This section of the FEDERAL REGISTER

contains regulatory documents having general

applicability and legal effect, most of which

are keyed to and codified in the Code of

Federal Regulations, which is published under

50 titles pursuant to 44 U.S.C. 1510.

The Code of Federal Regulations is sold by

the Superintendent of Documents.

Rules and Regulations Federal Register

10703 

Vol. 86, No. 34 

Tuesday, February 23, 2021 

1See 12 U.S.C. 1811, 1818, 1821, 1831o–1, 

1831p–1. 

2Herein, the term ‘‘industrial bank’’ means any 

insured State-chartered bank that is an industrial 

bank, industrial loan company, or other similar 

institution that is excluded from the definition of 

‘‘bank’’ in the Bank Holding Company Act pursuant 

to 12 U.S.C. 1841(c)(2)(H). State laws refer to both 

industrial loan companies and industrial banks. For 

purposes of this rule, the FDIC is treating the two 

types of institutions as the same. The rule does not 

apply to limited purpose trust companies and credit 

card banks that also are exempt from the definition 

of ‘‘bank.’’ 

3 12 U.S.C. 1816. 

4 12 U.S.C. 1817(j). 

5 12 U.S.C. 1828(c). 

6 Garn-St. Germain Depository Institutions Act of 

1982, Public Law 97–320, 96 Stat. 1469 (Oct. 15, 

1982). 

7Public Law 100–86, 101 Stat. 552 (Aug. 10, 

1987). 

FEDERAL DEPOSIT INSURANCE 

CORPORATION 

12 CFR Part 354 

RIN 3064–AF31 

Parent Companies of Industrial Banks 

and Industrial Loan Companies 

AGENCY: Federal Deposit Insurance 

Corporation. 

ACTION: Final rule. 

SUMMARY: The Federal Deposit 

Insurance Corporation is adopting a 

final rule that requires certain 

conditions and commitments for each 

deposit insurance application approval, 

non-objection to a change in control 

notice, and merger application approval 

that would result in an insured 

industrial bank or industrial loan 

company becoming, on or after the 

effective date of the final rule, a 

subsidiary of a company that is not 

subject to consolidated supervision by 

the Federal Reserve Board. The final 

rule also requires that before any 

industrial bank or industrial loan 

company may become a subsidiary of a 

company that is not subject to 

consolidated supervision by the Federal 

Reserve Board, such company and the 

industrial bank or industrial loan 

company must enter into one or more 

written agreements with the Federal 

Deposit Insurance Corporation. 

DATES: The rule is effective on April 1, 

2021. 

FOR FURTHER INFORMATION CONTACT: 

Amanda Ledig, Attorney, (202) 898– 

7261, aledig@fdic.gov; Merritt Pardini, 

Counsel, (202) 898–6680, mpardini@

fdic.gov; Joyce Raidle, Counsel, (202) 

898–6763, jraidle@fdic.gov; Gregory 

Feder, Counsel, (202) 898–8724, gfeder@

fdic.gov; Catherine Topping, Counsel, 

(202) 898–3975, ctopping@fdic.gov; 

Mark Flanigan, Senior Counsel, (202) 

898–7426, mflanigan@fdic.gov; Ashby 

Hilsman, Assistant General Counsel, 

(202) 898–6636, ahilsman@fdic.gov, 

Legal Division; Scott Leifer, Senior 

Review Examiner, (508) 698–0361, 

Extension 8027, sleifer@fdic.gov; Don 

Hamm, Special Advisor, (202) 898– 

3528, dhamm@fdic.gov; Patricia 

Colohan, Associate Director, Risk 

Management Examinations Branch, 

(202) 898–7283, pcolohan@fdic.gov, 

Division of Risk Management 

Supervision. 

SUPPLEMENTARY INFORMATION: 

Table of Contents 

I. Policy Objectives 

II. Background 

A. History 

B. Industrial Bank Exclusion Under the 

BHCA 

C. Industry Profile 

D. Supervision 

E. GAO and OIG Reports 

F. FDIC Moratorium and Other Agency 

Actions 

G. 2007 Notice of Proposed Rulemaking— 

Part 354 

H. Dodd-Frank Act and Industrial Banks 

III. The Proposed Rule 

IV. Discussion of General Comments and 

Final Rule 

A. General Comments 

1. Banking and Commerce 

2. Lack of Federal Consolidated 

Supervision 

3. Consumer Protection Risks 

4. Justification for the Proposed Rule 

B. Description of the Final Rule 

1. Section 354.1—Scope 

2. Section 354.2—Definitions 

3. Section 354.3—Written Agreement 

4. Section 354.4—Required Commitments 

and Provisions of Written Agreement 

5. Section 354.5—Restrictions on Industrial 

Bank Subsidiaries of Covered Companies 

6. Section 354.6—Reservation of Authority 

7. Responses to Additional Questions 

V. Expected Effects 

A. Overview of Industrial Banks 

B. Analysis of the Commitments 

C. Safety and Soundness of Affected Banks 

D. Broad Effects on the Banking Industry 

E. Expected Effects on Consumers 

F. Expected Effects on the Economy 

VI. Regulatory Analysis 

A. Regulatory Flexibility Act 

B. Paperwork Reduction Act 

C. Plain Language 

D. Riegle Community Development and 

Regulatory Improvement Act of 1994 

E. Congressional Review Act 

I. Policy Objectives 

The Federal Deposit Insurance 

Corporation (FDIC) monitors, evaluates, 

and takes necessary action to ensure the 

safety and soundness of State 

nonmember banks,1 including industrial 

banks and industrial loan companies 

(together, ‘‘industrial banks’’).2 In 

granting deposit insurance, issuing a 

non-objection to a change in control, or 

approving a merger, the FDIC must 

consider the factors listed in sections 6,3

7(j),4 and 18(c),5 respectively, of the 

Federal Deposit Insurance Act (FDI Act). 

Congress expressly made all industrial 

banks eligible for Federal deposit 

insurance in 1982.6 As deposit insurer 

and as the appropriate Federal banking 

agency for industrial banks, the FDIC 

supervises industrial banks. A key part 

of its supervision is evaluating and 

mitigating the risks arising from the 

activities of the control parties and 

owners of insured industrial banks to 

ensure they do not threaten the safe and 

sound operations of those industrial 

banks or pose undue risk to the Deposit 

Insurance Fund (DIF). 

Existing State and Federal laws allow 

both financial and commercial 

companies to own and control 

industrial banks. Congress expressly 

adopted an exception to permit such 

companies to own and control 

industrial banks, without becoming a 

bank holding company (BHC) under the 

Bank Holding Company Act (BHCA), as 

part of the Competitive Equality 

Banking Act of 1987 (CEBA).7 Industrial 

banks today are owned by financial and 

nonfinancial commercial firms. The 

FDIC has in recent years received 

applications from groups seeking to 

establish new industrial banks that 

would be owned by commercial parents. 

Proposals regarding industrial banks 

have presented unique risk profiles 

compared to traditional community 

10704 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

8 In the context of the proposed rule, ‘‘Federal 

consolidated supervision’’ referred to the 

supervision of a parent company and its 

subsidiaries by the Federal Reserve Board (FRB). 

Consolidated supervision of a bank holding 

company by the FRB encompasses the parent 

company and its subsidiaries, and allows the FRB 

to understand ‘‘the organization’s structure, 

activities, resources, and risks, as well as to address 

financial, managerial, operational, or other 

deficiencies before they pose a danger to the BHC’s 

subsidiary depository institutions.’’ See SR Letter 

08–9, ‘‘Consolidated Supervision of Bank Holding 

Companies and the Combined U.S. Operations of 

Foreign Banking Organizations’’ (Oct. 16, 2008). 

9See FDIC Deposit Insurance Applications, 

Procedures Manual Supplement, Applications from 

Non-Bank and Non-Community Bank Applicants, 

FIL–8–2020 (Feb. 10, 2020). 

10Parent Companies of Industrial Banks and 

Industrial Loan Companies, 85 FR 17771, 17772–73 

(Mar. 31, 2020). See also 12 U.S.C. 1831o–1(b). 

11 In March of 2020, the FDIC approved two 

deposit insurance applications for industrial banks 

owned by firms whose businesses are 

predominantly financial in nature, Square Financial 

Services, Inc., Salt Lake City, Utah (Square 

Financial), and Nelnet Bank, Salt Lake City, Utah 

(Nelnet). As part of both approvals, the FDIC 

required the industrial banks and their parent 

companies to enter into written agreements with the 

FDIC that are consistent with the requirements of 

the proposed and this final rule. 

12 96 Stat. 1469. 

13Prior to 1982, the FDIC had allowed some 

industrial banks to become federally insured, but 

FDIC insurance was typically limited to those 

industrial banks chartered by States where the 

relevant State’s law allowed them to receive 

‘‘deposits’’ or to use ‘‘bank’’ in their name. For 

additional historical context regarding industrial 

bank supervision, see The FDIC’s Supervision of 

Industrial Loan Companies: A Historical 

Perspective, Supervisory Insights (2004). 

14 12 U.S.C. 1813(a)(2). 

15 12 U.S.C. 1813(e)(2). 

16 12 U.S.C. 1813(q)(2). 

17Section 4 of the BHCA generally prohibits a 

BHC from acquiring ownership or control of any 

company which is not a bank or engaging in any 

activity other than those of banking or of managing 

or controlling banks and other subsidiaries 

authorized under the BHCA. See 12 U.S.C. 

1843(a)(1) and (2). The Home Owners’ Loan Act 

(HOLA) governs the activities of SLHCs, as 

amended by the Dodd-Frank Act, which generally 

subjects these companies to the permissible 

financial holding company activities under section 

4(k) of the BHCA (12 U.S.C. 1843(k), activities that 

are financial in nature or incidental to a financial 

activity). See 12 U.S.C. 1467a(c)(2)(H). 

bank proposals. These profiles have 

included potential owners that would 

not be subject to Federal consolidated 

supervision,8 affiliations with 

organizations whose activities are 

primarily commercial in nature, and 

non-community bank business models.9

Given the continuing interest in the 

industrial bank charter and the evolving 

business models, the FDIC proposed a 

rule in March 2020 to codify existing 

practices utilized by the FDIC to 

supervise industrial banks and their 

parent companies, to mitigate undue 

risk to the DIF that may otherwise be 

presented in the absence of Federal 

consolidated supervision of an 

industrial bank and its parent company, 

and to ensure that the parent company 

that owns or controls an industrial bank 

serves as a source of financial strength 

for the industrial bank, consistent with 

section 38A of the FDI Act.10 The 

proposed rule described certain 

commitments that would be required as 

a condition of the FDIC’s approval of, or 

non-objection to, each deposit insurance 

application, change in control notice, or 

merger application resulting in an 

industrial bank becoming a subsidiary 

of a company not subject to 

consolidated supervision by the Federal 

Reserve Board (FRB; each such parent 

company a Covered Company). The 

proposed rule required such a company 

and the subsidiary industrial bank to 

enter into one or more written 

agreements with the FDIC that contain 

certain commitments to be undertaken 

by the company to ensure the safe and 

sound operation of such industrial bank. 

The required commitments include 

capital and liquidity support from the 

parent to the industrial bank that have 

been incorporated in some form in the 

FDIC’s prior actions to create an 

appropriate supervisory structure for 

industrial banks and their parent 

companies.11

The FDIC is now issuing a final rule, 

which is largely consistent with the 

proposed rule. The final rule makes four 

substantive changes to the proposed 

rule. First, the final rule requires 

compliance from covered entities on or 

after the effective date of the rule rather 

than simply after, as proposed. Second, 

the final rule requires additional 

reporting by Covered Companies 

regarding systems for protecting the 

security, confidentiality, and integrity of 

consumer and nonpublic personal 

information. Third, the threshold 

regarding the limitation of a Covered 

Company’s representation on the board 

of a subsidiary industrial bank has been 

raised in the final rule from 25 percent, 

as proposed, to less than 50 percent. 

Lastly, the final rule modifies the 

restrictions on industrial bank 

subsidiaries concerning the 

appointment of directors and senior 

executive officers to apply to the 

industrial bank only during the first 

three years after becoming a subsidiary 

of a Covered Company. These changes 

are discussed in sections IV.B.1., 

IV.B.4., and IV.B.5. of this 

Supplementary Information section 

below. In addition to providing this 

comprehensive framework for 

supervision, the final rule also provides 

interested parties with certainty and 

transparency regarding the FDIC’s 

practices when making determinations 

on filings involving industrial banks. 

II. Background 

A. History 

Industrial banks began as small Statechartered loan companies in the early 

1900s to provide small loans to 

industrial workers. Initially, many 

industrial banks did not accept any 

deposits and funded themselves instead 

by issuing investment certificates. 

However, the Garn-St. Germain 

Depository Institutions Act of 1982,12

among other effects, made all industrial 

banks eligible for Federal deposit 

insurance. This expanded eligibility for 

Federal deposit insurance brought 

industrial banks under the supervision 

of both a State authority and the FDIC.13

The chartering States gradually 

expanded the powers of their industrial 

banks so that today industrial banks 

generally have the same commercial and 

consumer lending powers as 

commercial banks. 

Under the FDI Act, industrial banks 

are ‘‘State banks’’ 14 and all of the 

existing FDIC-insured industrial banks 

are ‘‘State nonmember banks.’’ 15 As a 

result, the FDIC is the appropriate 

Federal banking agency for industrial 

banks.16 Each industrial bank is also 

regulated by its respective State 

chartering authority. The FDIC generally 

exercises the same supervisory and 

regulatory authority over industrial 

banks as it does over other State 

nonmember banks. 

B. Industrial Bank Exclusion Under the 

BHCA 

In 1987, Congress enacted the CEBA, 

which exempted industrial banks from 

the definition of ‘‘bank’’ in the BHCA. 

As a result, parent companies that 

control industrial banks are not BHCs 

under the BHCA and are not subject to 

the BHCA’s activities restrictions or FRB 

supervision and regulation. The 

industrial bank exception in the BHCA 

therefore allows for commercial firms to 

own or control a bank. By contrast, 

BHCs and savings and loan holding 

companies (SLHCs) are subject to 

Federal consolidated supervision by the 

FRB and are generally prohibited from 

engaging in commercial activities.17

More specifically, the CEBA redefined 

the term ‘‘bank’’ in the BHCA to 

include: (1) Any FDIC-insured 

institution, and (2) any other institution 

that accepts demand or checkable 

deposit accounts and is engaged in the 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10705 

18 12 U.S.C. 1841(c)(1). 19Regulation D, 12 CFR part 204, implements the 

reserve requirements of section 19 of the Federal 

Reserve Act and defines a demand deposit as a 

deposit that is payable on demand, or issued with 

an original maturity or required notice period of 

less than seven days, or a deposit representing 

funds for which the depository institution does not 

reserve the right to require at least seven days’ 

written notice of an intended withdrawal. Demand 

deposits may be in the form of (i) checking 

accounts; (ii) certified, cashier’s, teller’s, and 

officer’s checks; and (iii) traveler’s checks and 

money orders that are primary obligations of the 

issuing institution. Other forms of accounts may 

also meet the definition of ‘‘demand deposit.’’ See 

12 CFR 204.2(b)(1). 

20 12 U.S.C. 1841(c)(2)(H). 

21Colorado was also grandfathered but it has no 

active industrial banks and has since repealed its 

industrial bank statute. 

22A NOW account is an interest-earning bank 

account whereby the owner may write drafts against 

the money held on deposit. NOW accounts were 

developed when certain financial institutions were 

prohibited from paying interest on demand 

deposits. The prohibition on paying interest on 

demand deposits was lifted when the FRB repealed 

its Regulation Q, effective July 21, 2011. See 76 FR 

42015 (July 18, 2011). Many provisions of the 

repealed Regulation Q were transferred to the FRB’s 

Regulation D. 

23 12 U.S.C. 1832(a). Only certain types of 

customers may maintain deposits in a NOW 

account. 12 U.S.C. 1832(a)(2). 

24Most of the growth during this period is 

attributable to financial services firms that 

controlled industrial banks offering sweep deposit 

programs to provide Federal deposit insurance for 

customers’ free cash balances and to American 

Express moving its credit card operations from its 

Delaware-chartered credit card bank to its Utahchartered industrial bank. 

25 During this time period, the FDIC received 57 

applications for Federal deposit insurance for 

industrial banks, 53 of which were acted on. Also 

during this time period, 21 industrial banks ceased 

to operate due to mergers, conversions, voluntary 

liquidations, and one failure (Southern Pacific 

Bank, Torrance, CA, failed in 2003). 

26Of the 58 industrial banks existing at this time, 

45 were chartered in Utah and California. The 

remaining industrial banks were chartered in 

Colorado, Hawaii, Minnesota, and Nevada. 

27Of the 23 industrial banks existing as of June 

30, 2020, 14 were chartered in Utah, four in 

Nevada, three in California, one in Hawaii, and one 

in Minnesota. An additional industrial bank, Nelnet 

Bank, began operations in November of 2020. 

Square Financial was approved in March and has 

not opened for business. 

28Security Savings Bank, Henderson, Nevada, 

failed in February 2009, and Advanta Bank 

Corporation, Draper, Utah, failed in March 2010. 

29 In each case, the institution pursued a 

voluntary transaction that led to termination of the 

respective institution’s industrial bank charter. One 

institution converted to a commercial bank charter 

and continues to operate, one merged and the 

resultant bank continues to operate, and two 

terminated deposit insurance following voluntary 

liquidations. Such transactions generally result 

from proprietary strategic determinations by the 

institutions and their parent companies or 

investors. 

30 In March of 2020, the FDIC approved the 

deposit insurance applications of Nelnet Bank and 

Square Financial. Square Financial has not yet 

commenced operations. 

31 Decisions to withdraw an application are made 

at the discretion of the organizers and can be 

attributed to a variety of reasons. In some cases, an 

application is withdrawn and then refiled after 

changes are incorporated into the proposal. In such 

cases, the new application is reviewed by the FDIC 

without prejudice. In other cases, the applicant 

may, for strategic reasons, determine that pursuing 

an insured industrial bank charter is not in the 

organizers’ best interests. 

business of making commercial loans.18

This change effectively closed the socalled ‘‘nonbank bank’’ exception 

implicit in the prior BHCA definition of 

‘‘bank.’’ The CEBA created explicit 

exceptions from this definition for 

certain categories of federally insured 

institutions, including industrial banks, 

credit card banks, and limited purpose 

trust companies. The exclusions from 

the definition of the term ‘‘bank’’ 

created in 1987 by the CEBA remain in 

effect today. To be eligible for the CEBA 

exception from the BHCA definition of 

‘‘bank,’’ an industrial bank must have 

received a charter from one of the 

limited number of States eligible to 

issue industrial bank charters, and the 

law of the chartering State must have 

required Federal deposit insurance as of 

March 5, 1987. In addition, an industrial 

bank must meet one of the following 

criteria: (i) Not accept demand 

deposits,19 (ii) have total assets of less 

than $100 million, or (iii) have been 

acquired prior to August 10, 1987.20

Industrial banks are currently 

chartered in California, Hawaii, 

Minnesota, Nevada, and Utah. Under 

the CEBA, these States were permitted 

to grandfather existing industrial banks 

and continue to charter new industrial 

banks.21 Generally, industrial banks 

offer limited deposit products, a full 

range of commercial and consumer 

loans, and other banking services. 

Although some industrial banks that 

have total assets of less than $100 

million accept demand deposits, most 

industrial banks do not offer demand 

deposits. Negotiable order of 

withdrawal (NOW) accounts 22 may be 

offered by industrial banks.23 Industrial 

banks have branching rights, subject to 

certain State law constraints. 

C. Industry Profile 

The industrial bank industry has 

evolved since the enactment of the 

CEBA. The industry experienced 

significant asset growth between 1987 

and 2006 when total assets held by 

industrial banks grew from $4.2 billion 

to $213 billion.24 From 2000 to 2006, 24 

industrial banks became insured.25 As 

of January 30, 2007, there were 58 

insured industrial banks with $177 

billion in aggregate total assets.26 The 

ownership structure and business 

models of industrial banks evolved as 

industrial banks were acquired or 

formed by a variety of commercial firms, 

including, among others, BMW, Target, 

Pitney Bowes, and Harley Davidson. For 

instance, certain companies established 

industrial banks, in part, to support the 

sale of the manufactured products (e.g. 

automobiles) or other services, whereas 

certain retailers established industrial 

banks to issue general purpose credit 

cards. In addition, certain financial 

companies also formed or acquired 

industrial banks to provide access to 

Federal deposit insurance for brokerage 

customers’ cash management account 

balances. The cash balances their 

customers maintain with the securities 

affiliate are swept into insured, interestbearing accounts at the industrial bank 

subsidiary, thereby providing the 

brokerage customers with FDIC-insured 

deposits during the period of time that 

cash is held for future investment. 

Since 2007, the industrial bank 

industry has experienced contraction 

both in terms of the number of 

institutions and aggregate total assets. 

As of September 30, 2020, there were 23 

industrial banks 27 with $173 billion in 

aggregate total assets. Four industrial 

banks reported total assets of $10 billion 

or more; ten industrial banks reported 

total assets of $1 billion or more but less 

than $10 billion. The industrial bank 

sector today includes a diverse group of 

insured financial institutions operating 

a variety of business models. A 

significant number of the existing 

industrial banks support the commercial 

or specialty finance operations of their 

parent company and are funded through 

non-core sources. 

The reduction in the number of 

industrial banks from 2007 to 2020 was 

due to a variety of factors, including 

mergers, conversions, voluntary 

liquidations, and the failure of two 

small institutions.28 For business, 

marketplace, or strategic reasons, 

several industrial banks converted to 

commercial banks and thus became 

‘‘banks’’ under the BHCA. Four 

industrial banks were approved in 2007 

and 2008; however, none of those 

institutions exist today.29 Moratoria 

imposed by the FDIC and Congress (as 

discussed below) were also a factor. 

Since the beginning of 2017, the FDIC 

has received 12 Federal deposit 

insurance applications related to 

proposed industrial banks. Of those, two 

have been approved,30 eight have been 

withdrawn, and two are pending.31 The 

FDIC anticipates potential continued 

interest in the establishment of 

industrial banks, particularly with 

regard to proposed institutions that plan 

to pursue a specialty or limited purpose 

business model. 

10706 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

32See 12 U.S.C. 1828(j)(1)(A). 33For purposes of section 106 of the BHCA, an 

industrial bank is treated as a ‘‘bank’’ and is subject 

to the anti-tying restrictions therein. See 12 U.S.C. 

1843(f)(1). 34 12 U.S.C. 1820(b)(4). 35Public Law 111–203, 124 Stat. 1376 (July 21, 

2010). 

36 12 U.S.C. 1831o–1(b). 

37See 12 U.S.C. 1831o–1(d). 

