a

GAO

United States Government Accountability Office

Report to the Honorable James A. Leach, 

House of Representatives

September 2005 INDUSTRIAL LOAN 

CORPORATIONS

Recent Asset Growth 

and Commercial 

Interest Highlight 

Differences in 

Regulatory Authority

GAO-05-621
What GAO Found

United States Government Accountability Office

Why GAO Did This Study

Highlights

Accountability Integrity Reliability

www.gao.gov/cgi-bin/getrpt?GAO-05-621.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact Richard J. 

Hillman at (202) 512-8678 or 

hillmanr@gao.gov. 

Highlights of GAO-05-621, a report to the 

Honorable James A. Leach, House of 

Representatives 

September 2005

INDUSTRIAL LOAN CORPORATIONS

Recent Asset Growth and Commercial 

Interest Highlight Differences in 

Regulatory Authority 

The ILC industry has experienced significant asset growth and has evolved 

from one-time, small, limited purpose institutions to a diverse industry that 

includes some of the nation’s largest and more complex financial institutions. 

Between 1987 and 2004, ILC assets grew over 3,500 percent from $3.8 billion 

to over $140 billion. In most respects, ILCs may engage in the same activities 

as other depository institutions insured by the FDIC and thus may offer a full 

range of loans, including consumer, commercial and residential real estate, 

small business, and subprime. ILCs are also subject to the same federal safety 

and soundness safeguards and consumer protection laws that apply to other 

FDIC-insured institutions. Therefore, from an operations standpoint, ILCs 

pose similar risks to the bank insurance fund as other types of insured 

depository institutions. 

Parents of insured depository institutions that provide similar risks to the 

bank insurance fund are not, however, being overseen by bank supervisors 

that possess similar powers. ILCs typically are owned or controlled by a 

holding company that may also own other entities. Although FDIC has 

supervisory authority over an insured ILC, it has less extensive authority to 

supervise ILC holding companies than the consolidated supervisors of bank 

and thrift holding companies. Therefore, from a regulatory standpoint, these 

ILCs may pose more risk of loss to the bank insurance fund than other insured 

depository institutions operating in a holding company. For example, FDIC’s 

authority to examine ILC affiliates and take certain enforcement actions 

against them is more limited than a consolidated supervisor. While FDIC 

asserted that its authority may achieve many of the same results as 

consolidated supervision, and that its supervisory model has mitigated losses 

to the bank insurance fund in some instances, FDIC’s authority is limited to a 

particular set of circumstances and may not be used at all times. Further, 

FDIC’s authority has not been tested by a large ILC parent during times of 

economic stress. 

An exemption in federal banking law currently allows ILC parents to mix 

banking and commerce more than the parents of other depository institutions. 

Three of the six new ILC charters approved during 2004 were for commercial 

firms, and one of the largest retail firms recently applied for an ILC charter. 

While some industry participants assert that mixing banking and commerce 

may offer benefits from operational efficiencies, empirical evidence 

documenting these benefits is mixed. Federal policy separating banking and 

commerce focuses on the potential risks from integrating these functions, 

such as the potential expansion of the federal safety net provided for banks to 

their commercial entities. GAO finds it unusual that a limited ILC exemption 

would be the primary means for mixing banking and commerce on a broader 

scale and sees merit in Congress more broadly considering the advantages 

and disadvantages of a greater mixing of banking and commerce. 

Industrial loan corporations (ILC) 

emerged in the early 1900s as small 

niche lenders that provided 

consumer credit to low and 

moderate income workers who 

were generally unable to obtain 

consumer loans from commercial 

banks. Since then, some ILCs have 

grown significantly in size, and 

some have expressed concern that 

ILCs may have expanded beyond 

the original scope and purpose 

intended by Congress. Others have 

questioned whether the current 

regulatory structure for overseeing 

ILCs is adequate. 

This report (1) discusses the 

growth and permissible activities of

ILCs and other insured depository 

institutions, (2) compares the 

supervisory authority of the FDIC 

with consolidated supervisors, and 

(3) describes ILC parents’ ability to 

mix banking and commerce. 

What GAO Recommends

GAO is not recommending 

executive action but believes 

Congress should consider 

strengthening the regulatory 

oversight of ILCs and more broadly 

consider the advantages and 

disadvantages of a greater mixing 

of banking and commerce by ILCs 

or other financial institutions. In 

commenting on a draft of this 

report, the Board agreed with both 

the findings and matters for 

congressional consideration. FDIC 

agreed with one of the findings but 

generally believed that no changes 

were needed in its supervisory 

approach. 
Page i GAO-05-621 Industrial Loan Corporations

Contents

Letter 1

Results in Brief 5

Background 10

ILCs Have Grown Significantly and Are No Longer Small, Limited 

Purpose Institutions 16

ILC Business Lines and Regulatory Safeguards Are Similar to Other 

Insured Financial Institutions 21

FDIC’s Supervisory Authority Over ILC Holding Companies and 

Affiliates Is Not Equivalent to Consolidated Supervisors’ 

