t-of
-poc
keth
ealth
-car
eex
pens
es,w
epr
oces
ses
elec
tron
iche
alth
care
clai
mpa
ymen
ts,i
ssue
Mas
terC
ard
card
sth
atfa
cilit
ate
the
use
ofFl
exib
leSp
endi
ngan
dH
ealth
Rei
mbu
rsem
entA
rran
gem
ents
,an
dpr
ovid
esp
ecia
lized
cred
itto
the
heal
th-c
are
com
mun
ity.T
hepr
oduc
tsan
dse
rvic
espr
ovid
edby
Opt
umH
ealth
Ban
ksi
mpl
ify
and
low
erth
eco
stof
heal
thca
re.
Targ
etB
ank
By
inte
grat
ing
with
the
com
mer
cial
reta
ilpa
rent
,we
can
offe
rcr
edit
toen
titie
sth
atca
n’tg
etit
else
whe
re(i
.e.,
it’s
notp
rofi
tabl
efo
roth
ers
tose
rve)
.Tar
getB
ank
offe
rs“c
lose
dlo
op”
com
mer
cial
cred
it,i.e
.,a
com
mer
cial
cred
itca
rdus
able
only
atTa
rget
stor
es.O
urcu
stom
erba
seis
pred
omin
antly
gove
rnm
enta
idag
enci
es,
nonp
rofi
ts,a
ndsc
hool
s;as
gove
rnm
ente
ntiti
esan
dno
npro
fits
,the
y’re
typi
cally
prec
lude
dfr
ompa
ying
inte
rest
and
late
fees
,so
the
cred
itex
tens
ion
isef
fect
ivel
yfr
ee,s
ave
the
inte
rcha
nge,
whi
chTa
rget
stor
espa
yto
Targ
etB
ank
(rig
htpo
cket
,lef
tpoc
keta
ccou
ntin
gfo
rth
epa
rent
com
pany
).T
hepa
rent
can
affo
rdto
(Con
tinu
ed)
56 James R. Barth et al.
Tabl
e18
:(C
onti
nued
)
Res
pond
ent
Adv
anta
ges
ofco
mm
erci
alow
ners
hip
ofIL
Cs
doth
is,b
ecau
seth
ecr
edit
exte
nsio
nm
eets
aco
mm
unity
serv
ice
obje
ctiv
efo
rth
eco
mpa
ny,a
nddr
ives
reta
ilsa
les.
Als
o,op
erat
iona
lly,m
any
ofth
ese
entit
ies
prov
ide
aid
oras
sist
ance
tofa
mili
esin
need
–th
eba
nk,
inte
grat
edw
ithth
ere
taile
r,ca
nho
nor
vouc
her
prog
ram
sfr
omth
ese
aid
agen
cies
,allo
win
ga
fam
ilyto
take
anag
ency
vouc
her
into
aTa
rget
Stor
eto
purc
hase
the
food
and
clot
hing
they
need
,but
prec
lude
the
purc
hase
ofbe
eran
del
ectr
onic
sor
othe
rag
ency
-dir
ecte
dno
nper
mis
sibl
eite
ms,
and
then
that
purc
hase
isbi
lled
agai
nstt
heag
ency
’scr
edit
acco
untw
ithth
eba
nk.F
rom
aco
stto
serv
e,an
dop
erat
iona
lpro
cess
,the
bank
-ret
aile
rin
tegr
atio
nis
the
only
mea
nsto
mak
eth
ispo
ssib
le.
The
Pitn
eyB
owes
Ban
kIn
c.A
com
mer
cial
bank
coul
dpr
ovid
eth
ese
rvic
es,b
utno
othe
rch
arte
ris
avai
labl
eto
the
pare
nt.
Toyo
taFi
nanc
ial
Savi
ngs
Ban
kT
here
are
nose
rvic
esan
ILC
can
offe
rth
atca
nnot
beof
fere
dby
aco
mm
erci
alba
nk.T
hebe
nefi
tto
the
pare
ntis
that
they
getd
irec
tcon
trol
over
prod
ucts
offe
red,
and
100%
ofth
epr
ofits
from
prod
ucts
asop
pose
dto
ash
arin
gag
reem
entw
itha
com
mer
cial
bank
(i.e
.,ha
ving
asu
bsid
iary
offe
ring
the
prod
ucts
asop
pose
dto
anex
tern
alpa
rtne
r).
Tra
nspo
rtat
ion
Alli
ance
Ban
kIn
c.A
llow
sou
rpa
rent
thro
ugh
the
ILC
toof
fer
fina
ncia
lpro
duct
san
dse
rvic
esto
itscu
stom
erba
se.
Wri
ghtE
xpre
ssFi
nanc
ialS
ervi
ces
Cor
p.