38When the FDIC has required a CALMA, the 

capital levels required generally have exceeded the 

average thresholds required of community banks, 

due to the risks involved in the business plans of 

many industrial banks. 

39See 12 U.S.C. 1818 and 1831aa. 40See OIG Evaluation 04–048, The Division of 

Supervision and Consumer Protection’s Approach 

for Supervising Limited-Charter Depository 

Institutions (2004), available at https://

www.fdicig.gov/reports04/04-048.pdf; OIG 

Evaluation 06–014, The FDIC’s Industrial Loan 

Company Deposit Insurance Application Process 

(2006), available at https://www.fdicig.gov/ 

reports06/06-014.pdf; U.S. Gov’t Accountability 

Office, GAO–05–621, Industrial Loan Corporations: 

Recent Asset Growth and Commercial Interest 

Highlight Differences in Regulatory Authority (Sept. 

2005), available at https://www.gao.gov/products/ 

GAO-05-621(GAO-05-621). 

41 GAO–05–621. 

42See Moratorium on Certain Industrial Loan 

Company Applications and Notices, 71 FR 43482 

(Aug. 1, 2006). 

43 Id. at 43483. 

44See Industrial Loan Companies and Industrial 

Banks, 71 FR 49456 (Aug. 23, 2006). The Notice 

included questions concerning the current risk 

D. Supervision

Because industrial banks are insured

State nonmember banks, they are 

subject to the FDIC’s Rules and 

Regulations, as well as other provisions 

of law, including restrictions under the 

Federal Reserve Act governing 

transactions with affiliates,32 anti-tying 

provisions of the BHCA,33 and insider 

lending regulations. Industrial banks are 

also subject to regular examination, 

including examinations focused on 

safety and soundness, Bank Secrecy Act 

and Anti-Money Laundering 

compliance, consumer protection 

including Community Reinvestment Act 

(CRA) compliance, information 

technology (IT), and trust services, as 

appropriate. Pursuant to section 10(b)(4) 

of the FDI Act, the FDIC has the 

authority to examine the affairs of any 

industrial bank affiliate, including the 

parent company, as may be necessary to 

determine the relationship between the 

institution and the affiliate, and the 

effect of such relationship on the 

depository institution.34

In addition, under section 38A of the 

FDI Act, as amended by the Dodd Frank 

Wall Street Reform and Consumer 

Protection Act (Dodd-Frank Act),35 the 

FDIC is required to impose a 

requirement on companies that directly 

or indirectly own or control an 

industrial bank to serve as a source of 

financial strength for that institution.36

In addition, subsection (d) of section 

38A of the FDI Act provides explicit 

statutory authority for the appropriate 

Federal banking agency to require 

reports from a controlling company to 

assess the ability of the company to 

comply with the source of strength 

requirement, and to enforce compliance 

by such company.37

Consistent with section 38A and other 

authorities under the FDI Act, the FDIC 

has historically required capital and 

liquidity maintenance agreements 

(CALMAs) 38 and other written 

agreements between the FDIC and 

controlling parties of industrial banks as 

well as the imposition of prudential 

conditions when approving or nonobjecting to certain filings involving an 

industrial bank. Such written 

agreements provide required 

commitments for the parent company to 

provide financial resources and a means 

for the FDIC to pursue formal 

enforcement action under sections 8 and 

50 of the FDI Act 39 should a party fail 

to comply with the agreements. 

E. GAO and OIG Reports

Beginning in 2004, the FDIC Office of

Inspector General (OIG) conducted two 

evaluations and the Government 

Accountability Office (GAO) conducted 

a statutorily mandated study regarding 

the FDIC’s supervision of industrial 

banks, including its use of prudential 

conditions.40 An OIG evaluation 

published in 2004 focused on whether 

industrial banks posed greater risk to 

the DIF than other financial institutions, 

and reviewed the FDIC’s supervisory 

approach in identifying and mitigating 

material risks posed to those institutions 

by their parent companies. A July 2006 

OIG evaluation reviewed the FDIC’s 

process for reviewing and approving 

industrial bank applications for deposit 

insurance and monitoring conditions 

imposed with respect to industrial bank 

business plans. A September 2005 GAO 

study cited several risks posed to banks 

operating in a holding company 

structure, including adverse 

intercompany transactions, operations 

risk, and reputation risk. The GAO 

study also discussed concerns about the 

FDIC’s ability to protect an industrial 

bank from those risks as effectively as 

the Federal consolidated supervisory 

approach under the BHCA.41

These reports acknowledged the 

FDIC’s supervisory actions to ensure the 

independence and safety and soundness 

of commercially owned industrial 

banks. The reports further 

acknowledged the FDIC’s authorities to 

protect an industrial bank from the risks 

posed by its parent company and 

affiliates. These authorities include the 

FDIC’s authority to conduct 

examinations, impose conditions on and 

enter into written agreements with an 

industrial bank parent company, 

terminate an industrial bank’s deposit 

insurance, enter into written agreements 

during the acquisition of an insured 

depository institution, and to pursue 

enforcement actions. 

F. FDIC Moratorium and Other Agency

Actions

In 2005, Wal-Mart Bank’s application 

for Federal deposit insurance drew 

extensive public attention to the 

industrial bank charter. The FDIC 

received more than 13,800 comment 

letters regarding Wal-Mart’s proposal. 

Most of the commenters were opposed 

to the application. Commenters also 

raised broader concerns about industrial 

banks, including the risk posed to the 

DIF by industrial banks owned by 

parent companies that are not subject to 

Federal consolidated supervision. 

Similar concerns were expressed by 

witnesses during three days of public 

hearings held by the FDIC in the spring 

of 2006 concerning the Wal-Mart 

application. Also in 2006, The Home 

Depot filed a change in control notice in 

connection with its proposed 

acquisition of EnerBank, a Utahchartered industrial bank. The FDIC 

received approximately 830 comment 

letters regarding the notice, almost all of 

which expressed opposition to the 

proposed acquisition. Ultimately, the 

Wal-Mart application and The Home 

Depot’s notice were withdrawn. 

To evaluate the concerns and issues 

raised with respect to the Wal-Mart and 

The Home Depot filings and industrial 

banks generally, on July 28, 2006, the 

FDIC imposed a six-month moratorium 

on FDIC action with respect to deposit 

insurance applications and change in 

control notices involving industrial 

banks.42 The FDIC suspended agency 

action in order to further evaluate (i) 

industry developments; (ii) the various 

issues, facts, and arguments raised with 

respect to the industrial bank industry; 

(iii) whether there were emerging safety

and soundness issues or policy issues

involving industrial banks or other risks

to the DIF; and (iv) whether statutory,

regulatory, or policy changes should be

made in the FDIC’s oversight of

industrial banks in order to protect the

DIF or important Congressional

objectives.43

In connection with this moratorium, 

on August 23, 2006, the FDIC published 

a notice and request for comment on a 

wide range of issues concerning 

industrial banks.44 The FDIC received 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10707 

profile of the industrial bank industry, safety and 

soundness issues uniquely associated with 

ownership of such institutions, the FDIC’s practice 

with respect to evaluating and making 

determinations on industrial bank applications and 

notices, whether a distinction should be made 

when the industrial bank is owned by an entity that 

is commercial in nature, and the adequacy of the 

FDIC’s supervisory approach with respect to 

industrial banks. 

45Approximately 12,485 comments on the notice 

were generated either supporting or opposing the 

proposed industrial bank to be owned by Wal-Mart 

or the proposed acquisition of Enerbank, also an 

industrial bank, by The Home Depot. The remaining 

comment letters were sent by individuals, law 

firms, community banks, financial services trade 

associations, existing and proposed industrial banks 

or their parent companies, the Conference of State 

Bank Supervisors, and two members of Congress. 

46See Moratorium on Certain Industrial Bank 

Applications and Notices, 72 FR 5290 (Feb. 5, 

2007). 

47See Industrial Bank Subsidiaries of Financial 

Companies 72 FR 5217 (Feb. 5, 2007); see also 

https://www.fdic.gov/news/news/press/2007/ 

pr07007.html. 

48See 12 U.S.C. 1820(b)(4). 

49See Crisis and Response, An FDIC History, 

2008–2013, available at https://www.fdic.gov/bank/ 

historical/crisis/. The financial crisis in 2008 and 

2009 threatened large financial institutions of all 

kinds, both inside and outside the traditional 

banking system, and thus endangered the financial 

system itself. Second, a banking crisis, 

accompanied by a swiftly increasing number of 

both troubled and failed insured depository 

institutions, began in 2008 and continued until 

2013. 

50See 12 U.S.C. 1831o–1. 

51 12 U.S.C. 1831o–1(b). This amendment also 

requires the appropriate Federal banking agency for 

a BHC or SLHC to require the BHC or SLHC to serve 

as a source of financial strength for any subsidiary 

of the BHC or SLHC that is a depository institution. 

12 U.S.C. 1831o–1(a). 

52Public Law 111–203, title VI, section 603(a), 

124 Stat. 1597 (2010). Section 603(a) also imposed 

a moratorium on FDIC action on deposit insurance 

applications by credit card banks and trust banks 

owned or controlled by a commercial firm. The 

Dodd-Frank Act defined a ‘‘commercial firm’’ for 

this purpose as a company that derives less than 15 

percent of its annual gross revenues from activities 

that are financial in nature, as defined in section 

4(k) of the BHCA (12 U.S.C. 1843(k)), or from 

ownership or control of depository institutions. 

53 Id. 

54See U.S. Government Accountability Office, 

GAO–12–160, Characteristics and Regulation of 

Exempt Institutions and the Implications of 

Removing the Exemptions (Jan. 2012), available at 

https://www.gao.gov/products/GAO-12-160. 

over 12,600 comment letters in response 

to the notice.45 The substantive 

comments related to the risk profile of 

the industrial bank industry, concerns 

over the mixing of banking and 

commerce, the FDIC’s practices when 

making determinations in industrial 

bank applications and notices, whether 

commercial ownership of industrial 

banks should be allowed, and perceived 

needs for supervisory change. 

The moratorium was effective through 

January 31, 2007, at which time the 

FDIC extended the moratorium one 

additional year for deposit insurance 

applications and change in control 

notices for industrial banks that would 

be owned by commercial companies.46

The moratorium was not applicable to 

industrial banks to be owned by 

financial companies. 

G. 2007 Notice of Proposed Rulemaking 

(NPR)—Part 354 

In addition to extending the 

moratorium for one year with respect to 

commercial parent companies, the FDIC 

published for comment a proposed rule 

designed to strengthen the FDIC’s 

consideration of applications and 

notices for industrial banks to be 

controlled by financial companies not 

subject to Federal consolidated bank 

supervision, identified as part 354 (2007 

NPR).47 The 2007 NPR would have 

imposed requirements on applications 

for deposit insurance, merger 

applications, and notices for change in 

control that would result in an 

industrial bank becoming a subsidiary 

of a company engaged solely in 

financial activities that is not subject to 

Federal consolidated bank supervision 

by either the FRB or the then-existing 

Office of Thrift Supervision (OTS). The 

rule would have established safeguards 

to assess the parent company’s 

continuing ability to serve as a source of 

strength for the insured industrial bank, 

and to identify and respond to problems 

or risks that may develop in the 

company or its subsidiaries. 

Similar to this final rule, the 2007 

NPR would have required a parent 

company to enter into a written 

agreement with the FDIC containing 

required commitments related to the 

examination of, and reporting and 

recordkeeping by, the industrial bank, 

the parent company, and its affiliates. 

The majority of commenters did not 

oppose these requirements, noting the 

FDIC already has authority to collect 

such information under section 10(b)(4) 

of the FDI Act.48 Many commenters, 

however, objected to limiting parent 

company representation on the 

industrial bank subsidiary’s board of 

directors to 25 percent, and argued 

instead for requiring that a majority of 

directors be independent. The majority 

of commenters stated that the FDIC 

should not impose capital requirement 

commitments as contemplated in the 

2007 NPR on commercial parents of 

industrial banks because a one-size-fits 

all regulatory approach to capital 

requirements would not be appropriate 

due to the idiosyncratic business 

models and operations of such parent 

companies. 

Though the 2007 NPR did not affect 

industrial banks that would be 

controlled by companies engaged in 

commercial activities, several 

commenters addressed the distinction 

between industrial banks owned by 

financial and nonfinancial companies. 

Two commenters contended that the 

FDIC lacked authority to draw a 

distinction between financial and 

nonfinancial industrial bank owners 

absent a change in law. Several 

commenters argued that drawing such a 

distinction would essentially repeal the 

exception of industrial banks from the 

definition of ‘‘bank’’ in the BHCA. There 

was little consensus among commenters 

as to whether commercially owned 

industrial banks pose unique safety and 

soundness issues. 

The FDIC did not finalize the 2007 

NPR. Although multiple factors 

contributed to the FDIC’s decision to not 

advance a final rule, the most significant 

factor was the onset of two 

interconnected and overlapping crises: 

the financial crisis of 2008–09, and the 

banking crisis from 2008 to 2013.49 With 

the advent of the crises, applications to 

form de novo insured institutions, or to 

acquire existing institutions, declined 

significantly, including with respect to 

industrial banks. 

H. Dodd-Frank Act and Industrial Banks 

As discussed above and in reaction to 

the 2008–09 financial crisis, the DoddFrank Act amended the FDI Act by 

adding section 38A.50 Under section 

38A, for any insured depository 

institution that is not a subsidiary of a 

BHC or SLHC, the appropriate Federal 

banking agency for the insured 

depository institution must require any 

company that directly or indirectly 

controls such institution to serve as a 

source of financial strength for the 

institution.51

Through the Dodd-Frank Act, 

Congress also imposed a three-year 

moratorium on the FDIC’s approval of 

deposit insurance applications for 

industrial banks that were owned or 

controlled by a commercial firm.52 The 

Dodd-Frank Act moratorium also 

applied to the FDIC’s non-objection to 

any change in control of an industrial 

bank that would place the institution 

under the control of a commercial 

firm.53 The moratorium expired in July 

2013, without any further action by 

Congress. 

In addition, the Dodd-Frank Act 

directed the GAO to conduct a study of 

the implications of removing all 

exceptions from the definition of 

‘‘bank’’ under the BHCA. The GAO 

report was published in January of 

2012.54 This report examined the 

number and general characteristics of 

10708 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

55 Id. at 13. 

56The GAO did not recommend repeal of the 

exemption. 

57 85 FR 17771 (Mar. 31, 2020). 58See proposed § 354.4(a)(1) through (8). 

59 ‘‘[T]he Corporation . . . shall have power . . . 

[t]o prescribe by its Board of Directors such rules 

and regulations as it may deem necessary to carry 

out the provisions of this chapter or of any other 

law which it has the responsibility of administering 

or enforcing (except to the extent that authority to 

issue such rules and regulations has been expressly 

and exclusively granted to any other regulatory 

agency).’’ 12 U.S.C. 1819(a)(Tenth). 

60See 12 U.S.C. 1815, 1818(a). 

61Such factors are the financial history and 

condition of the depository institution, the 

adequacy of the depository institution’s capital 

structure, the future earnings prospects of the 

depository institution, the general character and 

fitness of the management of the depository 

institution, the risk presented by such depository 

institution to the DIF, the convenience and needs 

of the community to be served by such depository 

institution, and whether the depository institution’s 

corporate powers are consistent with the purposes 

of the FDI Act. See 12 U.S.C. 1816. 

62See 12 U.S.C. 1817(j), 1828(c), and 1828(d). 

63 Given the disruptions caused by the COVID–19 

global pandemic, the FDIC announced on May 27, 

exempt institutions, the Federal 

regulatory system for such institutions, 

and potential implications of subjecting 

the holding companies of such 

institutions to BHCA requirements. The 

GAO report noted that the industrial 

bank industry experienced significant 

asset growth in the 2000s and, during 

this time, the profile of industrial banks 

changed: Rather than representing a 

class of small, limited-purpose 

institutions, industrial banks became a 

diverse group of insured institutions 

with a variety of business lines.55

Ultimately, the GAO found that Federal 

regulation of the exempt institutions’ 

parent companies varied, noting that 

FDIC officials interviewed in connection 

with the study indicated that 

supervision of exempt institutions was 

adequate, but also noted the added 

benefit of Federal consolidated 

supervision. Finally, data examined by 

the GAO suggested that removing the 

BHCA exceptions would likely have a 

limited impact on the overall credit 

market, chiefly because the overall 

market share of exempt institutions was, 

at the time of the study, small.56

III. The Proposed Rule 

On March 31, 2020, the FDIC 

published a notice of proposed 

rulemaking (NPR or proposal) to 

establish a supervisory framework for 

industrial banks and their parent 

companies that are not subject to 

Federal consolidated supervision.57 The 

proposed rule required certain 

conditions, commitments, and 

restrictions for each deposit insurance 

application approval, non-objection to a 

change in control notice, and merger 

application approval that would result 

in an industrial bank becoming a 

subsidiary of a company not subject to 

consolidated supervision by the FRB. 

The proposal required such a Covered 

Company to enter into one or more 

written agreements with the FDIC and 

the industrial bank subsidiary. The 

commitments included: 

• Furnishing an initial listing, with 

annual updates, of the Covered 

Company’s subsidiaries. 

• Consenting to FDIC examination of 

the Covered Company and its 

subsidiaries. 

• Submitting an annual report on the 

Covered Company and its subsidiaries, 

and such other reports as requested. 

• Maintaining such records as the 

FDIC deemed necessary. 

• Causing an independent annual 

audit of each industrial bank. 

• Limiting the Covered Company’s 

representation on the industrial bank’s 

board of directors or managers (board), 

as the case may be, to 25 percent. 

• Maintaining the industrial bank’s 

capital and liquidity at such levels as 

deemed appropriate and take other 

action necessary to provide the 

industrial bank with a resource for 

additional capital or liquidity. 

• Entering into a tax allocation 

agreement.58

The proposal also set forth the FDIC’s 

authority to require, as an additional 

commitment, a contingency plan that, 

among other items, provides a strategy 

for the orderly disposition of the 

industrial bank without the need for the 

appointment of a receiver or 

conservator. 

Recently, a number of companies 

have considered options for providing 

financial products and services by 

establishing an industrial bank 

subsidiary. Many companies have 

publicly noted the benefits of deposit 

insurance and establishing a deposittaking institution. Although many 

interested parties operate business 

models focused on traditional 

community bank products and services, 

others operate unique business models, 

some of which are focused on 

innovative technologies and strategies, 

including newer business models 

employed by fintech firms that utilize 

novel or unproven products or 

processes. 

Some of the companies recently 

exploring an industrial bank charter 

engage in commercial activities or have 

diversified business operations and 

activities that would not otherwise be 

permissible for BHCs under the BHCA 

and applicable regulations. Given the 

continuing interest in the establishment 

of industrial banks, particularly with 

regard to proposed institutions that plan 

to implement specialty or limited 

purpose business models, including 

those focused on innovative 

technologies, the FDIC believes a rule is 

appropriate to provide necessary 

transparency for market participants. 

Through this final rule, the FDIC is 

formalizing its framework to supervise 

industrial banks and mitigate risk to the 

DIF that may otherwise be presented in 

the absence of Federal consolidated 

supervision of an industrial bank and its 

parent company. 

The FDIC has the authority to issue 

rules to carry out the provisions of the 

FDI Act,59 including rules to ensure the 

safety and soundness of industrial banks 

and to protect the DIF. Moreover, as the 

only agency with the power to grant or 

terminate deposit insurance, the FDIC 

has a unique responsibility for the safety 

and soundness of all insured 

institutions.60 In granting deposit 

insurance, the FDIC must consider the 

factors in section 6 of the FDI Act; 61

these factors generally focus on the 

safety and soundness of the proposed 

institution and any risk it may pose to 

the DIF. The FDIC is also authorized to 

permit or deny various transactions by 

State nonmember banks, including 

merger and change in bank control 

transactions, based to a large extent on 

safety and soundness considerations 

and on its assessment of the risk to the 

DIF.62

The FDIC has the responsibility to 

consider filings based on statutory 

criteria and make decisions. Following 

the publication of the proposed rule, the 

FDIC approved two deposit insurance 

applications, by Square Financial and 

Nelnet, to create de novo industrial 

banks, the first such approvals since 

2008. The FDIC determined that the 

applications satisfied the seven 

statutory factors under section 6 of the 

FDI Act, and the FDIC’s approval of 

deposit insurance for these industrial 

banks fulfilled the Agency’s statutory 

responsibility. As part of both 

approvals, the FDIC required the 

industrial banks and their parent 

companies to enter into CALMAs and 

Parent Company Agreements to protect 

the industrial bank and address 

potential risks to the DIF. 

The FDIC invited comment on all 

aspects of the March 2020 proposal, 

including questions posed by the 

Agency. The comment period for the 

proposed rule ended on July 1, 2020.63

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10709 

2020, that it would extend the comment period 

from June 1, 2020, to July 1, 2020, to allow 

interested parties additional time to analyze the 

proposal and prepare comments. 

64On March 15, 2020, bank trade groups, and 

consumer and civil rights groups sent a letter to the 

FDIC urging the agency not to approve deposit 

insurance applications submitted by industrial 

banks until the NPR is finalized. See https://

bpi.com/consumer-civil-rights-groups-industryurge-fdic-halt-approval-of-industrial-bankapplications-close-ilc-loopholes-first/. On July 29, 

2020, some of the same groups sent a letter to 

Congress requesting a three-year moratorium on 

industrial bank licensing applications. See https:// 

bpi.com/banking-and-consumer-groups-call-oncongress-to-close-ilc-loophole/. 

65See Federal Reserve Bank of San Francisco, 

Economic Letter 1998–21, The Separation of 

Banking and Commerce (July 3, 1998), available at 

https://www.frbsf.org/economic-research/ 

publications/economic-letter/1998/july/separationbanking-commerce/. 

66The legislative history of the CEBA offers no 

explanation of why this exception was adopted. 

While the industrial bank exception was included 

in the Senate version of the Act, the House version 

omitted it. The Conference report does not shed 

much light: 

INDUSTRIAL LOAN COMPANY EXEMPTION 

SECTION 2(C) (2) (H) OF THE BANK HOLDING 

COMPANY ACT 

The Senate amendment exempts from the 

definition of ‘‘bank’’ certain industrial banks; 

industrial loan companies, or other similar 

institutions. The House recedes to the Senate. 

Conference Report to accompany H.R. 27— 

Competitive Equality Banking Act of 1987 (July 31, 

1987), at 121. 

67 12 U.S.C. 371c(a)(1), 371c–1(a)(1); see also 12 

U.S.C. 1828(j). 

68 12 U.S.C. 371c–1(b). 

69 12 U.S.C. 371c(a)(4). 