Authority 27

FDIC Actions May Help Mitigate Potential Risks, but Supervision of 

ILC Holding Companies and Affiliates Has Only Been Tested on a 

Limited Basis in Relatively Good Economic Times 48

ILCs May Offer Commercial Holding Companies a Greater Ability to 

Mix Banking and Commerce Than Other Insured Depository 

Institution, but Views on Competitive Implications Are Mixed 65

Recent Legislative Proposals May Increase the Attractiveness of 

Operating an ILC 76

Conclusions 79

Matters for Congressional Consideration 81

Agency Comments and Our Evaluation 82

Appendixes

Appendix I: Objectives, Scope, and Methodology 87

Appendix II: Comments from the Board of Governors of the Federal 

Reserve System 90

Appendix III: Comments from the Federal Deposit Insurance 

Corporation 92

Appendix IV: GAO Contact and Staff Acknowledgments 98

Tables Table 1: Comparison of Permissible Activities Between State 

Nonmember Commercial Banks and ILCs in a Holding 

Company Structure 23

Table 2: The Extent of Selected FDIC Authorities 38

Table 3: Affiliate Related Examination Procedures 50

Table 4: Comparison of Examination Resources and Organizational 

Structure of State Banking Supervisory Office 56
Contents

Page ii GAO-05-621 Industrial Loan Corporations

Table 5: Causes of Material ILC Failures and FDIC’s Response to 

Failures and Other Industry Conditions 60

Figures Figure 1: Number and Total Assets of ILCs 19

Figure 2: Percentage of ILC Assets Held by Individual States 20

Figure 3: Percentage of Estimated FDIC Insured Deposits Held by 

ILCs 21

Figure 4: Comparison of Explicit Supervisory Authorities of the 

FDIC, Board, and OTS 35
Contents

Page iii GAO-05-621 Industrial Loan Corporations

Abbreviations

BHC Act Bank Holding Company Act

Board Board of Governors of the Federal Reserve System

CEBA Competitive Equality Banking Act

CIBA Change in Bank Control Act

CSBS Conference of State Banking Supervisors

FDI Act Federal Deposit Insurance Act

FDIC Federal Deposit Insurance Corporation

FDIC-IG Federal Deposit Insurance Corporation Office of Inspector 

General

FFIEC Federal Financial Institutions Examination Council

Fund Bank Insurance Fund

GLBA Gramm Leach Bliley Act

HOLA Home Owners Loan Act

IAP Institution-Affiliated Party

ILC Industrial Loan Corporation

IT information technology

NCUA National Credit Union Association

Nevada DFI Nevada Division of Financial Institutions

NOW Negotiable Order of Withdrawal

OCC Office of the Comptroller of the Currency

OTS Office of Thrift Supervision

QTL Quality Thrift Lender 

SEC Securities and Exchange Commission

Treasury Department of the Treasury

Utah DFI Utah Department of Financial Institutions

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Page 1 GAO-05-621 Industrial Loan Corporations

United States Government Accountability Office

Washington, D.C. 20548

A

September 15, 2005 Letr

The Honorable James A. Leach

House of Representatives

Dear Mr. Leach:

Industrial loan corporations (ILC), also known as industrial banks, are 

state-chartered financial institutions that emerged in the twentieth century 

to provide consumer credit to low and moderate income workers who were 

generally unable to obtain consumer loans from commercial banks. Over 

the past 10 years, ILCs have experienced significant asset growth, and 

these one-time, small niche lenders have evolved into a diverse industry 

that includes some large, complex financial institutions. In addition, some 

commercial entities are increasingly interested in owning ILCs. For 

example, three large commercial entities were granted approval to open 

ILCs in 2004, and one of the largest retail enterprises recently applied for an 

ILC charter. As a result, some have expressed concerns that ILCs may be 

expanding beyond the original scope and purpose intended by Congress. 

ILCs are typically owned or controlled by a holding company that may also 

own other entities, and concerns have also been expressed that the current 

regulatory structure for overseeing ILCs in holding companies may not 

provide adequate protection against the potential risks that holding 

companies and nonbank affiliates may pose to an ILC. The regulation of the 

safety and soundness of ILCs rests with the Federal Deposit Insurance 

Corporation (FDIC) and the ILC’s respective state regulator. Under the 

Bank Holding Company Act (BHC Act), the Board of Governors of the 

Federal Reserve System (Board) generally supervises bank holding 

companies and has established a consolidated supervisory framework for 

assessing the risks to a depository institution that could arise because of 

their affiliation with other entities in a holding company structure. For 

example, the Board may generally examine holding companies and their 

nonbank subsidiaries, subject to some limitations, to assess, among other 

things, the nature of the operations and financial condition of the holding 

company and its subsidiaries; the financial and operations risks within the 

holding company system that may pose a threat to the safety and 

soundness of any depository institution subsidiary of such holding 

company; and the systems for monitoring and controlling such risks. Thus, 

consolidated supervisors take a systemic approach to supervising holding 

companies and nonbank subsidiaries of depository institutions. However, 

holding companies of ILCs operate under an exception to the BHC Act, and 
Page 2 GAO-05-621 Industrial Loan Corporations

most are not subject to Board oversight. Moreover, FDIC has not been 

given consolidated supervisory authority over ILC holding companies. 

FDIC has, however, employed what some term as a “bank-centric” 

supervisory approach that primarily focuses on isolating the insured 

institution from potential risks posed by holding companies and affiliates, 

rather than assessing these potential risks systemically across the 

consolidated holding company structure.

Another area of concern about ILCs is the extent to which they can mix 

banking and commerce through the holding company structure. The policy 

separating banking and commercial activity was largely a reaction to the 

perception that banks, especially those in a larger conglomerate 

organization, had a disproportionate amount of economic power in the 

period leading up to the stock market crash of 1929. The BHC Act 

maintains the historical separation of banking from commerce by generally 

restricting bank holding companies to banking-related or financial 

activities.1

 The BHC Act also allows ILC holding companies, including 

nonfinancial institutions such as retailers and manufacturers, and other 

institutions to avoid consolidated supervision and activities restrictions. 