Pare
ntco
mpa
nyca
now
nth
eba
nkw
ithou
tcre
atin
ga
bank
hold
ing
com
pany
.Dis
adva
ntag
eis
inin
abili
tyto
issu
eD
DA
acco
unts
and
limita
tions
onex
pand
ing
nonf
inan
cial
com
pone
nts
atpa
rent
leve
l.
Sour
ces:
Res
pond
ents
ofin
dust
rial
loan
com
pani
es,M
ilken
Inst
itute
.
Industrial Loan Companies 57
Table 19: Total revenues for financially owned ILCs and their parents,Q2 2010
Total Total %revenue Financially revenue parent
Parent company (US$B) owned ILC State (US$M) company
Leavitt Group Private ADB Bank UT 1.6 n.a.American Express
Co.14.7 American Express
Centurion BankUT 2,764.2 18.8
WellPoint 29.6 ARCUS Bank UT 1.7 <0.1Hafif Bancorp Private Balboa Thrift and
Loan AssociationCA 10.1 n.a.
Beal FinancialCorp.
Unlisted Beal Bank Nevada NV 328.6 n.a.
CapitalSource 0.4 CapitalSource Bank CA 175.6 48.6General Motors
Company,private equityconsortium
n.a. Capmark Bank UT 199.4 n.a.
Celtic Investment Private Celtic Bank UT 16.1 n.a.LandAmerica
Financial GroupDelisted Centennial Bank CA 20.0 n.a.
Circle Bancorp Private Circle Bank CA 9.1 n.a.TELACU Private Community
Commerce BankCA 11.2 n.a.
F&T FinancialServices
Private Finance & ThriftCo.
CA 9.1 n.a.
Finance Enterprises Private Finance FactorsLtd.
HI 12.8 n.a.
Unitrin 1.3 Fireside Bank CA 58.2 4.4First American
Financial Corp.2.0 First Security
Business BankCA 7.3 0.4
No affiliation - Golden SecurityBank
CA 5.0 n.a.
Lease Corp. ofAmerica
Private LCA Bank Corp. UT 3.4 n.a.
MedallionFinancial
<0.1 Medallion Bank UT 23.5 n.a.
CardWorks LP Private Merrick BankCorp.
UT 132.2 n.a.
Minnesota ThriftCo.
Private Minnesota FirstCredit & SavingsInc.
MN 1.2 n.a.
First FinancialCorp.
0.1 The Morris PlanCompany ofTerre Haute Inc.
IN 4.0 5.1
(Continued)
58 James R. Barth et al.
Table 19: (Continued)
Total Total %revenue Financially revenue parent
Parent company (US$B) owned ILC State (US$M) company
UnitedHealthGroup
46.5 OptumHealth BankInc.
UT 57.1 0.1
SemperverdeHolding Co.
Private Rancho Santa FeThrift & LoanAssociation
CA 3.0 n.a.
SLM Corp. 3.5 Sallie Mae Bank UT 222.3 6.4UBS AG 26.4 UBS Bank USA UT 237.6 0.9USAA Private USAA Savings
BankNV 780.1 n.a.
Steel PartnersHoldings LP
Private WebBank UT 4.5 n.a.
Lehman BrothersHoldings
n.a. WoodlandsCommercialBank
UT 89.3 n.a.
Alliance DataSystems
1.3 World FinancialCapital Bank
UT 48.3 3.6
Wright Express 0.2 Wright ExpressFinancialServices Corp.
UT 148.5 84.7
Notes: Total revenue for ILCs is the sum of total interest and noninterest income.Sources: FDIC, Bloomberg, Milken Institute.
Figure 15 shows more clearly that there is a significantly negative relationshipbetween the percentage of total deposits accounted for by brokered deposits andthe number of branches at the ILCs. Brokered deposits have become the primaryfunding source for institutions with few or no branches. Indeed, for some ILCs,brokered deposits are the only deposits on the balance sheet and, in some cases,the single most important funding source other than equity. Since ILCs with morethan $100 million in assets are not permitted to offer demand deposit accounts orcommercial checking accounts, brokered deposits are vital to these institutions.Furthermore, all the commercially owned ILCs conduct business on a nationalscale even though they have no branches. It is therefore impractical and not costeffective to raise retail deposits only in the markets in which their sole office islocated. Attempts to do so would clearly put undue stress on community banksthat raise retail deposits through their branch networks in these markets.30
30It should be noted that the FDIC does charge a premium for brokered deposits and also requires ahigher level of capital (“well capitalized” versus “adequately capitalized”). Also, brokered depositsare a very reliable and efficient source of funding for ILCs as brokered deposits are not subject to earlyredemption except in the case of death or certified mental incompetency of the depositor. Most are
Industrial Loan Companies 59
Table 20: Commercially owned ILCs account for a small share of theirparents’ total revenue, Q2 2010
Total Total %revenue Commercially revenue parent
Parent company (US$B) owned ILC State (US$M) company
BMW AG 36.8 BMW Bank ofNorth America
UT 325.5 0.89
Harley-Davidson 2.5 Eaglemark SavingsBank
NV 7.4 0.29
CMS Energy 3.3 EnerBank USA UT 16.7 0.51Fry’s Electronics n.a. First Electronic
BankUT 3.0 n.a.