The FDIC received 29 comments from 

industry group/trade associations, 

insured depository institutions, 

consumer and public interest groups, 

State banking regulator(s), law firms, a 

member of Congress, academics, and 

other interested parties.64 In addition, 

the FDIC received three letters related to 

the subject matter considered in the 

proposed rule prior to the formal 

comment period. The FDIC is now 

finalizing the proposed rule, with 

changes based on public comments, as 

described in detail below. 

IV. Discussion of General Comments 

and Final Rule 

A. General Comments 

Many commenters were supportive of 

the FDIC’s overall effort to provide 

certainty, clarity, and transparency to 

the supervisory framework for the 

parent companies and affiliates of 

industrial banks. A number of 

commenters were generally supportive 

of the industrial bank charter citing the 

benefits of charter choice, increased 

competition, and the provision of 

financial services. These commenters 

asserted the charter poses no increased 

risk to the DIF. In their view, the parent 

companies serve as an important source 

of strength and governance for the 

subsidiary industrial bank. They 

asserted that in times of stress, a 

diversified parent may be in a better 

position to provide capital support to a 

bank subsidiary than a BHC whose 

assets consist almost entirely of the 

bank subsidiary. These commenters also 

argued that an industrial bank benefits 

from its business relationship with the 

parent, for example, through marketing 

support and fewer start-up costs. State 

regulators stated that the joint 

supervisory approach to supervising 

industrial banks with the FDIC has been 

effective, and industrial banks with 

commercial parents do not present an 

outsized safety and soundness risk. 

Comments submitted by bank trade 

associations, consumer groups, and 

academics were generally critical of the 

proposed rule and expressed a range of 

concerns, which are discussed below. 

1. Banking and Commerce 

Commenters’ criticism of the 

industrial bank charter, and by 

extension the proposed rule, is focused, 

in part, on the mixing of banking and 

commerce through the commercial 

ownership of an industrial bank. The 

main argument is that commercial 

ownership of an industrial bank 

disregards the policy of separation of 

banking and commerce embodied in the 

BHCA 65 and raises risk to the DIF as a 

result of a lack of Federal consolidated 

supervision over the commercial parent 

company. 

Although Federal banking regulation 

has historically advanced a policy of 

separating banking and commerce, there 

is an express Congressional exception of 

industrial banks from the BHCA’s 

restrictions on commercial affiliations.66

The CEBA exception does not limit 

eligible parent companies to those 

engaged in financial activities. The 

FDIC’s responsibility is to implement 

the law as it exists today. Whether 

commercial firms should continue to be 

able to own industrial banks is a policy 

decision for Congress to make. 

Some commenters requested that the 

FDIC impose a new moratorium on 

deposit insurance applications 

involving industrial banks to allow for 

legislative action. Certain commenters 

argued that a moratorium, or a delay in 

the rulemaking more generally, was 

important in light of the current 

economic stress and uncertainty caused 

by the COVID–19 pandemic. The 

purpose of this final rule is to ensure 

adequate oversight of industrial banks 

owned by financial and commercial 

companies. Additional moratoria or 

delays in processing and considering 

applications are outside the scope of 

this rulemaking and would be 

inconsistent with the express 

Congressional exception of industrial 

banks from the BHCA’s restrictions on 

commercial affiliations and the FDIC’s 

statutory obligations to receive and 

process applications related to 

industrial banks. 

These commenters also argued that 

allowing commercial firms and 

industrial banks to combine could 

potentially lead to conflicts of interest 

in the lending process and undue 

concentrations of economic power— 

concerns they contend underlie the 

general prohibition against the mixing 

of commerce and banking in the BHCA. 

As noted above, the decision to allow 

commercial firms to own industrial 

banks was a decision made by Congress. 

Industrial banks are restricted from 

making favorable loans to their affiliates 

by sections 23A and 23B of the Federal 

Reserve Act, which quantitatively and 

qualitatively limit transactions between 

an industrial bank and its affiliates.67

Furthermore, section 23B of the Federal 

Reserve Act requires that any 

transaction between a bank and its 

affiliates must be ‘‘on terms and under 

circumstances, including credit 

standards, that are substantially the 

same, or at least as favorable to [the] 

bank or its subsidiary as those 

prevailing at the time for comparable 

transactions’’ with unaffiliated 

companies.68 All covered transactions 

between an industrial bank and its 

affiliates must be on terms and 

conditions that are consistent with safe 

and sound banking practices.69

Commenters’ competition concerns 

were based on the possibility that large 

commercial or technology firms will 

acquire industrial banks and lead to 

commercial and financial conglomerates 

with concentrated and excessive 

economic power. These commenters 

were concerned that the FDIC will not 

adequately consider the anti-trust 

implications of commercial and 

financial conglomerates. The FDIC 

recognizes that there is a possibility that 

large and complex companies may seek 

to acquire an industrial bank as 

emerging technologies and other trends 

are leading to changes in the provision 

of banking services. The FDIC has 

discretion to evaluate the competitive 

effects of such proposals when 

considering a deposit insurance 

application, specifically the statutory 

factors of the risk to the DIF and the 

convenience and needs of the 

community to be served, in order to 

ensure the market for the provision of 

10710 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

70As part of its considerations, the FDIC may also 

seek the views of other Federal agencies. 

71See 12 U.S.C. 1817(j)(7)(A), (B); 1828(c)(5). 

72Financial Services Modernization Act of 1999, 

Public Law 106–102, 113 Stat. 1338 (1999). 

73 12 U.S.C. 1831o–1(b). 

74See 12 U.S.C. 1831o–1(d). 

75See Report to the Congress and the Financial 

Stability Oversight Council Pursuant to Section 620 

of the Dodd-Frank Act (Sept. 2016). The 2016 joint 

report evaluated the risks of bank activities and 

affiliations, as required by section 620 of the DoddFrank Act. 76See 12 U.S.C. 1820(b) and 1820(b)(4)(A). 

banking services remains competitive 

and safe and sound.70 Moreover, the 

FDIC must consider the anticompetitive 

effects of a transaction when it is 

evaluating a notice under the Change in 

Bank Control Act (CBCA) or an 

application under the Bank Merger 

Act.71 Recognizing that the business 

models proposed by industrial banks are 

evolving (e.g., the increasing interplay 

of services between the bank and its 

nonfinancial affiliates), the FDIC is 

issuing this rule in order to help ensure 

the safety and soundness of industrial 

banks that become subsidiaries of 

Covered Companies. 

2. Lack of Federal Consolidated 

Supervision 

Many commenters that were critical 

of the proposed rule also argued that the 

potential future expansion of banks 

operating under the CEBA exception 

threatens the Federal safety net because 

the FDIC lacks the statutory tools to 

adequately examine and supervise 

industrial banks and their parents and 

affiliates. These commenters noted for 

instance the many ecommerce affiliate 

relationships of a large, overseas parent 

company. The FDIC sought comment on 

whether the commitments requiring 

examination and reporting included in 

the proposed rule were the best 

approach to gain transparency and 

identify any potential risk to the 

industrial banks. A number of 

commenters argued that the eight 

commitments in the FDIC’s proposed 

rule ‘‘fail to achieve parity with the 

regime of consolidated supervision 

required for BHCs.’’ Elements they 

viewed as lacking included 

consolidated capital and liquidity 

standards for the Covered Company, 

including both the industrial bank and 

all affiliated entities under common 

ownership, examination for compliance 

with the Volcker Rule requirements, 

sections 23A and 23B, and provisions in 

the Gramm-Leach-Bliley Act (GLBA) 72

on data safeguards and privacy of 

customer information. Such 

commenters also argued that the FDIC 

does not have the authority to conduct 

full-scope examinations across any and 

all affiliates, including the parent 

company, in their own right. Several 

commenters suggested that the FDIC ask 

Congress to transfer the supervision of 

parent companies of industrial banks to 

the FRB to conduct consolidated 

supervision. 

As discussed in the proposed rule, the 

FDIC has both the authority and the 

capacity to effectively regulate 

industrial banks and their parent 

companies, and this rule strengthens the 

FDIC’s supervision. The FDIC uses its 

supervisory authorities to mitigate the 

risks posed to insured depository 

institutions whose parent companies are 

not subject to consolidated supervision. 

In considering applications for deposit 

insurance and mergers, as well as 

change in control notices, the FDIC uses 

prudential conditions, as needed, to 

ensure sufficient autonomy and 

insulation of the insured depository 

institution from its parent and affiliates. 

The FDIC also requires CALMAs, which 

generally exceed the minimum capital 

requirements for traditional community 

banks, and other written agreements 

between the FDIC and controlling 

parties of industrial banks. These 

agreements are enforceable under 

sections 8 and 50 of the FDI Act. In 

addition, under section 38A of the FDI 

Act, the FDIC is required to impose a 

requirement on companies that directly 

or indirectly own or control an 

industrial bank to serve as a source of 

financial strength for that institution.73

Subsection (d) of section 38A of the FDI 

Act also provides explicit statutory 

authority for the appropriate Federal 

banking agency to require reports from 

a controlling company to assess the 

ability of the company to comply with 

the source of strength requirement, and 

to enforce compliance by such 

company.74 These prudential conditions 

and requirements will be embodied in 

written agreements consistent with the 

framework established by this final rule. 

In addition, an important focus of the 

FDIC’s examination and supervision 

program is evaluating and mitigating 

risk to insured depository institutions 

from affiliates. This includes examining 

the insured depository institution for 

compliance with laws and regulations, 

including affiliate transaction limits and 

capital maintenance.75 The examination 

reviews envisioned under this final rule 

provide the basis and opportunity to 

more fully evaluate the institution’s 

affiliate relationships. As noted above, 

most conflict situations affecting banks 

and their affiliates can be mitigated 

through the supervisory process and 

application of the restrictions in 

sections 23A and 23B of the Federal 

Reserve Act and need not pose 

excessive risk to the bank or the banking 

system. 

The rule also strengthens the FDIC 

supervisory framework in the area of 

contingency planning. This rule allows 

the FDIC to impose a contingency plan 

requirement, as needed, which will lead 

the FDIC, as well as the Covered 

Company and its subsidiary industrial 

bank, to a better understanding of the 

interdependencies, operational risks, 

and other circumstances or events that 

could create safety and soundness 

concerns for the insured industrial bank 

and attendant risk to the DIF. When 

imposed, this additional commitment 

will provide for recovery actions that 

address any financial or operational 

stress that may threaten the industrial 

bank. 

Finally, the FDIC’s oversight and 

enforcement power extends to the 

parent or affiliates of any industrial 

bank whose activities affect that bank, 

further protecting the industrial bank 

from risky activities of affiliates.76

The FDIC has not found that 

industrial banks pose unique safety and 

soundness concerns based on the 

activities of the parent organization. 

Industrial banks are subject to all of the 

same restrictions and requirements, 

regulatory oversight, and safety and 

soundness exams as any other kind of 

insured depository institution. As such, 

the risks posed are substantially similar 

to those of all other charter types. A 

number of commenters noted that two 

industrial banks failed during the recent 

financial crisis. While these failed 

institutions were owned by parent 

companies not subject to Federal 

consolidated supervision, the failures 

were not the result of factors related to 

the industrial bank charter, as further 

discussed below. 

Certain commenters also observed 

that several large corporate owners of 

industrial banks experienced stress 

during the 2008–09 financial crisis. In 

some cases, the parent organizations 

ultimately filed bankruptcy, while 

others pursued strategies to resolve the 

stress, including through access to 

government programs intended to 

alleviate the effects of the crisis within 

the financial services sector. These 

programs included the FDIC’s 

Temporary Liquidity Guarantee Program 

(TLGP) and the Troubled Asset Relief 

Program (TARP) administered by the 

Department of the Treasury. Desired 

access to these programs contributed to 

several companies pursuing conversions 

of an industrial bank to a commercial 

bank, which required approval of the 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10711 

77Subtitle A of Title V of the GLBA, captioned 

‘‘Disclosure of Nonpublic Personal Information,’’ 

limits the instances in which a financial institution 

may disclose nonpublic personal information about 

a consumer to nonaffiliated third parties, and 

requires a financial institution to disclose certain 

information sharing practices. ‘‘Nonpublic personal 

information’’ is defined to mean any personally 

identifiable financial information that is provided 

by the consumer to the financial institution; results 

from any transaction with the consumer or service 

performed for the consumer; or is otherwise 

obtained by the financial institution, but which is 

not ‘‘publicly available information.’’ See 15 U.S.C. 

6801–09. 

78See, e.g., 12 CFR part 332, Privacy of Consumer 

Financial Information. 

79The FTC is empowered to seek injunctive relief 

and voluntary consent decrees that can result in 

FTC oversight of a company for a period of up to 

20 years and may carry financial penalties for future 

violations. The Federal banking agencies enforce 

section 5 as to financial institutions under their 

supervision. 

80The CFPB has been active in the privacy area 

and recently issued an advanced notice of proposed 

rulemaking (ANPR) seeking input on the financial 

records access right granted by section 1033 of the 

Dodd-Frank Act pertaining to consumer 

information in the control or possession of 

consumer financial services providers. 85 FR 71003 

(Nov. 6, 2020). 

81For example, the California Consumer Privacy 

Act of 2018 serves as an omnibus law governing 

privacy rights. It was recently amended and 

expanded by the California Privacy Rights Act. 2020 

Cal. Legis. Serv. Prop. 24 (2020). The Massachusetts 

Data Security Regulation includes State-level 

general data protection security requirements. 201 

Mass. Code Regs. 17.00 et seq. The Act to Protect 

the Privacy of Online Consumer Information 

enacted by the Maine legislature is another example 

of a State law governing the privacy of consumer 

information. 35–A M.R.S. section 9301. These 

examples underscore the fact that although a 

uniform Federal law has not been enacted, privacy 

is increasingly in the forefront of the public and 

legislators alike. 

82The concern appears to arise from perceived 

abuses of longstanding statutory authority rather 

than the proposed rule. Congress enacted section 27 

of the FDI Act, 12 U.S.C. 1831d, in 1980, permitting 

State banks to charge interest at the rate permitted 

by the law of the State where the bank is located, 

Continued 

parent company to become a BHC 

subject to regulation and supervision by 

the FRB. 

However, it is important to note that 

each institution or company described 

in the comments was engaged in 

activities permissible for all Federal and 

State banks, BHCs, or financial holding 

companies, as evidenced by the ability 

to gain approval for the conversions to 

commercial banks and BHCs. Further, 

the types and degree of stress were also 

experienced by many other insured 

depository institutions and banking 

companies, some of which also sought 

participation in TLGP and/or TARP, 

failed, or pursued transactions to 

restructure the organization, merge, or 

raise capital to alleviate stress or avert 

failure. As such, the circumstances 

involving the companies highlighted in 

the comments were not dissimilar to 

those facing other banking companies, 

including companies subject to Federal 

consolidated supervision. 

3. Consumer Protection Risks 

Commenters opposed to the proposed 

rule also argued that the growth in 

industrial banks poses broader 

consumer protection risks. They 

asserted that the parent companies of 

industrial banks are not subject to 

Federal financial privacy and 

information security requirements and 

the absence of these requirements 

creates risk for customers of the 

industrial banks, whether or not they 

also obtain products and services from 

the parent companies or nonfinancial 

affiliates. BHCs and SLHCs are limited 

in their use of consumer financial data 

for commercial purposes. These 

commenters asserted that industrial 

bank parent companies should be 

subject to the same restrictions. 

While there is no general Federal 

regime covering how nonpublic 

personal information held in the U.S. 

may be disclosed or how it must be 

secured, financial institutions, 

including industrial banks, are subject 

to Title V of the GLBA.77 The GLBA and 

its implementing regulations, cited by 

some commenters, impose a range of 

privacy obligations on financial 

institutions, including industrial banks, 

that exceed those imposed on most 

other business types. Specifically, the 

GLBA and implementing rules (1) 

impose limitations on information 

sharing between financial institutions 

and nonaffiliated third parties and 

require disclosure of information 

sharing policies and practices to 

consumers and customers, and (2) 

require financial institutions to develop, 

implement, and maintain 

comprehensive information security 

programs.78 However, businesses that 

are not subject to the GLBA are not free 

from all privacy and data protection 

requirements. There are other Federal 

laws that address privacy and data 

protection that may apply to a Covered 

Company and its affiliates as well as 

financial institutions. As one example, 

the Fair Credit Reporting Act (FCRA) 

establishes standards for collection and 

permissible purposes for dissemination 

of data by consumer reporting agencies 

and obligations on furnishers of 

information. As another example, 

section 5 of the Federal Trade 

Commission Act (FTC Act) provides 

broad authority to the FTC to pursue 

unfair and deceptive trade acts and 

practices against most businesses arising 

from privacy and data protection 

practices.79 Further, the Dodd-Frank Act 

granted the Consumer Financial 

Protection Bureau (CFPB) broad 

authority to enforce unfair, deceptive, 

and abusive acts and practices related to 

consumer financial products and 

services that may cover the activities of 

a Covered Company and its affiliates.80

Adding to the complexity at the Federal 

level, States have enacted laws 

governing the collection, use, 

protection, and disclosure of personal 

information. Many States have 

consumer protection and privacy laws 

as well as laws similar to the FTC Act 

that prohibit unfair or deceptive 

business practices.81

In the absence of a single, 

comprehensive Federal law regulating 

privacy and the collection use, 

processing, disclosure, security, and 

disposal of personal information, the 

FDIC will continue to supervise and 

examine industrial banks and enforce 

compliance with the GLBA and all other 

Federal consumer protection laws and 

regulations. In addition, and in response 

to the concerns expressed by 

commenters that a Covered Company 

and affiliates that are not engaged in 

financial services would not be covered 

by the GLBA, the FDIC is including in 

the final rule a requirement for a 

Covered Company to inform the FDIC 

about its systems for protecting the 

security, confidentiality, and integrity of 

consumer and nonpublic personal 

information, as part of the Covered 

Company’s commitment to submit an 

annual report to the FDIC. This 

reporting will provide the FDIC with a 

better understanding across all of a 

Covered Company’s financial and 

nonfinancial affiliates and activities and 

provide the means to monitor for 

potential consumer protection risks. 

The FDIC will evaluate privacy and 

data protection issues presented by a 

deposit insurance application, a change 

in control notice, or a merger 

application involving an industrial bank 

on a case-by-case basis. When 

appropriate, the FDIC may consider 

imposing heightened requirements 

specific to industrial banks and Covered 

Companies regarding the use of 

consumer financial data for commercial 

purposes. Decisions will be based on the 

size and complexity of the industrial 

bank, the nature and scope of its 

activities, the sensitivity of any 

customer information at issue, and the 

unique facts and circumstances of the 

filing before the FDIC. 

Certain commenters expressed 

concerns about industrial bank and 

nonbank partnerships that the 

commenters believe have led to 

increased predatory lending.82 A major 

10712 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

even if that rate exceeds the rate permitted by the 

law of the borrower’s State. Federal court 

precedents reviewing this authority have upheld 

this practice for decades. Section 27 also permits 

States to opt out of its coverage by adopting a law, 

or certifying that the voters of the State have voted 

in favor of a provision which states explicitly that 

the State does not want section 27 to apply with 

respect to loans made in such State. 

83 5 U.S.C. 551 et seq. 

84 5 U.S.C. 553(b); see, e.g., National Lifeline 

Association v. F.C.C., 921 F.3d 1105, 1115 (D.C. Cir. 

2019). 

85Encino Motorcars, LLC v. Navarro, 136 S.Ct. 

2117, 2126 (2016). 86 F.C.C. v. Fox Television Stations, Inc., 556 U.S. 

502, 515 (2009). 87 Motor Vehicle Mfrs. Ass’n v. State Farm Mut. 

Auto. Ins. Co., 463 U.S. 29, 43 (1983). 

88As noted above in section II.H of this 

Supplementary Information section, after 2013, the 

moratorium imposed by Congress in the DoddFrank Act expired by its terms and was not 

renewed. 

89Each financial institution is assigned composite 

and component ratings for safety and soundness 

under the Uniform Financial Institutions Rating 

System (UFIRS). Under the UFIRS, composite 

ratings are based on an evaluation and rating of six 

essential components of an institution’s financial 

condition and operations: Adequacy of capital, the 

quality of assets, the capability of management, the 

quality and level of earnings, the adequacy of 

liquidity, and the sensitivity to market risk. 

Evaluations of the components take into 

consideration the institution’s size and 

sophistication, the nature and complexity of its 

activities, and its risk profile. 

component of the FDIC’s mission is to 

ensure that financial institutions treat 

consumers and depositors fairly, and 

operate in compliance with Federal 

consumer protection, antidiscrimination, and community 

reinvestment laws. The FDIC addresses 

the problem of predatory lending by 

taking supervisory action, by 

encouraging and assisting banks to serve 

all sectors of their community, and by 

providing consumers with information 

to help make informed financial 

decisions. 

4. Justification for the Proposed Rule 

Several commenters raised concerns 

that the FDIC offered insufficient 

justification for the proposed rule. In 

particular, commenters argued that the 

proposed rule did not set out a 

sufficient factual, legal, or policy basis 

for proposed rule, and that there was 

insufficient discussion of the risks, 

public policy concerns, and statutory 

public interest factors concerning 

industrial banks. 

The Administrative Procedure Act 

(APA) 83 requires a notice of proposed 

rulemaking to provide sufficient factual 

detail and rationale for the rule to 

permit interested parties to comment 

meaningfully.84

The proposed rule set out a clear 

description of the basis for the proposed 

rule. The NPR discussed the history of 

industrial banks in the U.S., both 

generally and in the context of 

controversies over the past two decades. 

The NPR acknowledged the arguments 

raised by critics, reviewing the potential 

risks inherent in approving and 

supervising industrial banks. These 

include concerns over the mixing of 

banking and commerce as well as the 

risk to the DIF posed by the lack of 

Federal consolidated supervision of 

parent companies. The NPR also set out 

the justification for the proposed rule, 

including the need to codify and clarify 

supervisory expectations for industrial 

banks and the importance of imposing 

commitments on parent companies to 

ensure the parent company can serve as 

a source of strength for its subsidiary 

industrial bank. The NPR provided 

sufficient discussion of the factual, 

legal, and policy considerations for the 

proposed rule, such that interested 

parties were able to—and did—submit a 

variety of comments on a number of 

issues raised in and by the proposed 

rule. 

A few commenters argued that the 

NPR did not adequately discuss the 

FDIC’s decision to allow industrial bank 

applications in the wake of both the 

temporary moratorium the FDIC put 

into place from 2006 to 2008 and the 

subsequent 2010 to 2013 moratorium 

Congress enacted through the DoddFrank Act. To reverse the industrial 

bank moratorium without additional 

details, these commenters suggest, is 

arbitrary and capricious and violates the 

APA. 