While some industry participants have stated that mixing banking and 

commerce may offer benefits from operational efficiencies, the policy of 

separating banking and commerce was based primarily on the potential 

risks that combining these activities may pose to the federal safety net for 

insured depository institutions, as well as the potential for more conflicts 

of interest and the potential increase in economic power exercised by large 

conglomerate enterprises. Currently ILC holding companies and 

companies that own or control other types of insured depository 

institutions and other nondepository institutions, such as unitary thrifts, 

are permitted to mix banking and commerce to varying degrees. However, 

some believe that ILCs may be the entities that offer the greatest ability to 

mix these activities. 

Currently, FDIC-insured banks, including ILCs, are not permitted to offer 

interest-bearing business checking accounts. Over the past several years, 

1

As amended by the Gramm-Leach-Bliley Act (GLBA), the BHC Act restricts the activities of 

bank holding companies to activities “closely related to banking” that were permitted by the 

Federal Reserve Board as of November 11, 1999. However, bank holding companies that 

qualify as financial holding companies can engage in additional activities defined in GLBA as 

activities that are “financial in nature,” as well as activities that are incidental to or 

complementary to financial activity. Pub. L. No. 106-102 §§ 102, 103, codified at 12 U.S.C. § 

1843(c)(8), (k) (2000 & Supp. 2004).
Page 3 GAO-05-621 Industrial Loan Corporations

there have been repeated legislative proposals to repeal this prohibition 

and some have stated that this prohibition is unnecessary and outdated. 

Recent legislative proposals would grant insured depository institutions, 

including many ILCs, the ability to pay interest on business checking 

accounts and branch into other states through establishing new branches—

known as de novo branching. Some have questioned whether these 

proposals would give ILCs a competitive advantage in the marketplace or 

essentially place ILCs on par with commercial banks. 

This report responds to your March 4, 2004, request for a review of several 

issues related to ILCs. Specifically you asked us to (1) describe the history 

and growth of the ILC industry; (2) describe the permissible activities and 

regulatory safeguards for ILCs as compared with other insured financial 

institutions; (3) compare FDIC’s supervisory authority over ILC holding 

companies and affiliates with the consolidated supervisors’ authority over 

holding companies and affiliates; (4) describe recent changes FDIC made 

to its supervisory approach of the risks that holding companies and 

affiliates could pose to ILCs and determine whether FDIC’s bank-centric 

supervisory approach protects the ILC from all the risks that holding 

companies and nonbank affiliates may pose to the ILC; (5) determine 

whether the ILC charter allows for a greater mixing of banking and 

commerce than other types of insured depository institutions, and whether 

this possibility has any competitive implications for the banking industry; 

and (6) determine the potential implications of granting ILCs the ability to 

pay interest on business checking accounts and operate de novo branches 

nationwide. 

To describe the history and growth of the ILC industry, we analyzed data, 

including information on ILC assets and estimated insured deposits for the 

time period 1987–2004. To describe the permissible activities of and 

regulatory safeguards for ILCs, we reviewed federal and state legislation, 

regulations, and guidance regarding ILCs and banks. We also interviewed 

management from various ILCs and spoke with officials from FDIC; the 

Board; and state supervisory officials from California, Nevada, and Utah 

that are responsible for the safety and soundness of insured institutions. 

We focused on ILCs and bank supervisors in these three states because 

they comprise over 99 percent of the ILC industry assets. We also analyzed 

FDIC data on ILCs from 1987–2004. To compare FDIC’s supervisory 

authority over ILC holding companies and affiliates with the consolidated 

supervisors’ authority over holding companies and affiliates, we reviewed 

and analyzed legislation and regulations that govern the supervision of 

insured depository institutions, including ILCs and their holding 
Page 4 GAO-05-621 Industrial Loan Corporations

companies, banks and their holding companies, and thrifts and their 

holding companies. We also compared agency examination manuals and 

guidance, interviewed officials regarding the FDIC’s, the Board’s, and the 

Office of Thrift Supervision’s (OTS) supervisory approaches and 

supervisory authorities, and spoke with state and FDIC regional staff 

responsible for conducting examinations. We focused our comparison 

primarily on the Board’s authorities relating to the consolidated 

supervision of bank holding companies and the FDIC’s supervision of ILCs, 

their holding companies, and affiliates from a safety and soundness 

perspective. However, because OTS also supervises similar institutions 

with similar risks, we also reviewed OTS’ supervisory authority with 

respect to thrifts and savings and loan holding companies. To describe 

what recent changes FDIC has made to its supervisory approach of the 

risks that holding companies and their nonbank subsidiaries could pose to 

ILCs and determine whether FDIC’s bank-centric supervisory approach 

protects the ILC from all the risks that holding companies and those 

subsidiaries may pose to the ILC, we reviewed and synthesized relevant 

supporting documents and the information from the two FDIC-Inspector 

General (FDIC-IG) material loss reviews related to ILCs. Where 

appropriate, after conducting our own due diligence review, we also relied 

upon the work of the FDIC-IG’s September 30, 2004, report on limited 

charter depository institutions, including ILCs, that provided information 

on FDIC’s guidance and procedures for supervising limited-charter 

depository institutions, including ILCs, and summarized recent actions 

regarding these institutions.2

 To determine whether the ILC charter allows 

for a greater mixing of banking and commerce than other types of insured 

depository institutions, and whether this possibility has any competitive 

implications for the banking industry and to determine the potential 

implications of granting ILCs the ability to pay interest on business 

checking accounts and operate de novo branches nationwide, we reviewed 

academic and other studies, relevant laws, and other documents, 

interviewed management from several ILCs, and hosted a panel of experts 

made up of academics, economists, industry practitioners, and 

independent consultants. See appendix I for additional details on our 

objectives, scope, and methodology. 