GE 73.4 GE CapitalFinancial Inc.
UT 391.1 0.53
Pitney Bowes 2.7 The Pitney BowesBank Inc.
UT 74.0 2.80
Target Corp. 31.1 Target Bank UT 3.6 0.01Toyota 111.2 Toyota Financial
Savings BankNV 44.7 0.04
Flying J n.a. TransportationAlliance BankInc.
UT 36.4 n.a.
Notes: Flying J Inc. is a private company (and is being restructured under Chapter 11);Fry’s Electronics is a private company. Total revenue for ILCs is the sum of total interestand noninterest income.Sources: FDIC, Bloomberg, Milken Institute.
POTENTIAL BENEFITS OF ILCs
The fact that ILCs exist is per se evidence that they provide potential benefits toboth their customers and owners. However, it is important to distinguish betweenfinancially owned ILCs and commercially owned ILCs. The loan composition ofboth commercially and financially owned ILCs reveal that it is not possible todistinguish the type of ownership simply based on the composition of the loanportfolio. All one can say is that the average loan-to-asset ratios for both types ofILCs are nearly identical, and the weighted average ratios show that commerciallyowned ILCs have a larger share of loans than the financially owned ILCs.
Financially owned ILCs are in many respects quite similar to other bankinginstitutions. Since their parents are financial firms, they could become financialholding companies by converting their ILCs to commercial banks. In this sense,there appears to be nothing particularly unique about financially owned ILCsas compared to commercial banks. However, both financially and commercially
issued in $1,000 increments. All of the record-keeping at the depositor level is accomplished by thedeposit broker.
60 James R. Barth et al.
owned ILCs are state-chartered rather than federally chartered, which is not thecase for commercial banks.
Apart from that difference, it is largely the fact that some ILCs are owned bycommercial firms that is truly unique today. The parents of these ILCs cannotconvert their ILCs to commercial banks and at the same time themselves becomefinancial holding companies. The only way for these commercial firms to currentlyown a banking institution is to continue owning their ILCs.
The business model associated with commercial ILCs has multiple characteris-tics that contribute to their stability:
• Marketing advantages and economies of scale. Many ILCs serve the lowest-risk parts of a broader financial operation. The bank obtains its businesswith little or no marketing cost and often only makes loans selected from abroad pool of applicants. Even if the broader pool is affected in an economicdownturn, it may have little impact on the loans made by the bank.
• Geographical risk reduction. Most ILCs serve specialized customer groupsspread across the nation, which helps reduce risk through geographical diver-sification. Access to such a large market is extremely difficult for a bank notowned by a large diversified parent.
• Capital. In times of stress, a diversified parent may be in a better position toprovide capital support to a bank subsidiary than a banking holding companywhose assets consist almost entirely of a bank subsidiary.
• Informational efficiencies. An ILC parent engaged in multiple business linesmay be better able to identify underserved markets and opportunities toprovide banking services to customers of the parent. This information mayenable the institution to make better loan decisions than traditional banks,to provide other financial services that are desired by the customers of theparent firm, and to make credit available when it is not readily availableelsewhere. For example, the ILC owned by Harley-Davidson is in a muchbetter position to assess the collateral value of a motorcycle than a typicalbank. Transportation Alliance Bank, because of its affiliation with thecompany operating truck stops nationwide, is better positioned to serve thebanking needs of long-haul truckers.
• Governance. The parent company of an ILC provides an additional and im-portant source of governance. It would not want its subsidiary institution todamage its reputation, especially if the subsidiary ILC is small in relation tothe parent.
To elicit more information, we sent surveys to all ILCs. We asked each ofthem to identify what they considered to be the advantages to the parent of suchownership. Twelve of the 39 ILCs responded to our survey; their responses areprovided in Table 18.