As the Supreme Court has noted, 

‘‘Agencies are free to change their 

existing policies as long as they provide 

a reasoned explanation for the 

change.’’ 85 The explanation need not 

prove that ‘‘the reasons for the new 

policy are better than the reasons for the 

old one; it suffices that the new policy 

is permissible under the statute, that 

there are good reasons for it, and that 

the agency believes it to be better, which 

the conscious change of course 

adequately indicates.’’ 86 Specifically, 

‘‘the agency must examine the relevant 

data and articulate a satisfactory 

explanation for its action including a 

rational connection between the facts 

found and the choice made.’’ 87

The NPR provided a reasoned 

discussion of the decision to move 

forward with the proposed rule, as 

discussed above. Furthermore, the NPR 

also explained why it was proceeding 

now when it chose not to do so with the 

2007 rulemaking. The NPR noted that 

the FDIC’s decision not to go forward 

with the 2007 proposal was rooted in a 

number of factors. More specifically, 

while the FDIC considered the 

comments received on the 2007 

rulemaking, industry conditions and 

other factors had the effect of reducing 

organizer interest in establishing new 

industrial banks. Most notably, interest 

in organizing new institutions of all 

charter types, including industrial 

banks, diminished given the 

deteriorating economic and market 

conditions identified as early as mid2007. In part, this diminished interest 

reflected the market uncertainty, 

restricted liquidity, reduced availability 

of capital, and difficult interest rate 

environment experienced by all 

institutions across the banking industry. 

In addition, interest in industrial bank 

charters was affected by changes in 

certain State laws that limited the 

ability to form or acquire industrial 

banks, and was reflected in the number 

of industrial banks seeking conversions 

to commercial bank charters. The 

factors, collectively, argued against 

moving forward with a final rule, as did 

the opportunity to closely monitor the 

performance of industrial banks during 

a period of significant stress.88

Overall, the performance and 

condition of industrial banks during the 

most recent banking crises was 

generally consistent with other FDICinsured institutions based on assigned 

supervisory ratings, which consider 

each institution’s unique business 

model, complexity, and risk profile. 

From the beginning of 2009 through 

2011, on average, industrial banks were 

assigned composite and component 

ratings similar to other charter types 

with regard to safety and soundness, 

consumer protection, and the CRA. 

Further, the portfolio of industrial banks 

reflected similar proportions of 

institutions that were composite rated 3, 

4, or 5 89 during the crisis, as well as a 

similar rate of failure as the portfolio of 

traditional community banks. 

Looking more specifically at financial 

performance, and notwithstanding their 

general focus on nontraditional business 

models, industrial banks have 

experienced, by most key measures of 

performance and condition, comparable 

results to other insured institutions. 

Industrial banks tend to maintain higher 

levels of capital and generate higher 

earnings. At year-ends 2009 through 

2011, industrial banks maintained a 

median tier 1 leverage capital (T1LC) 

ratio between 13.1 percent and 15.4 

percent, whereas, other insured 

institutions maintained a median T1LC 

ratio between 9.3 percent and 9.7 

percent. As of June 30, 2020, the median 

T1LC ratio for industrial banks was 14.6 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10713 

90FDIC Call Report Data, June 30, 2020. 

91 Id. 

92As has been noted in Crisis and Response, the 

housing bubble that developed during the early 

2000s burst in 2007, bringing the financial system 

‘‘relatively quickly to the brink of collapse’’ and 

resulted in the worst economic dislocation in 

decades. Large losses in economic output and large 

declines in economic indicators were evident, 

including with respect to steep declines in 

employment and household wealth, among other 

indicators. The related banking crisis was also 

severe, with almost 500 institutions failing during 

the period of 2008 through 2013. In addition, 

between March 2008 and December 2009, the 

number of problem banks rose from 90 to over 700, 

and ultimately peaked at almost 900 in early 2011. 

This level constituted nearly 12 percent of all FDICinsured institutions. See note 49. 

93Some of the industrial banks that were owned 

by thrift holding companies had sister financial 

institutions that were also FDIC-insured. 

Ownership of an industrial bank was not the 

driving force that caused or allowed these entities 

to issue guaranteed debt through the TLGP. Rather, 

the companies could have accessed the program 

simply by virtue of being a thrift holding company 

or owning an FDIC-insured institution. 

94As noted above, Security Savings Bank, 

Henderson, Nevada, failed in February 2009, and 

Advanta Bank Corporation, Draper, Utah, failed in 

March 2010. 

percent as compared to 10.3 percent for 

other insured institutions.90

Similarly, industrial banks reported a 

median return on average assets (ROAA) 

ratio of between 0.6 percent and 2.5 

percent at year-ends 2009 through 2011, 

versus a median ROAA ratio of between 

0.4 percent and 0.7 percent for other 

insured institutions. The median ROAA 

ratio for industrial banks and other 

insured institutions as of June 30, 2020, 

were 1.1 percent and 0.9 percent, 

respectively.91

The capital and earnings ratios for 

industrial banks is reflective of the 

higher degree of risk inherent in their 

business models. The specialty nature of 

most industrial bank business models, 

particularly when compared to 

traditional community banks (which 

constitute a large proportion of all other 

insured institutions), have contributed 

to the maintenance of higher levels of 

capital and earnings, generally. 

Additionally, since the mid-2000s, 

approved filings for industrial banks 

have largely included CALMAs that 

required higher capital requirements 

than other insured institutions. 

Further, industrial banks have been 

assigned examination ratings for the 

capital and earnings components that, 

on average, were very similar to those of 

other insured institutions. This 

generally indicates that industrial banks 

have implemented and maintained 

appropriate risk management practices 

that, given financial condition and 

performance, have adequately 

compensated for the risks inherent in 

the business models. 

When compared to other insured 

institutions, industrial banks typically 

maintain a lower volume of liquid assets 

and rely more heavy on non-core 

liabilities to fund longer-term earning 

assets. As a result, while still 

satisfactory, the liquidity posture for 

industrial banks was considered slightly 

lower both during and subsequent to the 

2008–09 financial crisis. In the FDIC’s 

experience, asset quality has been 

comparable between industrial banks 

and other insured institutions, 

indicating both a manageable volume of 

past due loans or other problem assets, 

as well as satisfactory risk management 

practices. In addition, management 

practices for industrial banks also have 

been in line with that of other insured 

institutions, both during and after the 

financial crisis. 

Despite the above, it is important to 

note that some industrial banks 

experienced stress during the 2008–09 

financial crisis. The circumstances 

experienced by industrial banks during 

the crisis were not dissimilar from the 

circumstances confronting other insured 

institutions and were not the result of 

factors related to the industrial bank 

charter. In general, the FDIC’s 

supervision helped to isolate the 

insured industrial bank from the stress 

of the parent organization, which 

helped in managing the potential risk to 

the industrial bank and the DIF. 

Nevertheless, as discussed above, 

several commenters noted the 

participation of industrial banks or their 

parent organizations in various 

government programs established 

during the crisis. There were six 

industrial banks (or their parent 

companies) among the more than 110 

companies that accessed the debt 

guarantee program component of the 

TLGP, including several owned by 

parent companies organized as thrift 

holding companies. However, it is 

important to note that establishment of 

the TLGP was prompted by the 

unexpected and precipitous market 

conditions brought on by the related 

housing, financial, and banking crises 

that occurred over the period of 2007 

through 2011.92 These conditions 

impacted even the largest banking 

companies in the U.S. and abroad.93

Some comments noted the crisis-era 

conversions of industrial banks and 

their parent organizations to commercial 

banks and BHCs. Of the conversions 

noted by commenters, the majority 

involved industrial banks that were 

fundamentally sound, based on the most 

recent examinations prior to the 

conversions. The same held with 

respect to the respective parent 

companies, one of which converted 

from a thrift holding company to a bank 

holding company during the crisis. In 

each case, the FRB determined that 

approval of the BHC applications was 

warranted, based on evaluation of the 

relevant statutory factors and regulatory 

requirements. Given these 

circumstances, the conversions and 

participation in crisis-related programs 

reflected responses to the broader 

conditions in all segments of the 

economy, including the financial sector. 

Finally, industrial banks did not 

experience a disproportionate rate of 

failures when compared to other types 

of institutions, and there have not been 

any industrial bank failures since 

2010.94

This experience with supervision in 

the industrial banking space informs the 

present rulemaking. The heightened 

source of strength requirements, along 

with other regulatory requirements 

included in the final rule, are examples 

of how the FDIC is applying lessons 

learned in this rulemaking process. 

Some commenters also questioned 

why the proposed rule applies to 

industrial banks that would be owned 

by financial and commercial companies, 

when the FDIC’s 2007 rulemaking was 

limited to financial companies and the 

FDIC’s extended moratorium applied 

only to commercial companies. As the 

FDIC discussed in the proposed rule, 

commenters on the 2007 rulemaking 

observed that the FDIC lacked authority 

to draw a distinction between financial 

and nonfinancial industrial bank 

owners absent a change in law. The 

FDIC agrees that the CEBA exception 

does not distinguish between 

commercial and financial parent 

companies of industrial banks in 

excluding them from the definition of 

‘‘bank.’’ As discussed above, the FDIC’s 

supervisory experience has shown that 

a distinction based on the activities of 

the parent company is not warranted in 

this final rule. 

Most crucial, though, is the fact that 

the most recent of the moratoriums 

commenters reference expired in 2013. 

In the ensuing years, Congress has 

declined to act with regard to industrial 

banks. The FDIC, as all agencies, is 

charged with enacting the laws as they 

exist today. Therefore, given that the 

rule is permissible under the statute, 

that it is sufficiently supported by the 

reasoning presented in the NPR and this 

Supplementary Information section, and 

that there is a clear connection between 

the facts at hand and the choice to 

proceed, the rule is a permissible 

change in policy. 

The FDIC believes that the final rule, 

which is largely consistent with the 

10714 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

95Although generally not subject to the rule, 

grandfathered industrial banks and their parent 

companies that are not subject to Federal 

consolidated supervision by the FRB will remain 

subject to FDIC supervision, including but not 

limited to examinations and capital requirements. 

See also the discussion of the reservation of 

authority in section IV.B.6. of this Supplementary 

Information. 

96The proposed rule divided the rule into two 

temporal states, on or before the effective date on 

the one hand, and after the effective date on the 

other hand. The final rule amends the dividing line 

so that the relevant timeframes would be before the 

effective date and on or after the effective date. This 

change was made because the effective date is 

proposed rule, is an appropriate 

response to safety and soundness issues 

surrounding financial and commercial 

ownership of industrial banks under 

existing law. Specific suggestions from 

commenters on the regulation itself are 

described below in the appropriate 

sections of this preamble on the specific 

sections of the rule. 

B. Description of the Final Rule 

1. Section 354.1—Scope 

This section of the proposed rule 

described the industrial banks and 

parent companies that would be subject 

to the rule. The proposed rule applied 

to industrial banks that, after the 

effective date, become subsidiaries of 

companies that are Covered Companies, 

as such term is defined in § 354.2. 

Industrial bank subsidiaries of 

companies that are subject to Federal 

consolidated supervision by the FRB 

would not have been covered by the 

proposed rule. An industrial bank that, 

on or before the effective date, is a 

subsidiary of a company that is not 

subject to Federal consolidated 

supervision by the FRB (a grandfathered 

industrial bank) generally would not 

have been covered by the proposed 

rule.95 A grandfathered industrial bank 

could become subject to the proposed 

rule following a grant of deposit 

insurance, change in control, or merger 

occurring on or after the effective date 

in which the resulting institution is an 

industrial bank that is a subsidiary of a 

Covered Company. Thus, a 

grandfathered industrial bank would 

have been subject to the proposed rule, 

as would its parent company that is not 

subject to Federal consolidated 

supervision, if such a parent company 

acquired control of the grandfathered 

industrial bank pursuant to a grant of 

deposit insurance after the effective 

date, a change in bank control 

transaction that closes after the effective 

date, or if the grandfathered industrial 

bank is the surviving institution in a 

merger transaction that closes after the 

effective date. Industrial banks that are 

not subsidiaries of a company, for 

example, those wholly owned by one or 

more individuals, would not have been 

subject to the proposed rule. 

The FDIC specifically sought 

comment on whether to apply the rule 

prospectively or to all industrial banks 

that, as of the effective date, are a 

subsidiary of a parent company that is 

not subject to Federal consolidated 

supervision by the FRB. A number of 

commenters expressed the view that the 

rule, if adopted, should apply only 

prospectively; that is, to industrial 

banks that become a subsidiary of a 

parent company that is a Covered 

Company as of the effective date of the 

rule, noting that existing industrial 

banks and their parents are subject to 

most of the standards of the proposed 

rule. Three commenters requested that 

the rule apply to a parent company and 

its subsidiary industrial bank if the 

parent company became a Covered 

Company after either the date of FDIC’s 

notice announcing the FDIC board 

meeting at which the proposed rule was 

considered or the date of the FDIC board 

meeting, rather than the effective date. 

Some commenters supported the 

retroactive application of the proposed 

rule to all industrial banks that, as of the 

effective date, are a subsidiary of a 

parent that is not subject to Federal 

consolidated supervision. These 

commenters asserted that otherwise 

existing industrial banks would enjoy a 

regulatory advantage over new 

industrial banks. They also argued that 

retroactive application would enhance 

the FDIC’s ability to perform its 

supervisory responsibilities. However, 

other commenters expressed concerns 

that applying the rule retroactively 

would violate the APA as parent 

companies of existing industrial banks 

had no opportunity to consider these 

requirements in their decision to 

establish or acquire an industrial bank. 

These commenters also argued that 

existing industrial banks have a record 

of sound operations under the existing 

supervisory framework. 

In addition, one commenter 

recommended that the final rule apply 

to grandfathered industrial banks that 

undergo certain other changes, such as 

when the industrial bank parent 

company acquires a subsidiary engaged 

in nonfinancial activities, or the 

industrial bank parent company engages 

in new nonfinancial activities. The final 

rule operates prospectively on the basis 

of a filing that would result in an 

industrial bank becoming a subsidiary 

of a company not subject to 

consolidated Federal supervision. In 

contrast, the suggested triggers, as 

described, would be applied to existing 

industrial banks and their parent 

companies, would not be related to a 

filing, and would not necessarily result 

in any impact to the industrial bank. 

Should such an impact be identified, 

the FDIC would rely on its supervisory 

or enforcement authority as the 

appropriate means to ensure the safe 

and sound operation of the industrial 

bank. Further, the commenter’s 

suggestion would be difficult to 

administer because the recommended 

triggers for applicability of the rule— 

engaging in ‘‘nonfinancial’’ activities— 

historically has proven difficult to 

define and measure. Accordingly, the 

final rule does not adopt the 

commenter’s recommendation. 

However, the FDIC will continue to 

apply all appropriate supervisory and 

enforcement authorities to existing 

industrial banks and their parent 

organizations, as appropriate, to ensure 

the continued safety and soundness of 

the industrial bank. 

The FDIC also sought comment on 

whether the rule should apply to 

industrial banks that do not have a 

parent company or to industrial banks 

that are controlled by an individual 

rather than a company. Several 

commenters asserted that it was not 

necessary to apply the requirements of 

the proposed rule to industrial banks 

without parent companies (or that are 

controlled by an individual rather than 

a company), in part because industrial 

banks themselves are subject to the 

same regulatory treatment as State 

nonmember banks. By contrast, several 

commenters asserted the requirements 

should be applied to such industrial 

banks and/or also to an individual that 

controls an industrial bank. The FDIC 

believes that industrial banks that are 

owned by individuals or do not have a 

parent company generally do not 

present the same potential risks as 

industrial banks owned by companies. 

Industrial banks that are controlled by a 

parent company, whether engaged in 

commercial or financial activities, that 

are not subject to Federal consolidated 

supervision present the risks that are 

addressed by the safeguards in this final 

rule. In addition, applying the rule to 

industrial banks that have a parent 

company and requiring that the parent 

company provide capital support is 

consistent with the statutory 

requirements of section 38A of the FDI 

Act. 

After considering these comments 

regarding the scope of the proposed 

rule, the final rule will apply only 

prospectively as of the effective date of 

the rule, to industrial banks that become 

subsidiaries of companies that are 

Covered Companies.96 The FDIC must 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10715 

commonly understood to be the date upon which 

a rule is effective, not the day before a rule would 

take effect. 

97 During the period before the effective date of 

the final rule, the FDIC will consider pending 

deposit insurance applications, change in control 

notices, and merger applications for industrial 

banks on a case-by-case basis and impose 

conditions and requirements as appropriate and 

that are consistent with current practice. 

98 12 U.S.C. 1813. 

99The proposed rule erroneously referred to the 

presumptions set forth at 12 CFR 303.83(b)(1) and 

(2). The final rule corrects that technical error to 

correctly refer to § 303.82(b)(1) and (2). 

100 12 U.S.C. 1817(j)(8)(B). 

101 12 CFR 303.80 through 303.88. 

102 85 FR 12398 (Mar. 2, 2020); see also 

Regulation Y—Frequently Asked Questions, 

available at https://www.federalreserve.gov/ 

supervisionreg/reg-y-faqs.htm. 

consider the requirements of the APA 

and the Riegle Community Development 

and Regulatory Improvement Act 

(RCDRIA) in determining the effective 

date of new regulations, and both of 

these statutory schemes generally 

provide for an effective date that follows 

the date on which the regulations are 

published in final form. Thus, the final 

rule will be effective on April 1, 2021.97

The FDIC also sought comment on 

whether an individual that controls the 

parent company of an industrial bank 

should be responsible for the 

maintenance of the industrial bank’s 

capital and liquidity at or above FDICspecified levels and for causing the 

parent company to comply with the 

written agreements, commitments, and 

restrictions imposed on the industrial 

bank. The FDIC also asked whether an 

individual who is the dominant 

shareholder of a Covered Company 

should be required to commit to the 

maintenance of appropriate capital and 

liquidity levels. As discussed below, 

§ 354.3(b) of the proposed rule provided 

that the FDIC may condition a grant of 

deposit insurance, issuance of a nonobjection to a change in control, or 

approval of a merger on an individual 

who is a controlling shareholder of a 

Covered Company joining as a party to 

the written agreements required under 

the rule. In such cases where the FDIC 

would require the controlling 

shareholder to join as a party, the 

controlling shareholder would be 

required to cause the Covered Company 

to fulfill its obligations under the 

written agreements through the voting 

of shares, or otherwise. These 

obligations include, among other things, 

maintaining each subsidiary industrial 

bank’s capital and liquidity at such 

levels as the FDIC deems necessary for 

the safe and sound operation of the 

industrial bank (commitment (7)). 

Several commenters criticized the 

controlling shareholder requirement. 

Some commenters argued that an 

individual who controls or owns a 

parent company should not be held 

personally liable for maintaining the 

industrial bank’s capital or liquidity. 

These commenters expressed concern 

that such a requirement would make it 

more difficult to attract shareholders 

and capital. As noted above, in cases 

where the FDIC would require a person 

that controls a Covered Company to join 

as a party, such person would be 

required to vote their shares or take 

such other appropriate actions to cause 

the Covered Company to fulfill its 

obligations under the written 

agreements. The obligation to maintain 

the subsidiary industrial bank’s capital 

and liquidity rests with the Covered 

Company. 

Other commenters noted that the 

parent company already commits in the 

CALMA to provide support and were 

concerned that requiring the parent 

company’s shareholders to also provide 

a guarantee of support will drive away 

investors. These commenters, however, 

were not opposed to a requirement for 

the controlling shareholder to commit to 

vote his or her shares to comply with 

the CALMA. One commenter noted that 

the Office of the Comptroller of the 

Currency (OCC) may impose certain 

commitments on the controlling 

shareholder related to the ownership of 

shares and how the controlling 

shareholder exercises shareholder 

rights. 

Several commenters supported the 

approach of imposing certain conditions 

at the level of the Covered Company’s 

controlling shareholder as necessary to 

ensure the safety and soundness of the 

subsidiary industrial bank. Some 

commenters asserted that the FDIC 

should require the dominant 

shareholders of a parent company to 

maintain appropriate levels of capital 

and liquidity. Another commenter 

argued that the choice of ownership 

structure should not relieve an 

individual from source of strength and 

other obligations. 

The FDIC believes that in order to 

ensure that a Covered Company serves 

as a continuing source of financial 

strength to the subsidiary industrial 

bank, the FDIC may exercise its 

supervisory discretion to require a 

controlling, or dominant, shareholder of 

a Covered Company to join as a party to 

the written agreements required under 

the rule. An individual with controlling 

ownership has a direct and effective 

means by which to influence the major 

decisions of the Covered Company by 

voting shares or by exercising an 

influence as a member of the Covered 

Company’s board of directors. 

Accordingly, the FDIC is finalizing this 

requirement in § 354.3(b) as proposed. 

As discussed in the proposed rule, in 

such cases where FDIC would require 

the controlling shareholder to join as a 

party, the controlling shareholder would 

be required to cause the Covered 

Company to fulfill its obligations under 

the written agreements through voting 

shares, or otherwise, including to 

maintain the capital and liquidity levels 

of the subsidiary industrial bank at or 

above FDIC-specified levels. The FDIC 

intends to make such a determination 

on a case-by-case basis and will 

consider the business plan, capital 

structure, risk profile, and business 

activities of the Covered Company. 

2. Section 354.2—Definitions 

This section of the proposed rule 

listed the definitions that applied to part 

354. Terms that were not defined in the 

proposed rule that are defined in section 

3 of the FDI Act had the meanings given 

in section 3 of the FDI Act.98

The term ‘‘control’’ was defined to 

mean the power, directly or indirectly, 

to direct the management or policies of 

a company or to vote 25 percent or more 

of any class of voting securities of a 

company and specifically would have 

included the rebuttable presumption of 

control at 12 CFR 303.82(b)(1) and the 

presumptions of acting in concert at 12 

CFR 303.82(b)(2) 99 in the same manner 

and to the same extent as if they applied 

to an acquisition of securities of a 

company instead of a ‘‘covered 

institution.’’ These definitions are 

nearly the same as the definitions of 

‘‘control’’ in the CBCA 100 and the 

FDIC’s regulations implementing the 

CBCA 101 except that they would have 

broadened the term to apply to control 

of a company and not solely insured 

depository institutions so that the 

definition can accurately describe the 

relationship between the parent 

company of an industrial bank and any 

of its nonbank subsidiaries, which also 

would be affiliates of the industrial 

bank. 

Two commenters suggested that the 

rule should incorporate the definition of 

control used in the BHCA and its 

implementing regulations. One trade 

group commenter argued that such an 

approach would lead to consistency in 

the treatment of parent companies of 

insured depository institutions. An 

industrial bank commenter suggested 

that aligning the proposed rule’s 

definition of control with the BHCA and 

the FRB’s regulatory framework 102

would create a more uniform system 

that would make it easier for investors 

10716 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

103 80 FR 65889 (Oct. 28, 2015). The FDIC 

received no comments on its approach. 