2

The Division of Supervision and Consumer Protection’s Approach for Supervising 

Limited-Charter Depository Institutions (FDIC Office of Inspector General Report No. 

2004-048, Sept. 30, 2004).
Page 5 GAO-05-621 Industrial Loan Corporations

During this review, we did not assess the extent to which regulators 

effectively implemented consolidated supervision or any other type of 

supervision. Rather, we focused on the respective federal regulators’ 

authorities to determine whether there were any inherent limitations in 

these authorities. We conducted our work in Washington, D.C.; Los 

Angeles, California; San Francisco, California; Las Vegas, Nevada; and Salt 

Lake City, Utah; between May 2004 and August 2005 in accordance with 

generally accepted government auditing standards. 

Results in Brief ILCs began in the early 1900s as small, state-chartered, loan companies that 

primarily served the borrowing needs of industrial workers unable to 

obtain noncollateralized loans from banks. Since then, the ILC industry has 

experienced significant asset growth and has evolved from small, limited 

purpose institutions to a diverse industry that includes some of the nation’s 

largest and more complex financial institutions with extensive access to 

the capital markets. Most notably, between 1987 and 2004, ILC assets grew 

over 3,500 percent from $3.8 billion to over $140 billion, while the number 

of ILCs declined about 46 percent from 106 to 57. The amount of estimated 

insured deposits in the ILC industry has also grown significantly; however, 

these deposits represent less than 3 percent of the total estimated insured 

deposits in the Fund for all banks. This growth in the ILC industry has been 

concentrated in three states—California, Nevada, and Utah. In 2004, 6 ILCs 

were among the 180 largest financial institutions in the nation with $3 

billion or more in total assets, and one institution had over $66 billion in 

total assets. 

With one exception contained in federal and one state’s banking laws, ILCs 

in a holding company structure may generally engage in the same activities 

as FDIC-insured depository institutions. Also, FDIC-insured ILCs must 

comply with the same federal requirements as other FDIC-insured 

depository institutions. For these two reasons, ILCs pose risks to the Fund 

similar to those posed by other FDIC-insured institutions from an 

operations standpoint.3

 Like other FDIC-insured depository institutions, 

ILCs may offer a full range of loans such as consumer, commercial and 

residential real estate, and small business loans. Further, like a bank, an 

3

Under 12 U.S.C 1831a(a), FDIC-insured state banks, a group that includes ILCs, may not 

engage as principal in any activity that is not permissible for a national bank unless the FDIC 

has determined that any additional activity would pose no significant risk to the deposit 

insurance fund and the bank is in compliance with applicable federal capital standards.
Page 6 GAO-05-621 Industrial Loan Corporations

ILC may also “export” its home-state’s interest rates to customers residing 

elsewhere. However, because of restrictions in federal and California state 

banking law, most ILCs do not accept demand deposits.4

 As a result, many 

ILCs offer Negotiable Order of Withdrawal (NOW) accounts—similar in 

some respects to demand deposits and are, therefore, able to offer a service 

similar to demand deposits without their holding companies being subject 

to supervision under the BHC Act.5

 While most ILC holding companies are 

not subject to supervision under the BHC Act, ILCs generally are subject to 

the same federal regulatory safeguards that apply to commercial banks and 

thrifts, such as federal restrictions governing transactions with affiliates 

and laws addressing terrorism financing, money laundering, and other 

criminal activities by bank customers. 

FDIC’s supervisory authority over the holding companies and affiliates of 

ILCs is more limited than the authority that consolidated supervisors have 

over the holding companies and affiliates of banks and thrifts. For example, 

FDIC’s authority to examine an affiliate of an insured depository institution 

is limited to examinations necessary to disclose fully the relationship 

between the institution and any affiliate and the effect of the relationship 

on the institution. Relationships generally include arrangements involving 

some level of interaction, interdependence, or mutual reliance between the 

ILC and the affiliate, such as a contract, transaction, or the sharing of 

operations. When a relationship does not exist, any reputation or other risk 

presented by an affiliate that could impact the institution may not be 

detected. In contrast, consolidated supervisors, subject to functional 

regulation restrictions, generally are able to examine the holding company

4

California law prohibits industrial banks from accepting demand deposits. Cal. Financial 

Code § 105.7 (Deering 2002). Section 2c(2)(H) of the BHC Act exempts ILCs that satisfy 

certain criteria from the act. The exemption applies to ILCs organized under the laws of 

states which, on March 5, 1987, had or were considering laws to require FDIC insurance for 

ILCs and includes ILCs with assets of $100 million or more that do not accept demand 

deposits that may be withdrawn by check or similar means for payment to third parties. 12 

U.S.C. § 1841(c)(2)(H). The vast majority of ILCs exist in a holding company structure, and 

these ILCs’ assets account for 99 percent of total ILC industry assets. 