It is useful to also examine the contribution of the revenue generated by the ILCsto the total revenue of their parent companies. Tables 19 and 20 show the share of
Industrial Loan Companies 61
Tabl
e21
:Se
lect
edst
udie
son
the
mix
ing
ofba
nkin
gan
dco
mm
erce
Aut
hor
Pur
pose
Fin
ding
Hau
bric
han
dSa
ntos
(200
5)T
heau
thor
sex
amin
eth
ead
vant
ages
and
disa
dvan
tage
sof
mix
ing
bank
ing
and
com
mer
ceus
ing
the
“liq
uidi
ty”
appr
oach
tofi
nanc
iali
nter
med
iatio
n.
The
auth
ors
exte
ndpr
evio
usre
sear
chon
asse
tliq
uida
tion
and
argu
eth
atm
ixin
gba
nkin
gan
dco
mm
erce
incr
ease
sa
bank
’sef
fici
ency
indi
spos
ing
ofde
faul
ted
loan
sby
crea
ting
anin
tern
alm
arke
t.H
uert
as(1
988)
The
auth
ordi
scus
ses
whe
ther
bank
ing
and
com
mer
cesh
ould
bepe
rmitt
edto
cont
inue
tom
ix,a
ndif
so,h
owth
issh
ould
bedo
nean
dw
hatr
egul
atio
nsm
aybe
requ
ired
.
Aff
iliat
ions
betw
een
bank
ing
and
com
mer
ceha
vebe
enco
mm
onth
roug
hout
Am
eric
anhi
stor
y.T
heau
thor
argu
esth
atm
ixin
gba
nkin
gan
dco
mm
erce
isbe
nefi
cial
and
fair
tocu
stom
ers,
and
does
notj
eopa
rdiz
eth
esa
fety
ofco
nsum
erde
posi
tsor
thre
aten
the
stab
ility
ofth
epa
ymen
tsys
tem
.Con
sequ
ently
,the
find
ing
isth
atth
em
ixin
gof
bank
ing
and
com
mer
cesh
ould
bepe
rmitt
ed.
Kra
iner
(200
0)T
heau
thor
disc
usse
spo
tent
ialb
enef
itsan
dco
sts
ofba
nkin
gan
dco
mm
erce
affi
liatio
ns.
The
auth
orco
nclu
des
that
the
bene
fits
ofIL
Cs
wou
ldbe
inth
efo
rmof
enha
nced
effi
cien
cy,b
oth
oper
atio
nala
ndin
form
atio
nal.
The
sebe
nefi
tsar
elik
ely
togr
owbe
caus
eof
chan
ges
inte
chno
logy
.The
auth
oral
sono
tes
that
cost
sof
bank
ing
and
com
mer
cial
affi
liatio
nsar
elik
ely
tobe
felt
ona
smal
lsca
le.
Hau
bric
han
dSa
ntos
(200
3)T
heau
thor
sin
vest
igat
eth
ehi
stor
yof
bank
ing
and
com
mer
cein
the
U.S
.by
cons
ider
ing
the
two-
way
inte
rloc
king
that
take
spl
ace
betw
een
bank
san
dco
mm
erci
alfi
rms.
The
exte
nsiv
elin
kage
sbe
twee
nba
nkin
gan
dco
mm
erce
have
chan
ged
with
shif
ting
defi
nitio
nsof
“ban
k”an
dch
angi
ngm
etho
dsof
“con
trol
.”It
issh
own
that
regu
latio
nspe
rse
dono
tel
imin
ate
thes
elin
kage
s.Fu
rthe
rmor
e,it
ispo
inte
dou
ttha
t“at
times
polit
ical
pres
sure
sha
vefo
rced
bank
ing
and
com
mer
ceap
art;
attim
esec
onom
icpr
essu
reha
spu
shed
them
toge
ther
.”
(Con
tinu
ed)
62 James R. Barth et al.Ta
ble
21:
(Con
tinu
ed)
Aut
hor
Pur
pose
Fin
ding
Bla
ir(2
004)
The
auth
orex
amin
estw
odo
min
antv
iew
son
the
sepa
ratio
nof
bank
ing
and
com
mer
ceby
pres
entin
gits
pote
ntia
lben
efits
and
risk
sfr
omth
epu
blic
polic
ype
rspe
ctiv
e.
•A
lthou
ghth
ecu
rren
tpro
hibi
tions
onco
rpor
ate
owne
rshi
pof
bank
sar
eju
stif
ied
onth
egr
ound
sth
atba
nkin
gan
dco
mm
erce
have
alw
ays
been
sepa
rate
,the
reis
noev
iden
ceof
alo
ng-t
erm
sepa
ratio
nin
U.S
.ban
king
hist
ory.
Ext
ensi
velin
ksbe
twee
nba
nkin
gan
dco
mm
erce
have
exis
ted
and
cont
inue
toex
ist.