104 80 FR 65889, 65893. 

105 12 U.S.C. 1817(j). 

106 12 U.S.C. 1828(c). 

107 12 U.S.C. 1816. 108See 85 FR at 17772–73. 

109The FDIC may consider requiring an 

intermediate holding company in the case of a 

Covered Company that is not located in the United 

States and presents unique circumstances. 

110See also supra note 96. 

to balance their investment decisions 

with the regulatory implications of 

certain levels of investment. 

The FDIC has considered these 

comments and has decided to retain the 

definition used in the proposed rule. 

First, the definition of control proposed 

in the NPR is consistent with the 

definition of control that the FDIC uses 

in other contexts, namely changes in 

bank control. The FDIC in 2015 

amended its filing requirements and 

processing procedures for notices filed 

under the CBCA with respect to 

proposed acquisitions of State 

nonmember banks and certain parent 

companies thereof.103 Among other 

things, the FDIC’s CBCA implementing 

regulations adopted the best practices of 

the related regulations of the OCC and 

FRB, rendering more consistent the 

CBCA implementing regulations of the 

Federal banking agencies. 

Second, the FDIC is not the Federal 

banking agency responsible for 

implementing and interpreting the 

BHCA and has not developed precedent 

for the implementation of the BHCA. In 

adopting the CBCA implementing 

regulations, the FDIC noted that it found 

the logic of the FRB’s interpretations 

regarding control under the BHCA 

useful in analyzing fact patterns under 

the CBCA, but did not adopt the FRB’s 

interpretations, preferring instead to 

review each case based on the facts and 

circumstances presented.104

The term ‘‘Covered Company’’ meant 

any company that is not subject to 

Federal consolidated supervision by the 

FRB and that, directly or indirectly, 

controls an industrial bank (i) as a result 

of a change in bank control under 

section 7(j) of the FDI Act,105 (ii) as a 

result of a merger transaction pursuant 

to section 18(c) of the FDI Act,106 or (iii) 

that is granted deposit insurance under 

section 6 of the FDI Act,107 in each case 

after the effective date of the rule. 

Under these provisions, a company 

would control an industrial bank if the 

company would have the power, 

directly or indirectly, (i) to vote 25 

percent or more of any class of voting 

shares of any industrial bank or any 

company that controls the industrial 

bank (i.e., a parent company), or (ii) to 

direct the management or policies of 

any industrial bank or any parent 

company. In addition, the FDIC 

presumes that a company would have 

the power to direct the management or 

policies of any industrial bank or any 

parent company if the company will, 

directly or indirectly, own, control, or 

hold with power to vote at least 10 

percent of any class of voting securities 

of any industrial bank or any parent 

company, and either the industrial 

bank’s shares or the parent company’s 

shares are registered under section 12 of 

the Securities Exchange Act of 1934, or 

no other person (including a company) 

will own, control, or hold with power 

to vote a greater percentage of any class 

of voting securities. If two or more 

companies, not acting in concert, will 

each have the same percentage, each 

such company will have control. As 

noted above, control of an industrial 

bank can be indirect. For example, 

company A may control company B, 

which in turn may control company C 

which may control an industrial bank. 

Company A and company B would each 

have indirect control of the industrial 

bank, and company C would have direct 

control. As a result, the industrial bank 

would be a subsidiary of companies A, 

B, and C. 

One commenter observed that the 

Supplementary Information for the 

proposed rule characterized BHCs and 

SLHCs as generally prohibited from 

engaging in commercial activities.108

This commenter noted that 

grandfathered unitary SLHCs are 

permitted to engage in certain 

‘‘grandfathered’’ activities, which may 

include commercial activities and 

requested that the FDIC clarify its 

position with respect to grandfathered 

unitary SLHCs. The FDIC recognizes 

that certain grandfathered unitary 

SLHCs may be able to engage in 

commercial activities. Further, as the 

FDIC intends to apply the final rule 

prospectively, a grandfathered unitary 

SLHC that is subject to Federal 

consolidated supervision would not be 

subject to the final rule. 

In response to question 5 in the NPR, 

commenters were split on whether to 

require a Covered Company to form an 

intermediate holding company from 

which to conduct its financial activities. 

One commenter suggested that there 

would be limited benefit to requiring a 

Covered Company that conducts 

activities other than financial activities 

to conduct some or all of its financial 

activities (including ownership and 

control of an industrial bank) through 

an intermediate holding company, 

observing that any potential benefit 

could be significantly outweighed by 

the complexity and cost of 

implementing an intermediate holding 

company structure, and may only serve 

to organizationally distance the bank 

from the primary source of strength, 

most commonly the top tier parent 

company. Another commenter strongly 

opposed the possible requirement, 

arguing that in many cases it would not 

make sense to create a corporate 

structure in service of an industrial bank 

that is a small part of the overall 

activities or assets of a Covered 

Company. 

Another commenter argued that 

complex diversified Covered Companies 

that conduct nonfinancial activities 

must be required to structure their 

financial activities under an 

intermediate holding company so that 

the intermediate holding company may 

be subjected to enhanced supervision. 

The final rule will not require a 

Covered Company that conducts 

activities other than financial activities 

to conduct some or all of its financial 

activities (including ownership and 

control of an industrial bank) through 

an intermediate holding company.109

The FDIC believes that such a structure 

is not required to adequately supervise 

industrial banks and their parent 

companies. 

The final rule includes the definition 

of Covered Company as proposed with 

one revision: The proposed rule defined 

a Covered Company as a company that 

is not subject to Federal consolidated 

supervision by the FRB and that 

controls an industrial bank as a result of 

the non-objection to a change in bank 

control, or approval of a merger 

transaction or deposit insurance after 

the effective date. The final rule applies 

where such a non-objection or approval 

occurs on or after the effective date. 

This revision is not a change in FDIC 

policy, but rather a recognition that the 

effective date is commonly understood 

to be the date upon which a rule is 

effective.110

The FDIC received no comment on a 

number of definitions: The terms ‘‘FDI 

Act,’’ ‘‘filing,’’ ‘‘FRB,’’ ‘‘industrial 

bank,’’ and ‘‘senior executive officer.’’ 

The final rule adopts these terms as 

proposed. 

In the NPR, the FDIC requested 

comment on whether the rule should 

include other types of nonbank banks, 

in addition to industrial banks. One 

commenter stated that all bank and 

financial service companies, including 

industrial banks and other institutions 

that have been excluded from the BHCA 

definition of bank (such as credit card 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10717 

111See 12 CFR 303.11(a) (‘‘The FDIC may 

approve, conditionally approve, deny, or not object 

to a filing after appropriate review and 

consideration of the record.’’). See 12 CFR 303.2(bb) 

for a list of standard conditions. 

112 12 U.S.C. 1818(b); 1831aa(a). 

and limited purpose trust banks) should 

be subject to a level playing field, 

including subjecting the parent 

company to Federal consolidated 

supervision. Another commenter stated 

that it was not necessary to include 

credit card banks and trust companies 

in the scope of the rule because they are 

limited purpose institutions. Another 

commenter suggested that the rule may 

be appropriate for other kinds of banks 

whose owners are not subject to the 

BHCA, but cautioned that there may be 

unique issues related to those charters 

that should be considered before 

extending the rule to such institutions. 

The FDIC has decided not to extend 

the scope of the final rule at this time 

to other types of banking institutions 

that have parent companies not subject 

to Federal consolidated supervision. 

These other types of institutions (credit 

card banks and limited purpose trust 

companies) operate under a limited 

purpose charter, which narrows the 

range of services they may offer. As a 

result, the FDIC’s experience indicates 

these charter types have generally not 

presented the broad issues as presented 

by industrial banks. 

Commenters also suggested additional 

terms for which definitions would be 

useful. The FDIC believes that the final 

rule is sufficiently clear that such 

additional definitions were not 

determined to be necessary, although 

section IV.B.5. of this Supplementary 

Information section provides examples 

of what will and will not be considered 

a ‘‘material change’’ to a business plan 

requiring prior FDIC approval. 

3. Section 354.3—Written Agreement 

This section of the proposed rule 

prohibited any industrial bank from 

becoming a subsidiary of a Covered 

Company unless the Covered Company 

enters into one or more written 

agreements with the FDIC and its 

subsidiary industrial bank. In such 

agreements, the Covered Company 

would make certain required 

commitments to the FDIC and the 

industrial bank, including those listed 

in paragraphs (a)(1) through (8) of 

§ 354.4, the restrictions in § 354.5, and 

such other provisions as the FDIC may 

deem appropriate in the particular 

circumstances. When two or more 

Covered Companies will control (as the 

term ‘‘control’’ is defined in § 354.2), 

directly or indirectly, the industrial 

bank, each such Covered Company 

would be required to execute such 

written agreement(s). This circumstance 

could occur, for example, (i) when two 

or more Covered Companies will each 

have the power to vote 10 percent or 

more of the voting stock of an industrial 

bank or of a company that controls an 

industrial bank, the stock of which is 

registered under section 12 of the 

Securities Exchange Act of 1934, or (ii) 

when one Covered Company will 

control another Covered Company that 

directly controls an industrial bank. 

Section 354.3(a) of the final rule is 

unchanged from the proposal. 

As discussed above, proposed 

§ 354.3(b) allowed the FDIC, in its sole 

discretion, to require, as a condition to 

the approval of or non-objection to a 

filing, that a controlling shareholder of 

a Covered Company join as a party to 

any written agreement required in 

§ 354.3. In such cases, the controlling 

shareholder would be required to cause 

the Covered Company to fulfill its 

obligations under the written agreement, 

through the voting of shares, or 

otherwise. 

In addition to the written agreements, 

commitments, and restrictions of the 

final rule, the FDIC will condition an 

approval of an application or a nonobjection to a notice on one or more 

actions or inactions of the applicant or 

notificant, as deemed appropriate by the 

FDIC.111 The FDIC may enforce 

conditions imposed in writing in 

connection with any action on any 

application, notice, or other request by 

an industrial bank or a company that 

controls an industrial bank,112 so it is 

not necessary to include provisions 

regarding conditions in the proposed 

rule. 

4. Section 354.4—Required 

Commitments and Provisions of Written 

Agreement 

The FDIC historically has included 

conditions in deposit insurance 

approval orders for industrial banks that 

are intended to create a sufficient 

supervisory structure with respect to a 

Covered Company. The commitments 

that the FDIC has required industrial 

banks and their parent companies to 

undertake in written agreements have 

varied on a case-by-case basis, 

depending on the facts and 

circumstances and the particular 

concerns the FDIC has identified during 

the review of the application materials. 

Section 354.4 of the proposed rule 

required each party to a written 

agreement to comply with paragraphs 

(a)(1) through (8). These required 

commitments are intended to provide 

the safeguards and protections that the 

FDIC believes are prudent to impose to 

maintain the safety and soundness of 

industrial banks that are controlled by 

Covered Companies. These required 

commitments and other provisions are 

intended to establish a level of 

information reporting and parent 

company obligations similar to that 

which would be in place if the Covered 

Company were subject to Federal 

consolidated supervision. The 

requirements reflect commitments and 

additional provisions that, for the most 

part, the FDIC has previously required 

as a condition of granting deposit 

insurance to industrial banks. The FDIC 

proposed to include these required 

commitments in the rule to provide 

transparency to current and potential 

industrial banks, the companies that 

control them, and the general public. 

In order to provide the FDIC with 

more timely and more complete 

information about the activities, 

financial performance and condition, 

operations, prospects, and risk profile of 

each Covered Company and its 

subsidiaries, the proposed rule required 

that each Covered Company furnish to 

the FDIC an initial listing, with annual 

updates, of all of the Covered 

Company’s subsidiaries (commitment 

(1)); consent to the FDIC’s examination 

of the Covered Company and each of its 

subsidiaries to monitor compliance with 

any written agreements, commitments, 

conditions, and certain provisions of 

law (commitment (2)); submit to the 

FDIC an annual report on the Covered 

Company and its subsidiaries, and such 

other reports as the FDIC may request 

(commitment (3)); maintain such 

records as the FDIC deems necessary to 

assess the risks to the industrial bank 

and to the DIF (commitment (4)); and 

cause an independent audit of each 

subsidiary industrial bank to be 

performed annually (commitment (5)). 

In the NPR, the FDIC sought comment 

on whether the proposed commitments 

requiring examination and reporting 

serve the supervisory purpose of 

transparency and identifying any 

potential risks to the industrial bank 

and whether there was a better approach 

for supervising a Covered Company. As 

discussed above in section IV.A.2. of 

this Supplementary Information section, 

a number of commenters were generally 

critical of the proposed commitments as 

being inadequate and failing to achieve 

parity with the regime of consolidated 

supervision required for BHCs. The 

FDIC believes that the examination 

reviews envisioned under the final rule 

enhance the existing supervisory 

practices and allow for a more robust 

evaluation of the industrial bank’s 

affiliate relationships. In addition, the 

FDIC believes the enhanced reporting 

10718 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

113See 12 U.S.C. 1831o–1(d). 

114See 12 U.S.C. 1820(b) and 1820(b)(4)(A). 

115 If the Covered Company is required to submit 

reports to the Securities and Exchange Commission 

(SEC), the requirement to submit an annual report 

may be satisfied through submission of SEC Form 

10–K (or equivalent), along with the company’s 

annual audit report and management letter (with 

management responses), provided that the 

combination of reports addresses each requirement 

as stated in the rule. In some cases, it may be 

necessary or appropriate to also submit evaluations 

of the Covered Company’s internal operations, 

along with management responses, satisfying the 

Statement on Standards for Attestation 

Engagements (SSAE) Number 18, Report on 

Controls at a Service Organization Relevant to User 

Entities’ Internal Control over Financial Reporting, 

as issued or amended by the Auditing Standards 

Board, or similar reports or evaluations. 

116For example, in a situation where a parent 

company issues securities, the SEC’s role and 

expertise lies in supervising the parent company as 

an issuer of securities, not in the role of a parent 

company of an industrial bank. 

117 12 U.S.C. 1820(b)(4). 

118 12 U.S.C. 1813(u) and 1818. 

119See 12 U.S.C. 1831o–1(d). 

requirements in the final rule are 

consistent with section 38A(d) of the 

FDI Act, which provides explicit 

statutory authority for the FDIC to 

require reports from a controlling 

company of an industrial bank to assess 

the ability of the company to comply 

with the source of strength requirement, 

and to enforce compliance by such 

company.113 The final rule adopts these 

commitments as proposed, other than as 

described below. Implementation of the 

rule positions the FDIC to better protect 

the industrial bank from activities of a 

parent organization that present 

heightened risk to the organization and 

the bank and to ensure that the parent 

company is a continuing source of 

financial strength.114

In response to the concerns expressed 

by commenters that a Covered Company 

that is not engaged in financial services 

would not be covered by the GLBA, the 

FDIC is revising the commitment in the 

final rule that a Covered Company 

submit an annual report to the FDIC 

(commitment (3)) to include a 

requirement for a Covered Company to 

inform the FDIC about its systems for 

protecting the security, confidentiality, 

and integrity of consumer and 

nonpublic personal information. This 

reporting will provide the FDIC 

appropriate information across all of a 

Covered Company’s financial and 

nonfinancial activities to monitor for 

potential consumer protection risks. 

The FDIC also sought comment on 

whether the commitment and 

requirements of the rule are 

appropriately tailored in light of the 

GLBA’s restrictions on the extent to 

which a Federal banking agency may 

regulate and supervise a functionally 

regulated affiliate of an insured 

depository institution. 

Most commenters supported the 

reporting 115 and examination 

requirements that enable the FDIC to 

monitor and evaluate financial and 

other conditions in the parent 

organization that are relevant to the 

industrial bank. One commenter 

supported carving out functionally 

regulated entities from the scope of the 

required commitments in § 354.4 to be 

consistent with ‘‘jurisdictional 

boundaries’’ contemplated by the GLBA. 

While functionally regulated financial 

firms do not raise the types of concerns 

that commercial firms do with respect to 

industrial banks, different regulatory 

supervisors will have different 

supervisory approaches and will be 

focused, by design, on the aspects of a 

business that concern that regulator.116

The FDIC serves as the regulator for the 

industrial bank and exercises oversight 

of the parent company to the extent 

necessary to ensure the safety and 

soundness of the industrial bank 

subsidiary and to protect the DIF. 

Through examination and reporting, the 

FDIC will be able to gauge and monitor 

the operational risks an industrial bank 

affiliate, whether functionally regulated 

or unregulated, presents to the 

industrial bank. The FDIC may take 

action to prevent or redress an unsafe or 

unsound practice if action to address 

that risk when limited to the industrial 

bank would not effectively protect 

against the risk. 

The FDIC sought comment on 

whether a Covered Company should be 

required to disclose to the FDIC certain 

additional affiliates or portfolio 

companies of the Covered Company 

because these affiliates could engage in 

transactions with, or otherwise impact, 

the subsidiary industrial bank. One 

trade association commenter opposed 

any further extension of the reporting 

requirement as being burdensome. A 

number of commenters acknowledged 

the FDIC’s authority to understand 

affiliate relationships and their impact 

on the industrial bank, but suggested 

that the reporting be tailored by 

including a materiality threshold. 

Otherwise, these commenters believed 

the reporting would be burdensome 

while potentially providing information 

with no real relevance to the industrial 

bank. 

Other commenters argued that the 

final rule should require a Covered 

Company to disclose its affiliates and 

portfolio companies that could engage 

in transactions with, or otherwise 

impact, the subsidiary industrial bank 

in order to provide the FDIC a complete 

and transparent picture of the business 

model. These commenters observed that 

related entities may impact the financial 

condition and results of operations of 

the Covered Company, which may 

negatively impact its ability to serve as 

a source of strength for the industrial 

bank. 

The FDIC believes that the 

relationship of a bank with its affiliated 

organizations is important to the 

analysis of the condition of the bank 

itself. Because of commonality of 

ownership or management that may 

exist, transactions with affiliates may 

not be subject to the same sort of 

objective analysis that exists in 

transactions between independent 

parties. Also, affiliates offer an 

opportunity to engage in types of 

business activities that are prohibited to 

the bank itself yet those activities may 

affect the condition of the bank. In 

recognition of the importance of these 

relationships, the FDIC has been granted 

authority, under certain conditions to 

examine affiliates in connection with its 

examination of a bank to disclose the 

relationship between the bank and a 

given affiliate, as well as the effect of 

that relationship on the bank.117 The 

FDIC also has been granted authority to 

bring enforcement actions against 

insured State nonmember banks and 

their institution-affiliated parties.118 As 

discussed above in section IV.A.2., 

industrial banks are subject to these 

same examination and enforcement 

authorities as other banks, as well as 

sections 23A and 23B of the Federal 

Reserve Act and Regulation W, which 

govern transactions with affiliates. In 

addition, section 38A of the FDI Act 

provides authority for the FDIC to 

require reports from a company that 

controls an industrial bank to assess the 

ability of the company to comply with 

the source of strength requirement, and 

to enforce compliance by such 

company.119 Section 38A of the FDI Act 

therefore provides an additional 

supervisory tool to the FDIC in 

regulating Covered Companies, 

including their subsidiaries. 

In supervising industrial banks, the 

FDIC considers each industrial bank’s 

purpose and placement within the 

organizational structure and tailors 

reporting and other requirements 

accordingly. Requiring the disclosure of 

the Covered Companies’ subsidiaries 

along with the other reporting tools 

available to the FDIC as discussed above 

are sufficient and will appropriately 

cover those affiliates of the industrial 

bank of most concern to the FDIC. 

Accordingly, the FDIC is adopting 

§ 354.4(a)(1) as proposed. 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10719 

120 ‘‘[T]he Corporation . . . shall have power . . . 

[t]o prescribe by its Board of Directors such rules 

and regulations as it may deem necessary to carry 

out the provisions of this chapter or of any other 

law which it has the responsibility of administering 

or enforcing (except to the extent that authority to 

issue such rules and regulations has been expressly 

and exclusively granted to any other regulatory 

agency).’’ 12 U.S.C. 1819(a)(Tenth). 

121See Interagency Policy Statement on Income 

Tax Allocation in a Holding Company Structure, 63 

Continued 

In order to limit the extent of each 

Covered Company’s influence over a 

subsidiary industrial bank, the proposed 

rule required each Covered Company to 

commit to limit its representation on the 

industrial bank’s board of directors to 25 

percent of the members of the board, or 

if the bank is organized as a limited 

liability company and is managed by a 

board of managers, to 25 percent of the 

members of the board of managers, or if 

the bank is organized as a limited 

liability company and is managed by its 

members, to 25 percent of managing 

member interests (commitment (6)). For 

example, if company A, which has 15 

percent representation on the subsidiary 

industrial bank’s board, controls 

company B, then the companies’ 

representation would be aggregated and 

limited to no more than 25 percent. 

Thus, company B’s representation 

would be limited to no more than 10 

percent. 

The FDIC sought comment on 

whether this threshold is appropriate. 

Three commenters argued against any 

limitation of a Covered Company’s 

representation on the board of a 

subsidiary industrial bank. These 

commenters noted the burden in 

identifying independent director 

candidates and obtaining the prior 

approval for candidates associated with 

a Covered Company. In addition, these 

commenters argued that the restriction 

would limit the coordination necessary 

and appropriate among entities within 

an organization. One commenter 

expressed the concern that there could 

be a negative effect on the remaining 

directors if an independent director 

leaves a board. That is, the potential 

need to eliminate a director associated 

with a Covered Company in order to 

comply with the rule on a continuing 

basis. 

One commenter asserted that there 

may be conflicts between the rule 

limitation and unspecified State law, 

while another noted the lack of 

comparable limitations on other legal 

structures, creating a distinct difference 

between Covered Companies and other 

operating entities. A number of 

commenters also suggested that relying 

on the simple majority of independent 

directors, as has been applied in other 

instances, has not led to issues or 

concerns regarding the subsidiary 

industrial bank. 

To address the concerns regarding the 

limitation, commenters suggested either 

raising the threshold from 25 percent to 

one-third, or requiring that a simple 

majority be independent. While 

acknowledging the need for some degree 

of director independence to limit the 

potential influence from Covered 

Companies, these commenters noted 

that the higher threshold may enhance 

coordination between the industrial 

bank and Covered Companies. By 

extension, the increased coordination 

would enable the Covered Companies to 

have a better understanding of the 

industrial bank’s obligations. One 

comment also noted that the FDIC 

would retain its full enforcement 

authority should circumstances require 

action. 