5

NOW accounts are deposit accounts that give the depository institution the right to require 

at least 7 days written notice prior to withdrawal and have other characteristics set forth in 

Federal Reserve Regulation D. 12 C.F.R. § 204.2(b)(3) (2004). Under the Federal Deposit 

Insurance Act, NOW accounts may be offered to individuals and nonprofit organizations and 

for the deposit of public funds. 12 U.S.C. § 1832 (2000). 
Page 7 GAO-05-621 Industrial Loan Corporations

and any nonbank subsidiary regardless of whether the subsidiary has a 

relationship with the affiliated insured bank.6

 FDIC officials told us that 

with its examination authority, as well as its abilities to impose conditions 

on or enter into agreements with an ILC holding company in connection 

with an application for federal deposit insurance, terminate an ILC’s 

deposit insurance, enter into agreements during the acquisition of an 

insured entity, and take enforcement measures, FDIC can protect an ILC 

from the risks arising from being in a holding company as effectively as the 

consolidated supervision approach. However, with respect to the holding 

company, these authorities are limited to particular sets of circumstances 

and are less extensive than those possessed by consolidated supervisors of 

bank and thrift holding companies. 

While FDIC’s bank-centric supervisory approach has undergone various 

enhancements designed to help mitigate the potential risks that FDICexamined institutions, including ILCs in a holding company structure, can 

be exposed to by their holding companies and affiliates, questions remain 

about whether FDIC’s supervisory approach and authority over BHC Actexempt holding companies and their nonbank subsidiaries address all risks 

to the ILC from these entities. FDIC revised the guidance for its riskfocused examinations to, among other things, provide additional factors 

that might be considered in assessing a parent company’s potential impact 

on an insured depository institution affiliate. In addition, FDIC’s monitoring 

and application processes may also help to mitigate risks to ILCs with 

foreign holding companies and affiliates. FDIC has provided some 

examples where its supervisory approach effectively protected the insured 

institution and mitigated losses to the Fund. However, FDIC’s supervision 

of large rapidly growing ILCs and FDIC’s authority over ILC holding 

companies and nonbank subsidiaries, including the risks that these entities 

could pose to the ILC, has been refined during a period of time described as 

the “golden age of banking” and has not been tested during a time of 

significant economic stress or by a large, troubled ILC. 

Because most ILC holding companies and their subsidiaries are exempt 

from business activity limitations that generally apply to the holding 

companies and affiliates of other types of insured depository institutions, 

ILCs may provide a means for mixing banking and commerce more than 

6

For purposes of this report, the term “bank” refers to insured depository institutions, 

including ILCs and thrifts. The Federal Deposit Insurance Act defines the term “bank” to 

include ILCs. 12 U.S.C. § 1813(a).
Page 8 GAO-05-621 Industrial Loan Corporations

ownership or affiliation with other insured depository institutions. During 

our review, we identified other instances where the mixing of banking and 

commerce previously existed, or currently exists on a limited basis, such as 

unitary thrift holding companies, certain “nonbank banks” in a holding 

company, and activities permitted under GLBA, such as merchant banking 

and grandfathered, limited nonfinancial activities by securities and 

insurance affiliates of financial holding companies.7

 However, federal law 

significantly limits the operations and product mixes of these entities and 

activities as compared with ILC holding companies. Additionally, with the 

exception of a limited, credit-card-only bank charter, ownership or 

affiliation with an ILC is today the only option available to nonfinancial, 

commercial firms wanting to enter the insured banking business. Three of 

the six new ILC charters approved by FDIC during 2004 are owned by 

nonfinancial, commercial firms, and one of the nation’s largest retailers 

recently filed an application to own an ILC. The policy generally separating 

banking and commerce is based primarily on potential risks that 

integrating these functions may pose such as the potential expansion of the 

federal safety net provided for banks to their commercial holding 

companies or affiliates, potential increase in conflicts of interest, and the 

potential increase in economic power exercised by large conglomerate 

enterprises. While some industry participants state that mixing banking 

and commerce may offer benefits from operational efficiencies, empirical 

evidence documenting these benefits is mixed.

Recent legislative proposals to allow insured depository institutions, 

including certain ILCs, to offer NOW accounts to business customers and 

the ability to de novo branch will expand the availability of products and 

services that insured depository institutions, including ILCs, could offer 

and may make the ownership of ILCs increasingly attractive, particularly to 

commercial entities. FDIC-insured depository institutions, including ILCs, 

are currently prohibited from offering interest-bearing business checking 

accounts. Recent legislative proposals would remove the current 

prohibition on paying interest on demand deposits and allow insured 

depository institutions, including all or some ILCs, to offer interest-bearing 

business NOW checking accounts. This would, in effect, expand the 

7

Unitary thrift holding companies are generally any company that owns a single thrift. 