•D
espi
teth
epo
tent
ialr
isks
ofm
ixin
gba
nkin
gan
dco
mm
erce
,the
evid
ence
sugg
ests
that
with
adeq
uate
safe
guar
dsin
plac
e,th
eca
refu
lmix
ing
ofba
nkin
gan
dco
mm
erce
can
yiel
dbe
nefi
tsw
ithou
texc
essi
veri
sk.
Ras
kovi
ch(2
008)
The
auth
orev
alua
tes
the
maj
orar
gum
ents
ofm
ixin
gof
bank
ing
and
com
mer
ceby
rela
ting
each
ofth
ose
argu
men
tsw
ithex
istin
gth
eore
tical
and
empi
rica
lres
earc
h.
The
auth
orco
nclu
des
that
maj
orco
ncer
nsth
atha
vebe
enra
ised
are
theo
retic
ally
wea
kor
lack
empi
rica
lsup
port
.
Bar
th,C
apri
o,an
dL
evin
e(2
001,
2006
a)
The
auth
ors
exam
ine
the
effe
ctof
regu
latio
nan
dow
ners
hip
onba
nkpe
rfor
man
cean
dst
abili
tyus
ing
acr
oss-
coun
try
empi
rica
lan
alys
is.
The
auth
ors
cons
truc
tam
easu
reof
mix
ing
bank
ing
and
com
mer
ceba
sed
the
abili
tyof
nonf
inan
cial
firm
sto
own
and
cont
rol
com
mer
cial
bank
san
dvi
ceve
rsa
for
each
coun
try
inth
esa
mpl
e.T
heau
thor
sfi
ndno
sign
ific
antr
elat
ions
hip
betw
een
the
mea
sure
sof
mix
ing
bank
ing
and
com
mer
cean
dth
ele
velo
fba
nkin
gse
ctor
deve
lopm
ento
rth
ede
gree
ofin
dust
rial
com
petit
ion.
The
yal
sofi
ndth
atco
untr
ies
that
rest
rict
bank
sfr
omow
ning
nonf
inan
cial
firm
sar
em
ore
likel
yto
expe
rien
cea
bank
ing
cris
is.T
hey
conc
lude
that
som
eof
the
maj
orre
ason
sfo
rre
stri
ctin
gth
em
ixin
gof
bank
ing
and
com
mer
ce–t
ore
duce
fina
ncia
lfra
gilit
yor
topr
omot
efi
nanc
iald
evel
opm
ent–
are
not
supp
orte
dby
empi
rica
levi
denc
e.
(Con
tinu
ed)
Industrial Loan Companies 63Ta
ble
21:
(Con
tinu
ed)
Aut
hor
Pur
pose
Fin
ding
Bys
trom
(200
4)T
heau
thor
estim
ates
the
prob
abili
tyof
syst
emic
bank
ing
cris
esus
ing
asa
mpl
eof
diff
eren
tcou
ntri
es,a
ndex
amin
esho
wit
can
beex
plai
ned
byva
riou
sin
stitu
tiona
lfac
tors
.
Incl
uded
inth
elis
tof
inst
itutio
nalf
acto
ris
anin
dex
ofre
gula
tory
rest
rict
ion,
and
bank
sow
ning
nonf
inan
cial
firm
sar
eam
ong
one
ofth
eva
riab
les
used
toco
nstr
uctt
his
inde
x.T
hepa
per’
sem
piri
cal
find
ings
show
that
the
prob
abili
tyof
bank
failu
reis
syst
emat
ical
lyhi
gher
inco
untr
ies
with
mor
ere
gula
tory
rest
rict
ions
.W
all,
Rei
cher
t,an
dL
iang
(200
8aan
d20
08b)
The
auth
ors
asse
ssth
epo
tent
ialp
ract
ical
effe
cts
ofin
tegr
atin
gba
nkin
gan
dco
mm
erce
usin
gec
onom
icth
eory
,pas
tex
peri
ence
with
dere
gula
tion,
and
obse
rved
cros
s-in
dust
ryco
mbi
natio
ns.
•E
cono
mic
theo
rysu
gges
tsth
atjo
intc
orpo
rate
owne
rshi
pof
bank
san
dco
mm
erci
alfi
rms
has
seve
ralp
oten
tialb
enef
its,i
nclu
ding
econ
omie
sof
scal
ean
dsc
ope,
incr
ease
din
tern
alca
pita
lmar
kets
,an
ddi
vers
ific
atio
n.T
hese
bene
fits
offs
etco
sts
asso
ciat
edw
ithso
me
com
bina
tions
ofba
nkin
gan
dco
mm
erci
alfi
rms.