The FDIC understands the challenges 

involved in the selection of directors of 

insured institutions. However, the prior 

approval requirement should not 

substantially interfere in a wellqualified candidate’s ability to assume 

the responsibilities of the position in a 

timely manner, and thereby to achieve 

the noted benefits of appropriate 

coordination between the industrial 

bank and the Covered Company. As to 

the possibility that an independent 

director’s departure from a board may 

result in temporary non-compliance 

with the established threshold, the 

FDIC’s construction and use of written 

agreements provides sufficient 

mechanisms by which compliance can 

be timely achieved without the extreme 

consequence of removing other directors 

or requiring FDIC actions to enforce the 

commitment. 

As to the specific threshold, the FDIC 

is revising the commitment in the final 

rule to establish a less than 50 percent 

threshold, which will maintain a 

sufficient number of independent 

directors while addressing a number of 

the commenters’ concerns. In making 

this change, the FDIC considered the 

potential numeric challenges that could 

confront industrial banks whose boards 

are comprised of a comparatively small 

number of directors. In addition, the 

change enables Covered Companies and 

industrial banks to select director 

candidates believed to be most qualified 

to direct and oversee the institution. As 

such, the change enables Covered 

Companies and industrial banks to 

exercise some additional flexibility 

when selecting directors. Nevertheless, 

the FDIC retains the authority, as 

appropriate, to require a higher 

threshold of director independence. 

Finally, one comment requested 

clarification as to whether officers of the 

industrial bank would be included 

within the limitation. In short, if an 

officer in question is associated with a 

Covered Company, the individual 

would be counted against the limitation. 

In order to ensure that a subsidiary 

industrial bank has available to it the 

resources necessary to maintain 

sufficient capital and liquidity, the 

proposed rule required each party to a 

written agreement to commit to 

maintain each subsidiary industrial 

bank’s capital and liquidity at such 

levels as the FDIC deems necessary for 

the safe and sound operation of the 

industrial bank, and to take such other 

actions as the FDIC finds appropriate to 

provide each subsidiary industrial bank 

with the resources for additional capital 

or liquidity (commitment (7)). As 

discussed above, the FDIC is finalizing 

§ 354.3(b) as proposed, which provides 

that the FDIC may require the 

controlling or dominant shareholder of 

a Covered Company to join as a party to 

the written agreements required under 

the rule, including commitment (7). The 

final rule includes commitment (7) as 

proposed. 

Lastly, the proposed rule required that 

each Covered Company and its 

subsidiary industrial bank(s) enter into 

a tax allocation agreement that expressly 

recognizes an agency relationship 

between the Covered Company and the 

subsidiary industrial bank with respect 

to tax assets generated by such 

industrial bank, and that further states 

that all such tax assets are held in trust 

by the Covered Company for the benefit 

of the subsidiary industrial bank and 

promptly remitted to such industrial 

bank (commitment (8)). As proposed, a 

tax allocation agreement would have 

also provided that the amount and 

timing of any payments or refunds to 

the subsidiary industrial bank by the 

Covered Company should be no less 

favorable than if the subsidiary 

industrial bank were a separate 

taxpayer. 

One commenter questioned the 

FDIC’s statutory authority to impose 

such a requirement. The FDIC has the 

power to issue rules to carry out the 

provisions of the FDI Act,120 including 

rules to ensure the safety and soundness 

of industrial banks and to protect the 

DIF. As the FDIC discussed in the 

proposed rule, companies and their 

subsidiaries, including insured 

depository institutions and their parent 

companies, will often file a consolidated 

income tax return. A 1998 interagency 

policy statement issued by the Federal 

banking agencies and the U.S. 

Department of the Treasury, and an 

addendum thereto 121 (collectively, 

10720 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

FR 64757 (Nov. 23, 1998); Addendum to the 

Interagency Policy Statement on Income Tax 

Allocation in a Holding Company Structure, 79 FR 

35228 (June 19, 2014). The 2014 Addendum to the 

Interagency Policy Statement on Income Tax 

Allocation in a Holding Company Structure also 

clarifies that all tax allocation agreements are 

subject to the requirements of section 23B of the 

Federal Reserve Act, and tax allocation agreements 

that do not clearly acknowledge that an agency 

relationship exists may be subject to additional 

requirements under section 23A of the Federal 

Reserve Act. 

122These commenters raised the same or similar 

concerns with respect to § 354.5(b), which the FDIC 

also is deleting in the final rule. 

Policy Statement), acknowledges this 

practice, noting that a consolidated 

group may prepare and file Federal and 

State income tax returns as a group so 

long as the interests of any insured 

depository institution subsidiaries are 

not prejudiced. Given the potential 

harm to insured subsidiary institutions, 

the Policy Statement encourages parent 

companies and their insured depository 

institution subsidiaries to enter into 

written, comprehensive tax allocation 

agreements, and notes that inconsistent 

practices regarding tax obligations may 

be viewed as an unsafe and unsound 

practice prompting either informal or 

formal corrective action. The final rule, 

consistent with the proposed rule, 

similarly seeks to avoid potential harm 

to a subsidiary industrial bank by 

requiring such a written tax allocation 

agreement. The final rule includes 

commitment (8) as proposed. 

In addition to the eight commitments 

discussed above, § 354.4(b) of the 

proposed rule permitted the FDIC to 

condition the approval of an application 

or non-objection to a notice on the 

Covered Company and industrial bank 

committing to adopt, maintain, and 

implement an FDIC-approved 

contingency plan that presents one or 

more actions to address potential 

significant financial or operational 

stress that could threaten the safe and 

sound operation of the insured 

industrial bank. The plan also would 

reflect strategies for the orderly 

disposition of the industrial bank 

without the need for the appointment of 

a receiver or conservator. Such 

disposition could include, for example, 

sale of the industrial bank to, or merger 

with, a third party. 

The FDIC received two comments on 

the contingency plan requirement. One 

commenter stated that the FDIC should 

consider size, complexity, 

interdependencies, and other relevant 

factors in requiring, reviewing, and 

approving a contingency plan—similar 

to the ‘‘living will’’ requirements under 

section 165(d) of the Dodd-Frank Act 

where the FRB has tiered certain 

requirements based upon an 

institution’s asset size. This commenter 

also suggested that the FDIC formalize 

these considerations in the final rule. 

The other commenter stated that, while 

dissolution requirements may be 

appropriate for large complex 

institutions that pose a risk to the DIF, 

smaller banks do not pose the same 

risks nor require the same level of 

complex planning. According to this 

commenter, the cost of contingency 

planning would outweigh its benefit for 

smaller institutions. This commenter 

also stated that, at a minimum, any 

contingency planning requirement 

should be no more stringent than the 

requirement for other FDIC-insured 

intuitions of the same size. 

As discussed in the NPR, a 

contingency plan commitment would 

only be required in certain 

circumstances based upon the facts and 

circumstances presented, and after 

taking into consideration size, 

complexity, interdependencies, and 

other relevant factors. The final rule 

preserves the FDIC’s supervisory 

discretion to tailor the contents of any 

contingency plan to a specific Covered 

Company and its insured industrial 

bank subsidiary. This ability to tailor 

the requirements of a contingency plan 

serves to minimize the burdens of 

developing and implementing such a 

plan. It should also be noted that 

contingency plans are not the same as 

resolution plans under section 165(d) of 

the Dodd-Frank Act or § 360.10 of the 

FDIC’s Rules and Regulations, and the 

contents of a contingency plan (if 

required) would be far less complex. A 

contingency plan is an explanation of 

the steps the industrial bank and 

Covered Company could take to mitigate 

the impacts of financial and operational 

stress outside of the receivership 

process. Finally, the FDIC believes that 

a contingency plan, when required, may 

help the FDIC, the Covered Company, 

and its industrial bank subsidiary to 

better understand the relevant 

interdependencies, operational risks, 

and other circumstances or events that 

could create safety and soundness 

concerns and attendant risk to the DIF. 

Accordingly, the FDIC is finalizing this 

requirement as proposed. 

While the contingency plan is one 

type of commitment that the FDIC 

would be able to require of Covered 

Companies and their industrial bank 

subsidiaries, there may be other 

commitments that the FDIC may 

determine to be appropriate given the 

business plan, capital levels, or 

organizational structure of a Covered 

Company or its subsidiary industrial 

bank. Section 354.4(c) of the proposed 

rule provided that the FDIC may require 

such additional commitments from a 

Covered Company or controlling 

shareholder of a Covered Company in 

addition to those described in § 354.4(a) 

or (b) in order to ensure the safety and 

soundness of the industrial bank and 

reduce potential risk to the DIF. 

Several commenters specifically 

addressed § 354.4(c).122 One commenter 

raised concerns that the rule would be 

applied to Covered Companies or 

controlling shareholders of existing 

industrial banks. As discussed above, 

because the rule is constructed to apply 

prospectively, parties will become 

subject to the rule only as the result of 

(1) the formation of an industrial bank 

on or after the effective date of the final 

rule, or (2) a merger transaction or 

change in control on or after the 

effective date of the final rule, assuming 

the institution retains its industrial bank 

charter. 

A second commenter raised concerns 

that § 354.4(c) vests open-ended 

authority in the FDIC to change, at any 

time and for any reason, the obligations 

of a Covered Company or controlling 

shareholder. The commenter further 

suggested that agreements should be 

negotiated at the outset. Another 

commenter also suggested that the FDIC 

should rely on its enforcement authority 

rather than including additional 

commitments in the written agreements. 

In response to commenters’ concerns 

about the application of this section, the 

FDIC is removing § 354.4(c) to avoid 

confusion that the FDIC would 

unilaterally impose additional 

commitments (or restrictions). 

Notwithstanding this deletion, the FDIC 

retains its general supervision, 

examination, and enforcement 

authorities (as reserved by § 354.6) to 

take any actions beyond the scope of the 

final rule, including actions to ensure 

the safe and sound operation of any 

insured depository institution, 

including an industrial bank, and 

further to ensure that a parent of an 

industrial bank acts as a source of 

financial strength to that insured 

institution. For example, the FDIC may 

require additional, unique commitments 

from a Covered Company or a 

controlling shareholder of a Covered 

Company when the FDIC determines it 

is necessary to address specific elements 

of a filing or circumstances related to 

the filer. Additional commitments may 

be derived, for instance, from elements 

of the business model presented, 

including the nature and scope of 

activities conducted, the risk profile of 

the activities, and the complexity of 

operations. The proposed relationships 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10721 

and transactions with the parent 

organization that may impact the 

industrial bank also could be taken into 

consideration. 

The FDIC also sought comment on 

whether the rule should include a 

commitment that the parent company 

will maintain its own capital at some 

defined level on a consolidated basis. A 

number of commenters argued that 

creating consolidated capital 

requirements for the parent company 

would ensure that it is able to serve as 

a source of strength for its subsidiary 

industrial bank. Some commenters 

argued that such capital standards 

should be comparable to those imposed 

on BHCs of similar size and systemic 

significance. These commenters also 

argued that the absence of a 

consolidated capital standard for the 

parent company creates a lower 

standard of supervision than is imposed 

by the BHCA. One commenter 

recommended that such requirements 

should be greater than the requirements 

applicable to other FDIC-insured 

depository institutions due to the 

enhanced risk of the Covered Company 

on the industrial bank and the DIF. 

By contrast, several commenters 

argued that applying a capital standard 

on the parent company itself is not 

encompassed within the FDIC’s 

statutory mandate to preserve the safety 

and soundness of insured depository 

institutions. Other commenters 

observed that for many industrial bank 

parent companies, measures of tangible 

equity are not often the most pertinent 

indicator of the financial health of the 

company or its ability to serve as a 

source of strength. These commenters 

argued that given the diversity of 

industrial bank parent company 

operations, a more tailored approach 

would be appropriate. 

The FDIC does not believe that the 

final rule should impose capital 

requirement commitments on Covered 

Companies because a one-size-fits all 

regulatory approach to capital 

requirements would not be appropriate, 

given the idiosyncratic business models 

and operations of such parent 

companies. The FDIC believes that the 

final rule and its supervisory framework 

adequately ensure that a parent 

company of an industrial bank has the 

ability to serve as a source of strength. 

5. Section 354.5—Restrictions on 

Industrial Bank Subsidiaries of Covered 

Companies 

Section 354.5 of the proposed rule 

required the FDIC’s prior written 

approval before an industrial bank that 

is a subsidiary of a Covered Company 

may take certain actions. These 

restrictions, like the required 

commitments discussed above, are 

generally intended to provide the 

safeguards and protections that the FDIC 

believes would be prudent to impose 

with respect to maintaining the safety 

and soundness of industrial banks that 

become controlled by companies that 

are not subject to Federal consolidated 

supervision. Accordingly, the proposed 

rule required prior FDIC approval for 

the subsidiary industrial bank to take 

any of five actions set forth in § 354.5(a). 

In order to ensure that the industrial 

bank does not immediately after 

becoming a subsidiary of a Covered 

Company engage in high-risk or other 

inappropriate activities, the subsidiary 

industrial bank would have been 

required to obtain the FDIC’s prior 

approval to make a material change in 

its business plan after becoming a 

subsidiary of a Covered Company 

(paragraph (a)(1)). In order to limit the 

influence of the parent Covered 

Company, the subsidiary industrial 

bank would have been required to 

obtain the FDIC’s prior approval to add 

or replace a member of the board of 

directors or board of managers or a 

managing member, as the case may be 

(paragraph (a)(2)); add or replace a 

senior executive officer (paragraph 

(a)(3)); employ a senior executive officer 

who is associated in any manner with 

an affiliate of the industrial bank, such 

as a director, officer, employee, agent, 

owner, partner, or consultant of the 

Covered Company or a subsidiary 

thereof (paragraph (a)(4)); or enter into 

any contract for material services with 

the Covered Company or a subsidiary 

thereof (paragraph (a)(5)). Pursuant to 

proposed § 354.5(b), the FDIC would 

have been able to, on a case-by-case 

basis, impose additional restrictions on 

the Covered Company or its controlling 

shareholder if circumstances warrant. 

The FDIC is adopting revisions to the 

restrictions in § 354.5(a)(2), (3), and (4) 

and removing § 354.5(b), as discussed 

below. 

The FDIC sought comment on 

whether these restrictions should be 

time-limited. A number of commenters 

generally argued that the restrictions 

should only apply during the industrial 

bank’s de novo period (i.e., the first 

three-years of operation). Some 

commenters suggested that the FDIC 

should or could apply ongoing 

restrictions (beyond the de novo period) 

when special circumstances exist. One 

commenter proposed that the FDIC 

implement a process to allow an 

industrial bank to request a waiver of 

the requirements at the conclusion of 

the de novo period. Two commenters 

recommended limiting the restrictions 

to the de novo period except for 

paragraph (a)(4) covering employment 

of a senior executive officer who is also 

currently associated with an affiliate of 

the industrial bank. Most of these 

commenters were concerned that the 

ongoing restrictions in these sections 

created greater burdens on industrial 

banks than required of non-industrial 

banks. 

By contrast, other commenters argued 

that these restrictions should be 

perpetual in duration and viewed them 

as important safeguards on the actions 

of a Covered Company with respect to 

an industrial bank subsidiary. One 

commenter argued that given the unique 

and significant risks posed by industrial 

banks and their parent companies, the 

restrictions should not be limited to any 

number of years after an industrial bank 

becomes a subsidiary of a Covered 

Company. 

The FDIC previously has imposed 

restrictions similar to those contained in 

§ 354.5 in prior actions on filings 

involving industrial banks. The agency’s 

experience indicates that there are 

advantages and disadvantages to 

imposing such restrictions on a 

perpetual basis, just as there are 

advantages and disadvantages to 

imposing the restrictions on a timelimited basis. The relative advantages 

and disadvantages vary depending on 

the nature of the particular restriction. 

Nevertheless, certain items are believed 

so directly related to the industrial 

bank’s ongoing safe and sound 

operation that a perpetual restriction is 

warranted. As such, the FDIC is 

adopting the restrictions regarding 

material changes to business plans, 

entering into contracts for material 

services with a Covered Company or its 

subsidiaries, and employing a senior 

executive officer that is associated with 

an affiliate of the industrial bank as 

proposed, with one exception noted 

below. 

However, having considered 

commenters’ suggestions regarding the 

restrictions on the appointment of 

directors (paragraph (a)(2)) and senior 

executive officers (paragraph (a)(3)), the 

FDIC is modifying the final rule to apply 

a three-year period to filings approved 

by the FDIC for an industrial bank that 

is a subsidiary of a Covered Company. 

This modification provides flexibility 

for industrial banks to timely appoint 

directors and officers. The FDIC’s 

supervisory efforts and enforcement 

authorities remain fully accessible if an 

industrial bank’s director or officer 

selection raises concerns. Further, 

consistent with § 354.6 of the final rule, 

the FDIC may impose additional 

restrictions if appropriate to a particular 

10722 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

123See supra notes 59–62 and accompanying text. 

124 85 FR 1204. 

125 85 FR 34734. 

126State savings associations will be examined by 

the FDIC under the CRA regulations of the OCC, 12 

CFR part 25 and 12 CFR part 195, as may be 

amended from time to time. 

127 85 FR 66410. 

128See Statement of Policy on Applications for 

Deposit Insurance, 63 FR 44756 (Nov. 20, 1998), 

amended by 67 FR 79276 (Dec. 27, 2002). 

filing. Thus, as circumstances warrant, 

the FDIC may extend the three-year 

period or impose the restriction on a 

perpetual basis. 

In light of the changes to paragraphs 

(a)(2) and (3) above, the FDIC is also 

adopting a revision to the restriction on 

employment of a senior executive 

officer who is currently associated with 

an affiliate of the industrial bank 

(paragraph (a)(4)). The restriction is 

modified in the final rule to cover a 

senior executive officer who is or was 

during the past three years associated 

with an affiliate of the industrial bank 

to prevent evasion of the restriction. As 

noted above, this restriction is not 

otherwise modified with respect to its 

perpetual duration. 

As discussed above, proposed 

§ 354.5(b) has been removed to align 

with the change the FDIC made to 

§ 354.4(c). 

Several commenters requested that 

the FDIC clarify what is meant by a 

‘‘material change’’ to the industrial 

bank’s business plan that requires the 

FDIC’s written approval prior to 

effecting such change. Because business 

plan changes or deviations may alter the 

facts and circumstances that supported 

the FDIC’s action on a filing in which 

the business plan condition was 

imposed, the following generally have 

been determined to constitute a material 

change in or deviation from an 

institution’s business plan: 

• Increases in financial statement 

categories or subcategories (such as 

types of loans, funding, revenue, or 

capital) of 25 percent or more; 

• Introduction of distinctly new or 

different business strategies or 

objectives, including products or 

services, target markets, delivery 

channels, or business development 

strategies; 

• Changes to the institution’s 

financial strategies, or the acquisition of 

assets, an operating entity, or the 

assumption of deposits or other 

liabilities; or 

• Changes in organizational 

relationships such that the manner in 

which the institution implements or 

carries out its business strategies or 

objectives is impacted. 

6. Section 354.6—Reservation of 

Authority 

The FDIC proposed to clarify that it 

retains the authority to take supervisory 

or enforcement actions, including 

actions to address unsafe or unsound 

practices, or violations of law. 

The FDIC has broad supervision, 

examination and enforcement powers 

and authorities granted to it by the FDI 

Act and other laws.123 The reservation 

of authority in § 354.6 clarifies that, 

notwithstanding the final rule, the FDIC 

retains the authority to exercise those 

powers, as it would for any insured 

depository institution where it is the 

appropriate Federal banking agency, 

which includes industrial banks. While 

the final rule establishes certain 

commitments and restrictions with 

respect to industrial banks and Covered 

Companies, § 354.6 recognizes that the 

FDIC could require industrial banks and 

their parent companies that are not 

subject to Federal consolidated 

supervision by the FRB to enter into 

written agreements, provide additional 

commitments, or abide by additional 

restrictions if necessary to maintain the 

safety and soundness of the industrial 

bank. Additionally, the FDIC’s powers 

and authorities may be applied to 

require written commitments and/or to 

impose restrictions in the context of a 

particular industrial bank and its parent 

to mitigate risk and ensure the safe and 

sound operation of the insured 

depository institution, even if not in 

connection with a filing pursuant to this 

part. 

The FDIC received only one comment 

that addressed the proposed reservation 

of authority, noting that the FDIC’s use 

of its discretion in applying the 

restrictions on industrial banks 

contained in § 354.5, together with a 

reservation of its examination authority, 

would allow for a practical 

implementation of the FDIC’s powers. 

The FDIC is adopting § 354.6 as 

proposed. During the period before the 

effective date of the final rule, the FDIC 

will consider pending deposit insurance 

applications, change in control notices, 

and merger applications for industrial 

banks on a case-by-case basis and 

impose conditions and requirements as 

appropriate and that are consistent with 

current practice and the FDIC’s general 

examination, supervision, and 

enforcement authorities. 

7. Responses to Additional Questions 

In addition to the questions discussed 

above, the FDIC sought responses to 

several additional questions. In 

response to the FDIC’s question whether 

there were additional categories of 

information that the FDIC should 

consider in evaluating an industrial 

bank’s ability to meet the convenience 

and needs of the community to be 

served, some commenters opposed to 

the rule expressed concern that the CRA 

requires modernization or is otherwise 

inadequate to ensure industrial banks 

are properly serving the credit needs of 

the communities in which the industrial 

bank operates. Two community group 

commenters went further indicating that 

the FDIC should not move forward with 

this rule until CRA assessment area 

procedures are updated. 

In January of 2020, the FDIC joined 

the OCC in issuing a CRA proposal to 

modernize CRA regulations.124 On May 

20, 2020, the OCC issued its CRA final 

rule.125 The FDIC did not move forward 

with a final rule following the proposal 

and continues to enforce its existing 

CRA regulation.126 More recently, on 

September 21, 2020, the FRB issued an 

ANPR to solicit public input regarding 

modernizing the FRB’s CRA regulatory 

and supervisory framework.127

Modernizing CRA regulations 

applicable to FDIC-supervised 

institutions is an important endeavor, 

and the FDIC is considering further 

rulemaking in this area, which may 

include seeking additional public input 

and engaging with the other prudential 

regulators. For the time being, however, 

the FDIC will continue to operate under 

the existing CRA regulations, which 

contain provisions including public 

participation in strategic plans and 

consideration for community 

development activity in insured 

institutions’ broader State-wide and 

regional areas. 

However, the statutory factor 

addressing convenience and needs of 

the community to be served is broader 

than the CRA. In assessing the statutory 

factor convenience and needs of the 

community to be served, the essential 

considerations are the deposit and 

credit needs of the community to be 

served, the nature and extent of the 

opportunity available to the applicant in 

that location, and the willingness and 

ability of the applicant to serve those 

financial needs.128 The markets to be 

served and the economic and 

competitive conditions within the 

markets are important to these 

considerations. The applicant’s CRA 

Plan is an important part of the FDIC’s 

evaluation of the convenience and 

needs to be served, but it is not the only 

consideration. The FDIC believes the 

benefits to finalizing this rule are 

significant, and formalizing and 

strengthening FDIC’s existing 

supervisory processes and policies that 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10723 

129The FDIC may require, in the case of a 

Covered Company located outside the United 

States, United States-based capital and liquidity 

support of the subsidiary industrial bank. 