Merchant banking refers to the practice where a financial institution makes a passive equity 

investment in a corporation with a view toward working with company management and 

operating partners to enhance the value of the equity investment over time. Federal banking 

law contains several provisions that are designed to distinguish merchant banking 

investments from the more general mixing of banking and commerce. 
Page 9 GAO-05-621 Industrial Loan Corporations

availability of products and services that insured depository institutions, 

including most ILCs, could offer. ILC advocates we spoke with stated that 

including ILCs in these legislative proposals maintains the current relative 

parity between ILC permissible activities and those of other insured bank 

charters. However, Board officials, as well as some industry observers we 

spoke with, told us that granting grandfathered ILCs the ability to pay 

interest on business NOW accounts represents an expansion of powers for 

ILCs, which, they stated, could further blur the distinction between ILCs 

and traditional banks. Another recent legislative proposal would allow 

banks and most ILCs (those included in a grandfather provision) to de novo 

branch by removing states’ authority to prevent them from doing so. Board 

officials we spoke with told us that, if enacted, these proposals could 

increase the attractiveness of owning an ILC, especially by private sector 

financial or commercial holding companies that already operate existing 

retail distribution networks.

To better ensure that supervisors of institutions with similar risks have 

similar authorities, we are asking Congress to consider various options 

such as eliminating the current exclusion for ILCs and their holding 

companies from consolidated supervision, granting FDIC similar 

examination and enforcement authority as a consolidated supervisor, or 

leaving the oversight responsibility of small, less complex ILCs with the 

FDIC, and transferring oversight of large, more complex ILCs to a 

consolidated supervisor. In addition, we are asking Congress to more 

broadly consider the advantages and disadvantages of mixing banking and 

commerce to determine whether continuing to allow ILC holding 

companies to engage in this activity significantly more than the holding 

companies of other types of financial institutions is warranted or whether 

other entities should be permitted to engage in this level of activity. 

We provided a draft of this report to the Board, FDIC, OTS, and SEC for 

review and comment. Each of these agencies provided technical comments 

that were incorporated as appropriate. In written comments, the Chairman 

of the Board of Governors of the Federal Reserve System (see app. II) 

concurred with the report’s findings and conclusions and stated that 

“consolidated supervision provides important protections to the insured 

banks that are part of a larger organization, as well as the federal safety net 

that supports those banks” and that the report “properly highlights the 

broad policy implications that ILCs raise with respect to maintaining the 

separation of banking and commerce.” In written comments from the 

Chairman of the Federal Deposit Insurance Corporation (see app. III), 

FDIC concurred that from an operations standpoint, ILCs do not appear to 
Page 10 GAO-05-621 Industrial Loan Corporations

have a greater risk of failure than other types of insured depository 

institutions but generally believed that no changes were needed in its 

supervisory approach over ILCs and their holding companies and disagreed 

with the matters for congressional consideration. Specifically, FDIC’s 

disagreements generally focused on three primary areas—whether 

consolidated supervision of ILC holding companies is necessary to ensure 

the safety and soundness of the ILC; that FDIC’s supervisory authority may 

not be sufficient to effectively supervise ILCs and insulate insured 

institutions against undue risks presented by external parties; and the 

impact that consolidated supervision of ILCs and their holding companies 

would have on the marketplace and the federal safety net. However, we 

believe that consolidated supervision offers broader examination and 

enforcement authorities that may be used to understand, monitor, and 

when appropriate, restrain the risks associated with insured depository 

institutions in a holding company structure. We continue to be concerned 

that FDIC’s bank-centric approach has only been tested on a limited basis 

in relatively good economic times, and our report identifies additional tools 

that consolidated supervisors may use to help ensure the safety and 

soundness of insured depository institutions. Further, the report does not 

advocate an expansion of the federal safety net. Rather, this report 

advocates that ILCs and their holding companies be regulated in a similar 

manner as other insured depository institutions and their holding 

companies. 

Background Today, five federal agencies oversee federally insured depository 

institutions and consolidated supervised entities: Office of the Comptroller 

of the Currency, Board of Governors of the Federal Reserve, Federal 

Deposit Insurance Corporation, Office of Thrift Supervision, and the 

National Credit Union Association. Many of those institutions are state 

chartered and are subject to state regulation. The specific regulatory 

configuration depends on the type of charter the banking institution 

chooses—commercial bank, thrift, credit union, or industrial loan 

company. To achieve their safety and soundness goals, bank regulators 

establish capital requirements, conduct on-site examinations and off-site 

monitoring to assess a bank’s financial condition, and monitor compliance 

with banking laws. Regulators also issue regulations, take enforcement 

actions, and close banks they determine to be insolvent. In addition, federal 

regulators oversee compliance with and enforce consumer protection laws 

such as those requiring fair access to banking services and privacy 

protection. 
Page 11 GAO-05-621 Industrial Loan Corporations

The FDIC was created as an independent agency in 1933 to preserve and 

promote public confidence in the financial system by (1) insuring deposits 

in banks and thrift institutions for up to certain amounts (currently 

$100,000); (2) identifying, monitoring, and addressing risks to the Fund; 

and (3) limiting the effect on the economy and the financial system when a 

bank or thrift institution fails. Today, FDIC directly examines and 

supervises 5,272 insured, state-chartered banks, which, according to FDIC, 

is more than half of all institutions in the banking system. FDIC is the 

primary federal supervisor of state-chartered institutions that do not join 

the Federal Reserve System, including ILCs. In addition, FDIC is the 

backup supervisor for the remaining insured banks and thrift institutions. 

As of December 31, 2004, 3 of the top 16 largest insured institutions 

supervised by FDIC were ILCs. ILCs are also monitored at the state level 

and are subject to state and federal supervision in the same manner as state 

nonmember banks. 