•E
mpi
rica
lana
lysi
sof
the
pote
ntia
lgai
nsis
cond
ucte
dfo
rth
esp
ecif
icca
seof
Wal
-Mar
tacq
uiri
nga
bank
.The
auth
ors
find
that
ifW
al-M
arto
wne
da
bank
with
anea
rnin
gsdi
stri
butio
nsi
mila
rto
that
ofth
eav
erag
eU
.S.b
ank,
itw
ould
gene
rate
am
odes
tdec
line
inav
erag
eR
OE
butw
itha
redu
ctio
nin
risk
that
wou
ldbe
two
toth
ree
times
asla
rge.
•U
sing
empi
rica
lmet
hodo
logi
esan
din
dust
ry-l
evel
fina
ncia
ldat
afr
omIn
tern
alR
even
ueSe
rvic
eco
rpor
ate
inco
me
tax
filin
gto
exam
ine
gain
sfr
ompo
rtfo
liodi
vers
ific
atio
n,th
eau
thor
sfi
ndth
atba
nks
affi
liatin
gw
ithno
nban
king
activ
ities
(per
mitt
edby
the
Gra
mm
-Lea
ch-B
liley
Act
of19
99)
prov
ides
pote
ntia
lgai
nfr
omdi
vers
ific
atio
n.A
ngki
nand
(200
9)U
sing
acr
oss-
sect
iona
lstu
dy,t
heau
thor
inve
stig
ates
the
impa
ctof
bank
regu
latio
nson
the
seve
rity
ofba
nkin
gcr
ises
.
The
auth
orfi
nds
that
the
decl
ine
inec
onom
icac
tivity
follo
win
ga
bank
ing
cris
isw
illbe
less
seve
refo
rth
ose
coun
trie
sw
ithfe
wer
rest
rict
ions
onba
nkac
tiviti
es,i
nclu
ding
bank
sow
ning
nonf
inan
cial
firm
san
dvi
ceve
rsa.
64 James R. Barth et al.
the parents’ total revenue that is accounted for by financially and commerciallyowned ILCs, respectively.
As seen in Table 19, 16 of the parents of the financially owned ILCs are privatecompanies (one financially owned ILC has no parent) and therefore their revenuedata are not publicly available. For the 12 financially owned ILCs for which dataare available, the percentage of the parent companies’ revenue accounted for bythe subsidiary ILCs ranges from a low of less than 0.1% to a high of 123%.
In the case of commercially owned ILCs, as shown in Table 20, two of theparents of these ILCs are private companies. For the seven parent companies forwhich data are available, their subsidiary ILCs in every case account for less than3% of the parents’ total revenue. This suggests that parent firms are not dependenton their ILCs as a significant source of revenue but rather as complements to theirprimary business model. These data also seem to indicate that the parents wouldhave no incentive to exploit their ILCs in an inappropriate manner, since the onlyresult would be reputational damage in addition to adverse actions taken by theregulatory authorities.
In addition, it might be noted that financially owned ILCs had net incomeof $322,156 per employee and commercially owned ILCs had a net income of$404,989 per employee for 2009. In comparison, all FDIC-insured institutionshad a net income of $4,723 per employee.
In addition, Table 21 lists some of the academic studies that have examined theissue of mixing banking and commerce, along with their findings. They presentno evidence that the ownership of ILCs by commercial firms is unsound policyor that whatever risks might exist cannot be contained by appropriate regulation.In addition, according to the FDIC (1987), “the public policy implication of [thisstudy’s major] conclusion is that . . . the Bank Holding Company Act . . . should beabolished.”
VI. CONCLUSION
ILCs survived the Great Depression and, indeed, increased their loans throughoutthe period—a role they reprised during the most recent financial crisis.
But today the ILC industry is being studied by the GAO, as mandated by theDodd-Frank Act. This is certainly appropriate given the concerns surroundingILCs. But to reiterate: No commercially owned ILC has ever failed, and ILCshave performed well over the years—better, in many respects, than most otherFDIC-insured institutions.
There is simply no evidence that the U.S. financial system and economy wouldbe on sounder footing if diversified firms were prohibited from owning ILCs, andthis kind of empirical evidence should be required before acting on calls for anychange in the ILC industry (especially its abolition through repeal of the currentexemption for ILC owners in the BHCA).
Many of the diversified companies that would wish to enter this industry haveexpertise, resources, capital, and perhaps even established credit businesses to
Industrial Loan Companies 65
contribute to a bank, both during the start-up phase and over time. As the U.S. Trea-sury Department (1991) pointed out, “the development of these broadly diversifiedfirms has often proven beneficial to the economy at large, and financial marketsin particular. Most important has been the ability and willingness of such firmsto strengthen the capital positions of their financial services subsidiaries. . . . Thestability brought to the financial markets in this way is a net benefit to the economyoverall.”