130FDIC Call Report Data, June 30, 2020. 

131 During the same period, the FDIC did not 

receive any merger applications involving 

industrial banks. 

132 44 U.S.C. 3501 et seq. 

133Historically, industrial banks have elected not 

to become members of the Federal Reserve System. 

The FDIC is the primary Federal regulator for State 

nonmember banks and the insurer for all insured 

depository institutions. 

apply to parent companies of industrial 

banks that are not subject to Federal 

consolidated supervision should 

proceed even in the absence of a unified 

interagency rule on CRA. 

The FDIC also sought comment on the 

FDIC’s approach to foreign ownership of 

industrial banks. Some commenters 

argued that foreign ownership of 

industrial banks should not be 

permitted, or if permitted, should be 

heavily regulated. A commenter argued 

that the FDIC would not be well 

positioned to foresee the risks that a 

might arise for a foreign Covered 

Company in its home market. Another 

commenter asserted that the proposed 

supervisory approach fell short of the 

FRB’s consolidated supervision 

framework, leaving the FDIC with 

limited examination authority and 

therefore unable to adequately monitor 

foreign companies whose risks might be 

spread across multiple entities. Another 

commenter opposed foreign ownership 

of industrial banks, but suggested that if 

such arrangements were permitted, 

further commitments such as a high net 

stable funding ratio and a prefunded 

orderly liquidation fund should be 

required of foreign Covered Companies. 

On the other hand, a number of 

commenters indicated that there was no 

need to build in additional restrictions 

specific to foreign Covered Companies. 

These commenters noted that the FDIC 

already has robust supervisory authority 

to address unsafe and unsound 

conditions impacting insured 

depository institutions, and that the 

FDIC’s practice of securing additional 

commitments from foreign parent 

companies of industrial banks has been 

effective. Other commenters also argued 

for flexibility, indicating that 

determining what additional 

commitments would be necessary in 

such instances is a fact-specific inquiry 

and should be based on the parent 

company’s ability to be a source of 

strength for the industrial bank. 

The final rule does not contain any 

specific requirements for foreign 

Covered Companies beyond those to 

which U.S.-based Covered Companies 

are subject. The FDIC’s supervisory 

experience with foreign parent 

companies of industrial banks has 

shown that retaining the flexibility to 

secure additional commitments from 

such entities as needed is an effective 

approach. Such commitments would be 

in addition to the substantial 

requirements a Covered Company is 

subject to in the written agreements 

with the FDIC required by the final rule, 

including examination and reporting 

requirements, capital maintenance of 

the industrial bank, and contingency 

planning. These commitments allow the 

FDIC to ensure that a Covered Company 

can and will serve as a source of 

strength for its industrial bank, and 

along with the added flexibility to 

require additional commitments as 

needed, they are sufficient to address 

both domestic and foreign Covered 

Companies.129

V. Expected Effects 

As previously discussed, the final rule 

requires or imposes certain conditions, 

commitments, and restrictions for each 

deposit insurance application approval, 

non-objection to a change in control 

notice, and merger application approval 

that would result in an industrial bank 

becoming, pursuant to the rule, a 

subsidiary of a Covered Company. The 

final rule requires such Covered 

Company to enter into one or more 

written agreements with the FDIC and 

the industrial bank subsidiary. 

A. Overview of Industrial Banks 

As of June 30, 2020, the FDIC 

supervised 3,270 insured depository 

institutions, with combined assets of 

$3.84 trillion. Of these, 23 institutions 

were industrial banks, comprising 0.7 

percent of all FDIC-supervised 

institutions. The industrial banks hold 

combined assets of $169 billion, 

comprising 4.54 percent of the 

combined assets of FDIC-supervised 

institutions.130 The majority of 

industrial banks are headquartered in 

Utah and Nevada, and hold nearly all of 

the combined assets of industrial banks. 

As of June 30, 2020, 14 industrial banks 

were headquartered in Utah, four in 

Nevada, three in California, one in 

Hawaii, and one in Minnesota. 

The final rule applies prospectively to 

deposit insurance, change in control, 

and merger transactions resulting in an 

industrial bank that is controlled by a 

Covered Company. It is difficult to 

estimate the number of potential 

Covered Companies that will seek to 

establish or acquire an industrial bank, 

as such an estimate depends on 

considerations that affect Covered 

Companies’ decisions. These 

considerations, and how they affect 

decision making, are difficult for the 

FDIC to forecast, estimate, or model, as 

the considerations include external 

parties’ evaluations of potential 

business strategies for the industrial 

bank as well as future financial 

conditions, rates of return on capital, 

and innovations in the provision of 

financial services, among others. 

However, during the period of 2017 

through 2019, the FDIC received nine 

industrial bank deposit insurance 

applications and one change in control 

application.131 Consistent with the 

Paperwork Reduction Act (PRA) 132

estimates presented elsewhere in this 

rule, for this analysis the FDIC is 

estimating the final rule applies to four 

filings per year seeking to establish or 

acquire an industrial bank. 

The final rule could indirectly affect 

subsidiaries of Covered Companies. 

Such Covered Companies operate 

through a variety of structures that 

include a range of subsidiaries and 

affiliates. Further, the final rule includes 

the FDIC’s reservation of authority to 

require any industrial bank and its 

parent company, if not otherwise 

subject to part 354, to enter into written 

agreements, provide commitments, or 

abide by restrictions, as appropriate. 

Therefore, it is difficult to estimate the 

number of subsidiaries and affiliates of 

prospective Covered Companies, based 

on information currently available to the 

FDIC. However, based on the FDIC’s 

experience as the primary Federal 

regulator of industrial banks,133 the 

FDIC believes that the number of 

subsidiaries of the prospective Covered 

Companies affected by the final rule is 

likely to be small. 

B. Analysis of the Commitments 

Under the final rule, prospective 

Covered Companies are required to 

agree to the eight commitments, and 

may be required to agree to additional 

commitments under certain 

circumstances, which in summary 

include commitments by the Covered 

Company to: 

• Furnish an initial listing, with 

annual updates, of the Covered 

Company’s subsidiaries. 

• Consent to the examination of the 

Covered Company and its subsidiaries. 

• Submit an annual report on the 

Covered Company and its subsidiaries, 

and such other reports as requested. 

• Maintain such records as deemed 

necessary. 

• Cause an independent annual audit 

of each industrial bank. 

• Limit the Covered Company’s 

representation on the industrial bank’s 

board of directors or managers (board), 

10724 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

134See FDIC Deposit Insurance Application 

Procedures Manual Supplement, Applications from 

Non-Bank and Non-Community Bank Applicants, 

FIL–8–2020 (Feb. 10, 2020). 

135Subject matter experts in the FDIC’s Division 

of Risk Management Supervision estimated that 

time devoted to complying with the commitments 

is broken down as follows: 25 percent (Executives 

and Managers), 15 percent (Legal), 15 percent 

(Compliance Officers), 15 percent (Financial 

Analysts), 15 percent (IT Specialists), and 15 

percent (Clerical). The Standard Occupational 

Classification System occupations and codes used 

by the FDIC are: Executives and Managers 

(Management Occupations, 110000), Lawyers 

(Lawyers, Judges, and Related Workers, 231000), 

Compliance Officers (Compliance Officers, 131041), 

Financial Analysts (Financial Analysts, 132051), IT 

Specialists (Computer and Mathematical 

Occupations, 150000), and Clerical (Office and 

Administrative Support Occupations, 430000). To 

estimate the weighted average hourly compensation 

cost of these employees, the 75th percentile hourly 

wages reported by the Bureau of Labor Statistics 

(BLS) National Industry-Specific Occupational 

Employment and Wage Estimates as used for the 

relevant occupations in the Depository Credit 

Intermediation sector, as of May 2018. The 75thpercentile wage for lawyers is not reported, as it 

exceeds $100 per hour, so $100 per hour is used. 

The hourly wage rates reported do not include nonmonetary compensation. According to the 

September 2019 Employer Cost of Employee 

Compensation data, compensation rates for health 

and other benefits are 33.8 percent of total 

compensation. To account for non-monetary 

compensation, the hourly wage rates reported by 

BLS are adjusted by that percentage. The hourly 

wage is adjusted by 2.28 percent based on changes 

in the Consumer Price Index for Urban Consumers 

from May 2018 to September 2019 to account for 

inflation and ensure that the wage information is 

contemporaneous with the non-monetary 

compensation statistic. Finally, the benefit-andinflation-adjusted wages for each occupation are 

weighted by the percentages listed above to arrive 

at a weighted hourly compensation rate of $94.15. 

136FDIC Call Report Data, December 31, 2019. 

as the case may be, to less than 50 

percent. 

• Maintain the industrial bank’s 

capital and liquidity at such levels as 

deemed appropriate and take such other 

action to provide the industrial bank 

with a resource for additional capital or 

liquidity. 

• Enter into a tax allocation 

agreement. 

• Depending on the facts and 

circumstances, provide, adopt, and 

implement a contingency plan that sets 

forth strategies for recovery actions and 

the orderly disposition of the industrial 

bank without the need for a receiver or 

conservator. 

The FDIC historically has imposed 

prudential conditions similar to the 

commitments listed above in connection 

with approving or not objecting to 

certain industrial bank filings. These 

conditions generally relate to the board 

and senior management, the business 

plan, operating policies, financial 

records, affiliate relationships, and other 

conditions on a case-by-case basis, 

depending on the facts and 

circumstances identified during the 

review of the respective filings.134

The table below presents the FDIC’s 

analysis of the estimated costs to 

institutions that would be affected by 

the final rule of each required 

commitment. In each case, the FDIC 

used a total hourly compensation 

estimate of $94.15 per hour.135 The 

FDIC received no comments regarding 

the estimated burden of the rule as 

proposed. 

Proposed commitment Estimated annual 

compliance hours 

Estimated annual 

compliance costs 

Lists of Subsidiaries ......................................................................................................................... 4 $376.60 

Consent to the FDIC Examination ................................................................................................... 100 9,415.00 

Annual and Such Other Reports as the FDIC may Request .......................................................... 10 941.50 

Maintain Such Records as the FDIC Deems Necessary ................................................................ 10 941.50 

Independent Audit 1 ......................................................................................................................... 100 9,415.00 

Limit Membership on Board 2 .......................................................................................................... 0 0.00 

Maintain Capital and Liquidity ......................................................................................................... 12 1,129.80 

Tax Allocation Agreement 3 ............................................................................................................. 0 0.00 

Total .......................................................................................................................................... 236 22,219.40 

1The disclosure requirement and time to fulfill it are due to satisfying regulatory inquiries about the audit, and do not include the cost of the 

audit itself because Covered Companies already conduct audits for other purposes. 2 Determinations regarding board membership are considered in the normal course of business. 

3Tax allocation agreements are normal and customary among affiliated corporate entities. 

The final rule also authorizes the 

FDIC to require additional 

commitments, including a contingency 

plan that sets forth strategies for 

recovery actions and the orderly 

disposition of the industrial bank 

without the appointment of a receiver or 

conservator. The additional contingency 

plan commitment would be required 

only in certain circumstances, based on 

the facts and circumstances presented 

and taking into consideration the size, 

complexity, interdependencies, and 

other factors relevant to the industrial 

bank and Covered Company. 

It is difficult to estimate the 

recordkeeping, reporting, and disclosure 

costs associated with the contingency 

plan aspect of the final rule because 

such an estimate would depend on the 

organizational structure and activities of 

potential future Covered Companies. 

The FDIC currently lacks such detailed 

information on potential future Covered 

Companies. While the contingency plan 

commitment is meaningfully different 

from resolution plan requirements for 

large banks, and while industrial banks 

that might need to develop such 

contingency plans are meaningfully 

different from large banks subject to 

resolution planning requirements, the 

FDIC considered prior analyses 

regarding resolution planning 

requirements imposed on certain 

institutions to inform its analysis. 

Based in part on the FDIC’s 

experience implementing and managing 

the resolution planning requirements of 

§ 360.10, the FDIC estimates that 

Covered Companies and their industrial 

banks subject to the contingency plan 

commitment could incur $326,000 in 

recordkeeping, reporting, and disclosure 

compliance costs annually. To put the 

estimated cost of this commitment into 

context, the pre-tax net income of the 

median industrial bank in 2019 was 

$64,515,000.136 But, because the FDIC 

would have the supervisory discretion 

to tailor the contents of any contingency 

plan to a given Covered Company and 

its industrial bank, and because of the 

unique circumstances of the respective 

Covered Companies and industrial 

banks, the compliance costs incurred by 

Covered Companies would vary on a 

case-by-case basis, and could be lower. 

The final rule incorporates an 

additional element as part of the 

reporting commitment to address 

Covered Companies’ systems for 

protecting the security, confidentiality, 

and integrity of consumer and 

nonpublic personal information. 

However, the rule is constructed to 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10725 

137 $22,219.40 for all Covered Companies that 

seek to establish or acquire an industrial bank, and 

an additional $326,000 for those institutions 

required to adopt, implement, and adhere to a 

contingency plan. 

138FDIC Call Report Data, December 31, 2019. 

139 5 U.S.C. 601 et seq. 

140 5 U.S.C. 605(b). 

141The SBA defines a small banking organization 

as having $600 million or less in assets, where an 

organization’s ‘‘assets are determined by averaging 

the assets reported on its four quarterly financial 

statements for the preceding year.’’ See 13 CFR 

121.201 (as amended, effective Aug. 19, 2019). In 

its determination, the SBA ‘‘counts the receipts, 

employees, or other measure of size of the concern 

whose size is at issue and all of its domestic and 

foreign affiliates, regardless of whether the affiliates 

are organized for profit.’’ 13 CFR 121.103. 

Following these regulations, the FDIC uses a 

covered entity’s affiliated and acquired assets, 

averaged over the preceding four quarters, to 

determine whether the covered entity is ‘‘small’’ for 

the purposes of RFA. 

enable affected parties to comply with 

the various commitments by relying on 

established and ongoing reports and 

records, to the extent possible. As such, 

while recognizing the difficulty in 

estimating the costs associated with this 

additional element due to the unique 

circumstances of each affected party, the 

FDIC believes the enhanced 

commitment should have no material 

impact on the estimated overall burden. 

As illustrated by the preceding 

analysis, the final rule could pose as 

much as $348,000 in additional 

recordkeeping, reporting, and disclosure 

compliance costs for each Covered 

Company that seeks to establish or 

acquire an industrial bank.137 Covered 

Companies would also be likely to incur 

some regulatory costs associated with 

making the necessary changes to 

internal systems and processes. For 

context, the estimated $348,000 

recordkeeping, reporting, and disclosure 

costs only comprise 0.8 percent of the 

median noninterest expense for the 23 

existing industrial banks.138

The FDIC believes that the final rule 

would benefit the public by providing 

transparency for market participants 

and other interested parties. 

Additionally, the FDIC believes that the 

final rule would benefit the public by 

formalizing a framework by which the 

FDIC would supervise industrial banks 

and mitigate risk to the DIF that may 

otherwise be presented. 

It is difficult to estimate whether the 

final rule would serve as an incentive or 

disincentive for affected parties. 

Decisions to establish or acquire an 

industrial bank depend on many 

considerations that the FDIC cannot 

accurately forecast, estimate, or model, 

such as future financial conditions, rates 

of return on capital, and innovations in 

the provision of financial services. The 

final rule would enhance transparency 

in the FDIC’s evaluation of filings, 

which could increase the number of 

applications received. However, such 

transparency could also serve to limit 

the number of applications received. 

The FDIC analyzed historical trends 

in filings that would be subject to the 

final rule. Based on that analysis, and 

consistent with the FDIC’s PRA 

analysis, the FDIC assumes four 

applications: Three deposit insurance 

applications, and one change in bank 

control notice per year, on average. 

Between 2000 and 2009, the FDIC 

received as many as 12 and as few as 

two deposit insurance applications from 

entities seeking to organize an industrial 

bank; between 2017 and 2019, the FDIC 

received as many as four and as few as 

two such applications. Therefore, the 

FDIC believes it is reasonable to assume 

an annual deposit insurance application 

volume of four for the purpose of this 

analysis. In addition, the FDIC has 

received three change in bank control 

notices relating to industrial banks since 

2010; therefore, the FDIC believes it is 

reasonable to assume an annual volume 

of one for the purpose of this analysis. 

C. Safety and Soundness of Affected 

Banks 

The FDIC believes the final rule is 

consistent with supervisory approaches 

the FDIC has used to insulate industrial 

banks from risks posed by their parent 

companies, and that these supervisory 

approaches have been effective. For 

example, as previously noted, only two 

small industrial banks failed during the 

crisis. The FDIC believes the final rule 

would provide a prudentially sound 

framework for reaching decisions on 

industrial bank filings that the FDIC 

receives from time to time. 

D. Broad Effects on the Banking 

Industry 

To the extent that the final rule results 

in higher numbers of industrial banks, 

the increase could lead to increased 

competition for depositors and 

borrowers. The increased competition 

could result in one or more of: Higher 

yields on deposit products, lower 

interest rates on loan products, reduced 

fees, less restrictive underwriting 

standards, greater account opening 

bonuses for new customers, and other 

benefits. To the extent that the final rule 

does not result in a higher number of 

industrial banks, this would not be 

expected to lead to increased 

competition for depositors and 

borrowers. 

E. Expected Effects on Consumers 

To the degree the final rule results in 

an increase in the number of industrial 

banks, consumers could benefit from 

increased competition within the 

banking industry. These benefits could 

take the form of higher rates on deposit 

accounts, improved access to credit 

with better terms or lower rates, and 

lower fees for banking services. To the 

extent that the proposed rule does not 

result in a higher number of industrial 

banks, this would not be expected to 

lead to potential benefits from increased 

competition within the banking 

industry. Finally, in response to 

comments the final rule includes a 

commitment for a Covered Company to 

inform the FDIC about the Covered 

Company’s systems for protecting the 

security, confidentiality, and integrity of 

consumer and nonpublic personal 

information. This aspect of the final rule 

is expected to benefit consumers by 

helping to mitigate potential consumer 

protection risks. 

F. Expected Effects on the Economy 

The final rule’s effects on the 

economy are likely to be modest, in line 

with its potential effects on the banking 

industry and consumers. If the final rule 

results in a modest increase in the 

number of industrial banks or 

improvement in the provision of 

banking products and services, the 

effects on the economy are likely to be 

modest. 

VI. Regulatory Analysis 

A. Regulatory Flexibility Act 

The Regulatory Flexibility Act (RFA) 

generally requires an agency, in 

connection with a final rule, to prepare 

and make available for public comment 

a final regulatory flexibility analysis that 

describes the impact of a final rule on 

small entities.139 However, a final 

regulatory flexibility analysis is not 

required if the agency certifies that the 

rule will not have a significant 

economic impact on a substantial 

number of small entities.140 The Small 

Business Administration (SBA) has 

defined ‘‘small entities’’ to include 

banking organizations with total assets 

of less than or equal to $600 million.141

Generally, the FDIC considers a 

significant effect to be a quantified effect 

in excess of 5 percent of total annual 

salaries and benefits per institution, or 

2.5 percent of total noninterest 

expenses. The FDIC has considered the 

potential impact of the final rule on 

small entities in accordance with the 

RFA. Based on its analysis and for the 

reasons stated below, the FDIC believes 

that this final rule will not have a 

significant economic impact on a 

substantial number of small entities. 

10726 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

142FDIC Call Report Data, September 30, 2019. In 

order to determine whether an entity is ‘‘small’’ for 

purposes of the Regulatory Flexibility Act, the FDIC 

uses its ‘‘affiliated and acquired assets’’ as 

described in the immediately preceding footnote. 

The latest available bank and thrift holding 

company reports, which the FDIC uses to determine 

an entity’s ‘‘affiliated and acquired assets,’’ are as 

of September 30, 2019. 143 12 CFR 121.103. 

144For example, if a particular industrial bank’s 

parent company was a motorcycle manufacturer, 

then the size standards applicable to motorcycle 

manufacturers were used. 

145 44 U.S.C. 3501 et seq. 

146The final rule requires additional reporting by 

Covered Companies regarding systems for 

protecting the security, confidentiality, and 

integrity of consumer and nonpublic personal 

information as part of the annual report. 

As of June 30, 2020, the FDIC 

supervises 3,270 institutions, of which 

2,492 are defined as small institutions 

by the terms of the RFA.142 Of these 

3,270 institutions, 23 are industrial 

banks. 

As previously discussed, a currently 

chartered industrial bank would be 

subject to the final rule, as would its 

parent company that is not subject to 

Federal consolidated supervision, if 

such a parent company acquired control 

of the grandfathered industrial bank 

pursuant to a change in bank control 

transaction that closes after the effective 

date of the final rule, or if the 

grandfathered industrial bank is the 

surviving institution in a merger 

transaction that closes after the effective 

date of the final rule. 

Of the 23 existing industrial banks, 

eight reported total assets less than $600 

million, indicating that they could be 

small entities. However, to determine 

whether an institution is ‘‘small’’ for the 

purposes of the RFA, the SBA requires 

consideration of the receipts, 

employees, or other measure of size of 

the concern whose size is at issue and 

all of its domestic and foreign 

affiliates.143 The FDIC conducted an 

analysis to determine whether each 

industrial bank’s parent company was 

‘‘small,’’ according to the SBA size 

standards applicable to each particular 

parent company.144 Of the eight 

industrial banks that reported total 

assets less than $600 million, the FDIC 

was able to determine that three of these 

potentially small industrial banks were 

owned by holding companies which 

were not small for purposes of the RFA. 

However, the FDIC currently lacks 

information necessary to determine 

whether the remaining five industrial 

banks are small. Therefore, of the 23 

existing industrial banks, 18 are not 

small entities for purposes of the RFA, 

but no more than five, or about 22 

percent, may be small entities. 

Additionally, the FDIC has received 

three change in control notices relating 

to industrial banks since 2010. Of those 

three, only one was from an industrial 

bank that could possibly be small for 

purposes of the RFA. 

Therefore, given that no more than 

five of the 23 existing industrial banks 

are small entities for the purposes of the 

RFA, and that no more than one change 

in control notice received by the FDIC 

since 2010 may be from a small entity, 

the FDIC believes the aspects of the final 

rule relating to change in control notices 

or merger applications involving 

industrial banks is not likely to affect a 

substantial number of small entities 

among existing industrial banks. 