The Board was founded by Congress in 1913 and currently has the 

following four general areas of responsibility: (1) conducting the nation’s 

monetary policy by influencing the money and credit conditions in the 

economy in pursuit of full employment and stable prices; (2) supervising 

and regulating banking institutions to ensure the safety and soundness of 

the nation’s banking and financial system and to protect the credit rights of 

consumers; (3) maintaining the stability of the financial system and 

containing systemic risk that may arise in financial markets; and 

(4) providing certain financial services to the government, the public, 

financial institutions, and foreign official institutions, including playing a 

major role in operating the nation’s payments system. Today, the Board is 

the primary supervisor of 919 state-chartered member banks and 5,863 

bank holding companies, and has direct oversight of bank holding 

companies and their affiliates. 

The Office of the Comptroller of the Currency (OCC), established in 1863 

as a bureau of the Department of the Treasury (Treasury), is responsible for 

chartering, supervising, and regulating all national banks. OCC’s mission is 

to ensure a stable and competitive national banking system through 

(1) ensuring the safety and soundness of the national banking system; 

(2) fostering competition by allowing banks to offer new products and 

services; (3) improving the efficiency and effectiveness of OCC 

supervision, including reducing regulatory burden; and (4) ensuring fair 

and equal access to financial services for all Americans. OCC also 

supervises the federal branches and agencies of foreign banks. Currently, 

OCC supervises 1,906 national banks. 
Page 12 GAO-05-621 Industrial Loan Corporations

OTS was established as a bureau of the Treasury in 1989. Its mission is to 

supervise savings associations and their holding companies in order to 

maintain their safety and soundness and compliance with consumer laws 

and to encourage a competitive industry that meets America’s financial 

services needs. OTS is the primary federal supervisor of all federally 

chartered and many state-chartered thrift institutions, which includes 

savings banks and savings and loan associations. Currently, OTS regulates 

and supervises 886 thrifts8

—some of which, like ILCs, are owned by a 

commercial holding company—and has direct oversight of the thrift, the 

thrift holding company and its subsidiaries, and its affiliates. 

The National Credit Union Administration (NCUA) is an independent 

federal agency that charters and supervises federal credit unions and 

operates the National Credit Union Share Insurance Fund, which insures 

the savings in all federal and many state-chartered credit unions. Currently, 

NCUA regulates and supervises 9,128 credit unions.

In addition, the Securities and Exchange Commission has consolidated 

supervisory oversight of certain financial conglomerates, known as 

consolidated supervised entities, which are large, internationally active 

securities firms. Certain of these consolidated supervised entities own one 

or more large ILCs, although their primary line of business is the global 

securities market. 

Bank Holding Companies The BHC Act of 1956, as amended, contains a comprehensive framework 

for the supervision of bank holding companies and their nonbank 

subsidiaries. Bank holding companies are companies that own or control 

an FDIC-insured bank or other depository institution that meets the 

definition of “bank” in the BHC Act. Generally, any company that acquires 

control of an insured bank or bank holding company is required to register 

with the Board as a bank holding company. Regulation under the BHC Act 

8

We use the term thrift to refer to savings and loan associations. According to OTS, these 

institutions provide various financial services to consumers and small to mid-sized 

businesses in their communities and offer an array of deposit instruments including 

checking, savings, money market, and time deposits. Thrifts’ lending activities are primarily 

focused on residential lending, including first mortgage loans, home equity loans, and loans 

secured by multifamily residences. They also provide loans for other consumer needs such 

as for autos, education, and home improvements. In addition, thrifts provide community 

businesses with working capital loans, loans secured by commercial property, and 

construction loans.
Page 13 GAO-05-621 Industrial Loan Corporations

entails, among other things, consolidated supervision of the holding 

company by the Board, as well as restrictions on the activities of the 

holding company and its affiliates to those activities that are closely related 

to banking or, for qualified financial holding companies, activities that are 

financial in nature. The BHC Act defines “control” of an insured bank 

flexibly to include ownership or control of blocs of stock, the ability to 

elect a board majority, or other management control.9

 The Board’s bank 

holding company supervision manual states that a bank holding company 

structure may offer advantages. For example, a bank holding company 

structure allows entities to avoid some regulatory constraints such as 

limitations on geographic areas they can serve. In addition, a bank holding 

company structure may increase an organization’s financial flexibility by 

allowing the combined firm to avoid selected restrictions on the types of 

assets acquired, and types of liabilities that can be issued by the combined 

entity.

The Board’s bank holding company supervision manual states that the 

holding company structure can adversely affect the financial condition of a 

bank subsidiary through exposing the bank to various types of risk. The 

reasons these risks occur cover a variety of circumstances, including poor 

risk management, poor bank management, and poor asset quality. For 

example, a holding company or its subsidiary with poor risk management 

procedures may take on excessive investment or market risks and fail. This 

failure of the holding company or affiliate can impair the insured 

institution’s access to financial markets. In another example, a holding 

company with a poorly managed bank can initiate adverse intercompany 

transactions with the insured bank or impose excessive dividends on the 

insured bank.10 Adverse intercompany transactions may include charging 

9

Any one of the following circumstances will trigger coverage by the BHC Act: (1) Stock 

ownership -- Where the company owns, controls or has the power to vote 25 percent or 

more of any class of the voting securities of a bank or bank holding company (either directly 

or indirectly or acting through one or more other persons); (2) Ability to elect a board 

majority--Where the company controls the election of a majority of the directors or trustees 

of a bank or bank holding company; or (3) Effective control of management- Where the 

Board determines, after notice and opportunity for hearing, that the company directly or 

indirectly exercises a controlling influence over the management or policies of a bank or 

bank holding company. For purposes of this last provision, Congress expressly presumed 

that any company that directly or indirectly owns, controls, or has power to vote fewer than 

5 percent of any class of voting securities of a specific bank or bank holding company does 

not have the requisite control. See 12 U.S.C. § 1841(a).