During the most recent financial crisis, ILCs provided credit when other fi-nancial institutions were unable or unwilling to do so (due to a lack of liquidityor capital). If the ILC industry is allowed to grow, it may be able to tap intonew sources of capital from companies that are otherwise prohibited from own-ing a bank by the BHCA. The total net worth of U.S. non-financial corporatebusinesses was $13 trillion as of mid-2010. If even a small percentage of this cap-ital were invested in ILCs, it could contribute to an expansion in the availabilityof credit, a development that could have wider ramifications for U.S. economicgrowth.
Furthermore, U.S. financial institutions now compete in a global marketplace.The vast majority of countries around the world allow the mixing of banking andcommerce, leaving the United States out of step with international norms. Thissuggests that legislators, regulators, and other officials should be careful not to putU.S. financial institutions at a competitive disadvantage.
VII. BIBLIOGRAPHY
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Ashcraft, A. B. 2008. “Are bank holding companies a source of strength to theirbanking subsidiaries?” Journal of Money, Credit and Banking 40:273–294.
Baradaran, M. 2010. “The ILC and the reconstruction of U.S. banking.” SouthernMethodist University Law Review 63:101.
Barth, J. R., and M. A. Regalia. 1988. “The evolving role of regulation in thesavings and loan industry.” Pp. 113–191 in The Financial Services Revolution:Policy Directions for the Future, eds. C. England and T. F. Huertas. Boston:Kluwer Academic Press.
Barth, J. R., R. D. Brumbaugh Jr., and G. Yago. 1997. “Breaching the wallsbetween banking & commerce.” Banking Strategies, July 1.
Barth, J. R., R. D. Brumbaugh Jr., and J. A. Wilcox. 2000. “Glass-Steagall re-pealed: Market forces compel a new bank legal structure.” Journal of EconomicPerspectives 14:2:191–204.
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Barth, J. R., G. Caprio Jr., and R. Levine. 2006a. Rethinking Bank Regulation: TillAngels Govern. Cambridge, MA: Cambridge University Press.
Barth, J. R., L. Goldberg, D. E. Nolle, and G. Yago. 2006b. “Financial supervisionand crisis management: United States experience and lessons for emergingmarket economies.” Pp. 379–459 in Regulatory Reforms in the Age of FinancialConsolidation: The Emerging Market Economy and Advanced Countries, eds.L. J. Cho and J. K. Kim. Seoul, Korea: Tiger Press.
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Barth, J. R., Y.H. Chiang, and T. Li. 2011. “The ILC: Dinosaur or phoenix?”Milken Institute Review 13:1:38–45.
Blair, C. 2004. “The mixing of banking and commerce: Current policy issues.”FDIC Banking Review 16:4:97–120.
Bovenzi, J. F. 2007. Testimony on industrial loan companies before Senate Com-mittee on Banking, Housing, and Urban Affairs. October 4.
Bystrom, H. N.E. 2004. “The market’s view on the probability of banking sectorfailure: Cross-country comparisons.” Journal of International Financial Mar-kets Institutions and Money 14:419–438.
Falanga, S. 2007. “Continuing the debate over the role of ILCs.” Banking NewYork 1:1:24–25.
Federal Deposit Insurance Corporation. 1987. Mandate for Change: Restructuringthe Banking Industry. Washington, D.C.: FDIC.
Federal Deposit Insurance Corporation. 1997. “A unified federal charter for banksand savings associations.” FDIC Banking Review 10:1:1–16.
Federal Deposit Insurance Corporation. 2006. “Application for deposit insurancefor Wal-Mart Bank.” Federal Register 71:40:10531–10533.
Federal Reserve Board. 1972. “One-bank holding companies before the 1970Amendments.” Federal Reserve Bulletin 58:12;999–1008.
Haubrich, J. G. and J. A. C. Santos. 2003. “Alternative forms of mixing bankingwith commerce: Evidence from American history.” Financial Markets, Institu-tions & Instruments 12:2:121–64.
Haubrich, J. G. and J. A. C. Santos. 2005. “Banking and commerce: A liquidityapproach.” Journal of Banking and Finance 29:271–294.
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Mushinski, D. and R. J. Phillips. 2008. “The role of Morris Plan lending institu-tions in expanding consumer microcredit in the United States.” Pp. 121–139in Entrepreneurship in Emerging Domestic Markets, eds. G. Yago, J. R. Barth,and B. Zeidman. Vol. 7 of Milken Institute Series on Financial Innovation andEconomic Growth. New York: Springer.