As previously discussed, the final rule 

applies to industrial banks that, as of the 

effective date, become subsidiaries of 

companies that are Covered Companies, 

as such term is defined in § 354.2. It is 

difficult for the FDIC to estimate the 

volume of future applications from 

entities who seek to own and operate an 

insured industrial bank, or whether 

those entities would be considered 

‘‘small’’ according to the terms of RFA, 

with the information currently available 

to the FDIC. Such estimates would 

require detailed information on the 

particular business models of 

institutions, prevailing economic and 

financial conditions, the decisions of 

senior management, and the demand for 

financial services, among other things. 

However, the FDIC reviewed the firms 

with industrial bank applications 

pending before the FDIC as of December 

31, 2019. Each publically traded 

applicant had a market capitalization of 

at least $1 billion as of March 6, 2020. 

Each applicant operates either 

nationally within the United States, or 

operates worldwide, and none appear 

likely to be small for purposes of the 

RFA. Therefore, the FDIC believes that 

the aspects of the final rule relating to 

entities who seek to own and operate an 

insured industrial bank is not likely to 

affect a substantial number of small 

entities among existing industrial banks. 

Therefore, based on the preceding 

information, the FDIC certifies that the 

final rule does not significantly affect a 

substantial number of small entities. 

B. Paperwork Reduction Act 

In accordance with the requirements 

of the PRA,145 the FDIC may not 

conduct or sponsor, and the respondent 

is not required to respond to, an 

information collection unless it displays 

a currently valid Office of Management 

and Budget (OMB) control number. 

As discussed above, the final rule 

imposes PRA reporting and 

recordkeeping requirements for each 

industrial bank subject to the rule and 

its Covered Company. In particular, 

each industrial bank, and each Covered 

Company that directly or indirectly 

controls the industrial bank, must (i) 

agree to furnish the FDIC an initial 

listing, with annual updates, of all of the 

Covered Company’s subsidiaries; (ii) 

submit to the FDIC an annual report on 

the Covered Company and its 

subsidiaries, and such other reports as 

the FDIC may request; 146 (iii) maintain 

such records as the FDIC deems 

necessary to assess the risks to the 

industrial bank and to the DIF; and (iv) 

in the event that the FDIC has concerns 

about a complex organizational 

structure or based on other 

circumstances presented by a particular 

filing, the FDIC may condition the 

approval of an application or the nonobjection to a notice—in each case that 

would result in an industrial bank being 

controlled, directly or indirectly, by a 

Covered Company—on the Covered 

Company and industrial bank 

committing to providing to the FDIC, 

and thereafter adopting and 

implementing, a contingency plan that 

sets forth, at a minimum, one or more 

strategies for recovery actions and the 

orderly disposition of such industrial 

bank, without the need for the 

appointment of a receiver or 

conservator. 

The FDIC submitted its request to 

OMB for review and approval under 

section 3507(d) of the PRA (44 U.S.C. 

3507(d)) and § 1320.11 of OMB’s 

implementing regulations (5 CFR part 

1320) at the proposed rule stage. OMB 

filed a comment assigning the FDIC 

OMB control number 3064–0213 and 

indicated that OMB would re-review the 

PRA submission once the proposed rule 

was finalized. The FDIC did not receive 

any comments on the PRA. In addition, 

as stated above, because the final rule 

has been constructed to enable affected 

parties to comply with the various 

reporting commitments by relying on 

established and ongoing reports and 

records, the FDIC believes that the 

enhanced reporting commitment should 

have no effect on the PRA burden listed 

at the proposed rule stage. 

Information Collection 

Title: Industrial Banks and Industrial 

Loan Companies. 

OMB Number: 3064–0213. 

Affected Public: Prospective parent 

companies of industrial banks and 

industrial loan companies. 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10727 

147 12 U.S.C. 4809. 

148 12 U.S.C. 4802(a). 

149 12 U.S.C. 4802(b). 

150 5 U.S.C. 801 et seq. 

151 5 U.S.C. 801(a)(3). 

152 5 U.S.C. 804(2). 

SUMMARY OF ANNUAL BURDEN AND INTERNAL COST

Type of burden Obligation to 

respond 

Estimated 

number of 

respondents 

Estimated 

frequency of 

responses 

Estimated 

time per 

response 

Frequency of 

response 

Total annual 

estimated 

burden 

(hours) 

Initial listing of all of the Covered Company’s 

subsidiaries.

Reporting ............... Mandatory ..... 4 1.00 4 One Time ...... 16 

Annual update of listing of all of the Covered 

Company’s subsidiaries.

Reporting ............... Mandatory ..... 4 1.00 4 Annual .......... 16 

Annual report on the Covered Company and 

its subsidiaries, and such other reports as 

the FDIC may request.

Reporting ............... Mandatory ..... 4 1.00 10 Annual .......... 40 

Maintain records to assess the risks to the 

industrial bank and to the DIF.

Recordkeeping ....... Mandatory ..... 4 1.00 10 Annual .......... 40 

Contingency Plan ........................................... Reporting ............... Mandatory ..... 1 1.00 345 On Occasion 345 

Total Hourly Burden ................................ ................................ ....................... ........................ ........................ .................... ....................... 457 

C. Plain Language 

Section 722 of the GLBA 147 requires 

each Federal banking agency to use 

plain language in all of its proposed and 

final rules published after January 1, 

2000. The FDIC sought to present the 

final rule in a simple and 

straightforward manner and did not 

receive any comments on the use of 

plain language in the proposed rule. 

D. Riegle Community Development and 

Regulatory Improvement Act of 1994 

Pursuant to section 302(a) of the 

RCDRIA,148 in determining the effective 

date and administrative compliance 

requirements for new regulations that 

impose additional reporting, disclosure, 

or other requirements on insured 

depository institutions, each Federal 

banking agency must consider, 

consistent with principles of safety and 

soundness and the public interest, any 

administrative burdens that such 

regulations would place on affected 

depository institutions, including small 

depository institutions, and customers 

of depository institutions, as well as the 

benefits of such regulations. In addition, 

section 302(b) of RCDRIA requires new 

regulations and amendments to 

regulations that impose additional 

reporting, disclosures, or other new 

requirements on insured depository 

institutions generally to take effect on 

the first day of a calendar quarter that 

begins on or after the date on which the 

regulations are published in final 

form.149 The FDIC considered the 

administrative burdens and benefits of 

the final rule in determining its effective 

date and administrative compliance 

requirements. As such, the final rule 

will be effective on April 1, 2021. 

E. Congressional Review Act 

For purposes of the Congressional 

Review Act, OMB makes a 

determination as to whether a final rule 

constitutes a ‘‘major’’ rule.150 If a rule is 

deemed a ‘‘major rule’’ by the OMB, the 

Congressional Review Act generally 

provides that the rule may not take 

effect until at least 60 days following its 

publication.151

The Congressional Review Act defines 

a ‘‘major rule’’ as any rule that the 

Administrator of the Office of 

Information and Regulatory Affairs of 

the OMB finds has resulted in or is 

likely to result in (1) an annual effect on 

the economy of $100,000,000 or more; 

(2) a major increase in costs or prices for 

consumers, individual industries, 

Federal, State, or local government 

agencies or geographic regions, or (3) 

significant adverse effects on 

competition, employment, investment, 

productivity, innovation, or on the 

ability of United States-based 

enterprises to compete with foreignbased enterprises in domestic and 

export markets.152

The FDIC will submit the final rule 

and other appropriate reports to 

Congress and the Government 

Accountability Office for review. 

List of Subjects in 12 CFR Part 354 

Bank deposit insurance, Banks, 

banking, Finance, Holding companies, 

Industrial banks, Industrial loan 

company, Insurance, Parent company, 

Reporting and recordkeeping 

requirements, Savings associations. 

12 CFR Chapter III 

Authority and Issuance 

For the reasons stated in the 

preamble, the Federal Deposit Insurance 

Corporation amends title 12 of the Code 

of Federal Regulations by adding part 

354 to read as follows: 

PART 354—INDUSTRIAL BANKS 

Sec. 

354.1 Scope. 

354.2 Definitions. 

354.3 Written agreement. 

354.4 Required commitments and 

provisions of written agreement. 

354.5 Restrictions on industrial bank 

subsidiaries of Covered Companies. 

354.6 Reservation of authority. 

Authority: 12 U.S.C. 1811, 1815, 1816, 

1817, 1818, 1819(a) (Seventh) and (Tenth), 

1820(g), 1831o–1, 3108, 3207. 

§ 354.1 Scope. 

(a) In addition to the applicable filing 

procedures of part 303 of this chapter, 

this part establishes certain 

requirements for filings involving an 

industrial bank or a Covered Company. 

(b) The requirements of this part do 

not apply to an industrial bank that is 

organized as a subsidiary of a company 

that is not subject to Federal 

consolidated supervision by the Federal 

Reserve Board (FRB) before April 1, 

2021. In addition, this part does not 

apply to: 

(1) Any industrial bank that is or 

becomes controlled by a company that 

is subject to Federal consolidated 

supervision by the FRB; and 

(2) Any industrial bank that is not or 

will not become a subsidiary of a 

company. 

§ 354.2 Definitions. 

Unless defined in this section, terms 

shall have the meaning given to them in 

section 3 of the FDI Act. 

Control means the power, directly or 

indirectly, to direct the management or 

policies of a company or to vote 25 

percent or more of any class of voting 

securities of a company, and includes 

the rebuttable presumptions of control 

at § 303.82(b)(1) of this chapter and of 

acting in concert at § 303.82(b)(2) of this 

chapter. For purposes of this part, the 

10728 Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 

presumptions set forth in § 303.82(b)(1) 

and (2) of this chapter shall apply with 

respect to any company in the same 

manner and to the same extent as if they 

applied to an acquisition of securities of 

the company. 

Covered Company means any 

company that is not subject to Federal 

consolidated supervision by the FRB 

and that controls an industrial bank: 

(1) As a result of a change in bank 

control pursuant to section 7(j) of the 

FDI Act; 

(2) As a result of a merger transaction 

pursuant to section 18(c) of the FDI Act; 

or 

(3) That is granted deposit insurance 

by the FDIC pursuant to section 6 of the 

FDI Act, in each case on or after April 

1, 2021. 

FDI Act means the Federal Deposit 

Insurance Act, 12 U.S.C. 1811, et seq. 

Filing has the meaning given to it in 

§ 303.2(s) of this chapter. 

FRB means the Board of Governors of 

the Federal Reserve System and each 

Federal Reserve Bank. 

Industrial bank means any insured 

State bank that is an industrial bank, 

industrial loan company, or other 

similar institution that is excluded from 

the definition of the term ‘‘bank’’ in 

section 2(c)(2)(H) of the Bank Holding 

Company Act, 12 U.S.C. 1841(c)(2)(H). 

Senior executive officer has the 

meaning given it in § 303.101(b) of this 

chapter. 

§ 354.3 Written agreement. 

(a) No industrial bank may become a 

subsidiary of a Covered Company unless 

the Covered Company enters into one or 

more written agreements with both the 

Federal Deposit Insurance Corporation 

(FDIC) and the subsidiary industrial 

bank, which contain commitments by 

the Covered Company to comply with 

each of paragraphs (a)(1) through (8) in 

§ 354.4 and such other written 

agreements, commitments, or 

restrictions as the FDIC deems 

appropriate, including, but not limited 

to, the provisions of §§ 354.4 and 354.5. 

(b) The FDIC may, at its sole 

discretion, condition a grant of deposit 

insurance, issuance of a non-objection 

to a change in control, or approval of a 

merger on an individual who is a 

controlling shareholder of a Covered 

Company joining as a party to any 

written agreement required by 

paragraph (a) of this section. 

§ 354.4 Required commitments and 

provisions of written agreement. 

(a) The commitments required to be 

made in the written agreements 

referenced in § 354.3 are set forth in 

paragraphs (a)(1) through (8) of this 

section. In addition, with respect to an 

industrial bank subject to this part, the 

FDIC will condition each grant of 

deposit insurance, each issuance of a 

non-objection to a change in control, 

and each approval of a merger on 

compliance with paragraphs (a)(1) 

through (8) of this section by the parties 

to the written agreement. As required, 

each Covered Company must: 

(1) Submit to the FDIC an initial 

listing of all of the Covered Company’s 

subsidiaries and update such list 

annually; 

(2) Consent to the examination by the 

FDIC of the Covered Company and each 

of its subsidiaries to permit the FDIC to 

assess compliance with the provisions 

of any written agreement, commitment, 

or condition imposed; the FDI Act; or 

any other Federal law for which the 

FDIC has specific enforcement 

jurisdiction against such Covered 

Company or subsidiary, and all relevant 

laws and regulations; 

(3) Submit to the FDIC an annual 

report describing the Covered 

Company’s operations and activities, in 

the form and manner prescribed by the 

FDIC, and such other reports as may be 

requested by the FDIC to inform the 

FDIC as to the Covered Company’s: 

(i) Financial condition; 

(ii) Systems for identifying, 

measuring, monitoring, and controlling 

financial and operational risks; 

(iii) Transactions with depository 

institution subsidiaries of the Covered 

Company; 

(iv) Systems for protecting the 

security, confidentiality, and integrity of 

consumer and nonpublic personal 

information; and 

(v) Compliance with applicable 

provisions of the FDI Act and any other 

law or regulation; 

(4) Maintain such records as the FDIC 

may deem necessary to assess the risks 

to the subsidiary industrial bank or to 

the Deposit Insurance Fund; 

(5) Cause an independent audit of 

each subsidiary industrial bank to be 

performed annually; 

(6) Limit the Covered Company’s 

direct and indirect representation on the 

board of directors or board of managers, 

as the case may be, of each subsidiary 

industrial bank to less than 50 percent 

of the members of such board of 

directors or board of managers, in the 

aggregate, and, in the case of a 

subsidiary industrial bank that is 

organized as a member-managed limited 

liability company, limit the Covered 

Company’s direct and indirect 

representation as a managing member to 

less than 50 percent of the managing 

member interests of the subsidiary 

industrial bank, in the aggregate; 

(7) Maintain the capital and liquidity 

of the subsidiary industrial bank at such 

levels as the FDIC deems appropriate, 

and take such other actions as the FDIC 

deems appropriate to provide the 

subsidiary industrial bank with a 

resource for additional capital and 

liquidity including, for example, 

pledging assets, obtaining and 

maintaining a letter of credit from a 

third-party institution acceptable to the 

FDIC, and providing indemnification of 

the subsidiary industrial bank; and 

(8) Execute a tax allocation agreement 

with its subsidiary industrial bank that 

expressly states that an agency 

relationship exists between the Covered 

Company and the subsidiary industrial 

bank with respect to tax assets generated 

by such industrial bank, and that further 

states that all such tax assets are held in 

trust by the Covered Company for the 

benefit of the subsidiary industrial bank 

and will be promptly remitted to such 

industrial bank. The tax allocation 

agreement also must provide that the 

amount and timing of any payments or 

refunds to the subsidiary industrial 

bank by the Covered Company should 

be no less favorable than if the 

subsidiary industrial bank were a 

separate taxpayer. 

(b) The FDIC may require such 

Covered Company and industrial bank 

to commit to provide to the FDIC, and, 

thereafter, implement and adhere to, a 

contingency plan subject to the FDIC’s 

approval that sets forth, at a minimum, 

recovery actions to address significant 

financial or operational stress that could 

threaten the safe and sound operation of 

the industrial bank and one or more 

strategies for the orderly disposition of 

such industrial bank without the need 

for the appointment of a receiver or 

conservator. 

§ 354.5 Restrictions on industrial bank 

subsidiaries of Covered Companies. 

Without the FDIC’s prior written 

approval, an industrial bank that is 

controlled by a Covered Company shall 

not: 

(a) Make a material change in its 

business plan after becoming a 

subsidiary of such Covered Company; 

(b) Add or replace a member of the 

board of directors, board of managers, or 

a managing member, as the case may be, 

of the subsidiary industrial bank during 

the first three years after becoming a 

subsidiary of such Covered Company; 

(c) Add or replace a senior executive 

officer during the first three years after 

becoming a subsidiary of such Covered 

Company; 

(d) Employ a senior executive officer 

who is, or during the past three years 

has been, associated in any manner (e.g., 

Federal Register / Vol. 86, No. 34 / Tuesday, February 23, 2021 / Rules and Regulations 10729 

1 12 U.S.C. 1751 et seq. 

2 12 U.S.C. 1766(a). 

3 12 U.S.C. 1789. 

4 12 U.S.C. 1766(a). 

5 12 CFR part 704. 

6 75 FR 64786 (Oct. 20, 2010). 

7See e.g., 80 FR 25932 (May 6, 2015), 80 FR 

57283 (Sept. 23, 2015), and 82 FR 55497 (Nov. 22, 

2017). 

8 82 FR 55497 (Nov. 22, 2017). 

9 85 FR 17288 (Mar. 27, 2020). 

10 85 FR 20431 (Apr. 13, 2020). 

11 85 FR 71817 (Nov. 12, 2020). 

12 85 FR 13982 (Mar. 10, 2020). 

13See, https://www.ncua.gov/files/agenda-items/ 

AG20201217Item5b.pdf. 

as a director, officer, employee, agent, 

owner, partner, or consultant) with an 

affiliate of the industrial bank; or 

(e) Enter into any contract for services 

material to the operations of the 

industrial bank (for example, loan 

servicing function) with such Covered 

Company or any subsidiary thereof. 

§ 354.6 Reservation of authority. 

Nothing in this part limits the 

authority of the FDIC under any other 

provision of law or regulation to take 

supervisory or enforcement actions, 

including actions to address unsafe or 

unsound practices or conditions, or 

violations of law. 

Federal Deposit Insurance Corporation. 

By order of the Board of Directors. 

Dated at Washington, DC, on December 15, 

2020. 

James P. Sheesley, 

Assistant Executive Secretary. 

[FR Doc. 2020–28473 Filed 2–22–21; 8:45 am] 

BILLING CODE 6714–01–P 

NATIONAL CREDIT UNION 

ADMINISTRATION 

12 CFR Part 704 

RIN 3133–AF13 

Corporate Credit Unions 

AGENCY: National Credit Union 

Administration (NCUA). 

ACTION: Final rule. 

SUMMARY: The NCUA Board (Board) is 

issuing a final rule that amends the 

NCUA’s corporate credit union 

regulation. The final rule updates the 

definitions in this regulation and makes 

clear that corporate credit unions may 

purchase subordinated debt instruments 

issued by natural person credit unions. 

The final rule also specifies the capital 

treatment of these instruments for 

corporate credit unions that purchase 

them. 

DATES: The final rule is effective January 

1, 2022. 

FOR FURTHER INFORMATION CONTACT: 

Policy and Analysis: Robert Dean, 

National Supervision Analyst, Office of 

National Examinations and Supervision, 

(703) 518–6652; Legal: Rachel 

Ackmann, Senior Staff Attorney, Office 

of General Counsel, (703) 548–2601; or 

by mail at National Credit Union 

Administration, 1775 Duke Street, 

Alexandria, VA 22314. 

SUPPLEMENTARY INFORMATION: 

I. Introduction 

a. Legal Authority and Background 

The Board is issuing this rule 

pursuant to its authority under the 

Federal Credit Union Act (FCU Act).1

Under the FCU Act, the NCUA is the 

chartering and supervisory authority for 

Federal credit unions (FCUs) and the 

federal supervisory authority for 

federally insured credit unions (FICUs). 

The FCU Act grants the NCUA a broad 

mandate to issue regulations governing 

both FCUs and FICUs. Section 120 of 

the FCU Act is a general grant of 

regulatory authority and authorizes the 

Board to prescribe regulations for the 

administration of the FCU Act.2 Section 

209 of the FCU Act is a plenary grant 

of regulatory authority to the NCUA to 

issue regulations necessary or 

appropriate to carry out its role as share 

insurer for all FICUs.3 The FCU Act also 

includes an express grant of authority 

for the Board to subject federally 

chartered central, or corporate, credit 

unions to such rules, regulations, and 

orders as the Board deems appropriate.4

Part 704 of the NCUA’s regulations 

implements the requirements of the 

FCU Act regarding corporate credit 

unions.5 In 2010, the Board 

comprehensively revised the regulations 

governing corporate credit unions to 

provide longer-term structural 

enhancements to the corporate system 

in response to the financial crisis of 

2007–2009.6 The provisions of the 2010 

rule successfully stabilized the 

corporate system and improved 

corporate credit unions’ ability to 

function and provide services to natural 

person credit unions. Since 2010, and as 

part of the Board’s continuous 

reevaluation of its regulation of 

corporate credit unions, the Board has 

amended part 704 on several occasions.7

In 2017, the Board amended corporate 

credit union capital standards to change 

the calculation of capital after a 

consolidation and to set a retained 

earnings ratio target in meeting prompt 

corrective action (commonly referred to 

as PCA) standards.8 In October 2020, the 

Board issued a final rule to amend 

several provisions relating to corporate 

credit union investments in credit union 

service organizations (CUSOs) and other 

provisions relating to corporate credit 

union governance and technical matters, 

as discussed in the following sections. 

b. February 2020 Proposed Rule on Part 

704 

On February 20, 2020, the Board 

approved a notice of proposed 

rulemaking to update, clarify, and 

simplify several provisions of part 704 

(proposed rule).9 The proposed rule 

provided for a 60-day comment period, 

which the Board later extended by 60 

days because of COVID–19.10 The 

comment period ended on July 27, 2020. 

c. October 2020 Final Rule on Part 704 

The NCUA received 35 comment 

letters on the proposed rule. Comments 

were received from credit unions, both 

corporate and natural persons, credit 

union leagues and trade associations, 

individuals, corporate CUSOs, and an 

association of state credit union 

supervisors. In October 2020, the Board 

issued a final rule that: (1) Permits a 

corporate credit union to make a 

minimal investment in a CUSO without 

the CUSO being classified as a corporate 

CUSO and subject to heightened NCUA 

oversight; (2) expands the categories of 

senior staff positions at member credit 

unions eligible to serve on a corporate 

credit union’s board; (3) removes the 

experience and independence 

requirement for a corporate credit 

union’s enterprise risk management 

expert; (4) clarifies the definition of a 

collateralized debt obligation; and (5) 

simplifies the requirement for net 

interest income modeling.11

The October 2020 final rule deferred 

final action on the provisions in the 

proposed rule that addressed the 

permissibility and capital treatment for 

corporate credit union purchases of 

subordinated debt instruments under 

the Board’s January 2020 proposed rule 

on subordinated debt.12 In the October 

2020 final rule, the Board discussed the 

comments on this part of the proposed 

rule and noted that the commenters that 

addressed these provisions all 

supported them. The Board did not 

adopt the provisions at that time 

because it had not yet finalized the 

January 2020 proposed rule on 

subordinated debt. 

d. Final Rule on Subordinated Debt 

The Board has now adopted the 

January 2020 proposed rule on 

subordinated debt as final.13 These