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VIII. NOTES ON CONTRIBUTORS/ACKNOWLEDGMENTS
James R. Barth is the Lowder Eminent Scholar in Finance at Auburn Universityand the senior finance fellow at the Milken Institute. His research focuses onfinancial institutions and capital markets, both domestic and global, with specialemphasis on regulatory issues. An appointee of Presidents Ronald Reagan andGeorge H.W. Bush, Barth was chief economist of the Office of Thrift Supervisionand previously the Federal Home Loan Bank Board. He has also held the positionsof professor of economics at George Washington University, associate director ofthe economics program at the National Science Foundation, and Shaw FoundationProfessor of Banking and Finance at Nanyang Technological University. He hasbeen a visiting scholar at the U.S. Congressional Budget Office, the FederalReserve Bank of Atlanta, the Office of the Comptroller of the Currency and theWorld Bank. He has authored more than 200 articles in professional journals andhas co-authored and co-edited several books, including The Rise and Fall of the
68 James R. Barth et al.
U.S. Mortgage and Credit Markets: A Comprehensive Analysis of the Meltdown,China’s Emerging Markets: Challenges and Opportunities, The Great Savings andLoan Debacle, The Reform of Federal Deposit Insurance, and Rethinking BankRegulation: Till Angels Govern.
Tong (Cindy) Li is a research economist in the Financial Research Group at theMilken Institute. She specializes in the U.S. mortgage market, international capitalmarkets, banking regulations, and the Chinese economy. Li has authored and co-authored dozens of reports, papers, and articles. Her research work has beenpublished in academic journals and presented at major academic and regulatorconferences. She is a co-author of The Rise and Fall of the U.S. Mortgage andCredit Markets: A Comprehensive Analysis of the Meltdown and the author ofFinancial Institutions in China: A Study on Formal and Informal Credits. Shecurrently serves on the editorial board of Bank and Banking Systems. Li hasbeen interviewed by such major media outlets as China’s Phoenix Television andChina Youth Daily. She received her Ph.D. in economics from the Universityof California, Riverside, with research focused on microfinance and economicdevelopment, and special emphasis on China. She received a bachelor’s degree ininternational finance from Peking University.
Apanard (Penny) Angkinand is a senior research analyst in the Financial Re-search Group at the Milken Institute. Her research focuses on financial institutions,open economy macroeconomics, emerging market economies, and financial crises.Her work has been published in the Journal of International Money and Finance,International Review of Finance, Open Economies Review, The Journal of Inter-national Financial Markets, Institutions & Money, and the International Journalof Economics and Finance. Prior to joining the Institute, Angkinand was an as-sistant professor of economics at the University of Illinois at Springfield. Whilecompleting her Ph.D., she also held visiting scholar positions at the ClaremontInstitute for Economic Policy Studies and the Freeman Program in Asian PoliticalEconomy at the Claremont Colleges as well as a lecturer of economics at PitzerCollege and the University of Redlands. Angkinand received a Ph.D. in economicsfrom Claremont Graduate University.
Yuan-Hsin (Rita) Chiang is a research analyst in the Financial Research Group.She co-authored a Milken Institute report on industrial loan companies that ana-lyzes this unique financial industry from various aspects, including its historicaldevelopment, business model, economic impacts and the prospects for its survivalunder current financial reforms. Chiang has a range of research interests includingmacroeconomics, international money and finance, political economy, social net-work analysis, and strategic business modeling. She is completing her interfielddoctoral degree at the Claremont Graduate University, with empirical researchrevealing the impacts government capacity has on attracting foreign investmentsto local regions in China. At the National Taiwan University, she received a
Industrial Loan Companies 69
master’s degree in political economy, with research focused on the differencesin institutional frameworks among Asian central banks. She also received herbachelor’s degree in political science from National Taiwan University.
Li Li is a research analyst in the Financial Research Group at the Milken Institute.Her areas of expertise include affordable housing, cost-benefit analysis of publictransportation programs, and financial markets. She received a master’s degree inpublic policy from the University of Southern California with special focus onfinance and business economics. She has a bachelor’s degree in computer sciencefrom Zhejiang University, China.
This paper is a shorter version of a report by the authors, who very much appre-ciate funding provided by the Economic Development Corporation of Utah, theNevada Commission on Economic Development and the Milken Institute. Helpfulcomments were received from various state regulators, executives of industrialloan companies, and other individuals with extensive knowledge regarding the in-dustry. In this regard, special thanks are due to Paul Allred, Kelvin Anderson, DaleBronson, Matthew Browning, William J. Donnelly, Doug Foxley, Michael Jones,John B. Kemp, Edward Leary, Aimee McConkie, Neil Milner, Frank Pignanelli,Darryle Rude, Frank Salinger, Raymond Specht, George Sutton, and particularlyLouise Kelly. However, all the views expressed in this paper are those of theauthors. The authors also thank Lisa Renaud for the excellent editorial work andvaluable comments.