10As discussed more fully later in this report, federal law restricts transactions between an 

insured depository institution and its bank holding company affiliates.
Page 14 GAO-05-621 Industrial Loan Corporations

above market prices for products or services, such as information 

technology (IT) services, provided to the insured institution by an affiliate 

or requiring the insured institution to purchase poor quality loans at above 

market prices from an affiliate. Such loans may place the insured 

institution at higher risk of loss. Other types of risk that holding companies 

and affiliates can pose to insured institutions include operations or 

reputation risks. Operations risk is the potential that inadequate 

information systems, operations problems, breaches in internal controls, or 

fraud will result in unexpected losses. From a practical standpoint, insured 

depository institutions, including ILCs, may be susceptible to operations 

risk when they are dependent on or share in the products or services of a 

holding company or its subsidiaries, such as IT services or credit card 

account servicing. If these entities ceased their operations, there could be 

an adverse impact on the insured institution. Reputation risk is the 

potential that negative publicity regarding an institution’s or affiliate’s 

business practices, whether true or not, could cause a decline in the 

customer base, costly litigation, or revenue reductions. Operations or 

reputation risks that impact the holding company can also affect affiliates 

throughout the corporate structure.

The Board’s Regulation Y contains a provision stating that a bank holding 

company shall serve as a source of strength to its subsidiary banks and 

shall not conduct its operations in an unsafe and unsound manner.11 

According to the Board, as part of this policy, a bank holding company 

should stand ready to use its available resources to provide adequate funds 

to its subsidiary bank during periods of financial stress or adversity and 

should maintain the financial flexibility and capital raising capacity to 

obtain additional resources for assisting its affiliate. According to this 

doctrine, a bank holding company should not withhold financial support 

from an affiliate bank in a weakened or failing position when it is in a 

position to provide the support. According to the Board, a bank holding 

company’s failure to assist a troubled or failing subsidiary bank would 

generally be considered an unsafe and unsound practice and may result in a 

violation of Regulation Y. Consequently, such a failure would generally 

result in a cease and desist order or other enforcement action as authorized 

under banking law.

1112 C.F.R. § 225.4 (2004).
Page 15 GAO-05-621 Industrial Loan Corporations

Historical Policies 

Governing Separation of 

Banking and Commerce

The policy separating banking and commercial activity was first codified in 

provisions of the Banking Act of 1933 that generally are referred to as the 

Glass-Steagall Act. Glass-Steagall was largely a reaction to the perception 

that banks, and in particular banks that were part of larger conglomerate 

organizations, such as the J. P. Morgan and John D. Rockefeller entities of 

the era, wielded a disproportionate amount of economic power in the 

period leading up to the stock market crash of 1929. Among other things, 

Glass-Steagall generally prohibited banks from owning corporate stock for 

their own accounts and also limited affiliations between banks and 

securities firms. An immediate outcome of Glass-Steagall was that the 

Morgan, Rockefeller, and other complex business combinations with 

financial firms of the period were split into separate banking and 

nonbanking parts. Since then, Congress and banking supervisors have 

generally reaffirmed the long-standing policy of separating banking and 

commerce. For example, the BHC Act of 1956 generally prohibited bank 

holding companies from owning or controlling entities that were not banks 

unless, among other things, the Board determined that the entity’s activities 

were “so closely related to the business of banking . . . as to be a proper 

incident thereto....”12 In 1970, Congress amended the BHC Act to broaden 

the Board's authority to determine when an activity is sufficiently related to 

banking but restricted bank holding companies to the business of banking 

remained a controlling principle of the act.13 In 1999, the GLBA amended 

the BHC Act by, among other things, relaxing the distinction between 

separating banking and commerce to permit qualified bank holding 

companies—known as financial holding companies—to engage in a wider 

range of financial activities, such as insurance underwriting and securities 

brokerage. By restricting bank holding companies to activities that are 

financial in nature, GLBA generally reaffirmed the separation of banking 

from nonfinancial, commercial industries. In addition, in the GLBA, 

Congress also ended the unitary thrift provision that allowed commercial 

firms to acquire control of a single savings association.

12Bank Holding Company Act of 1956, Pub. L. No. 84-511 § 4.

13See Board of Governors of the Federal Reserve System v. Investment Company Institute, 

450 U.S. 46, 72, n. 51 (1980).
Page 16 GAO-05-621 Industrial Loan Corporations

ILCs Have Grown 

Significantly and Are 

No Longer Small, 

Limited Purpose 

Institutions

ILCs began in the early 1900s as small, state-chartered loan companies that 

served the borrowing needs of industrial workers that were unable to 

obtain noncollateralized loans from commercial banks. Since then, the ILC 

industry has experienced significant asset growth and has evolved from 

small, limited purpose institutions to a diverse group of insured financial 

institutions with a variety of business models. Most notably, from 1987 to 

2004, ILC assets have grown over 3,500 percent from $3.8 billion to over 

$140 billion, while the number of ILCs declined about 46 percent from 106 

to 57. In 2004, 6 ILCs were among the 180 largest financial institutions in 

the nation with $3 billion or more in total assets, and one institution had 

over $66 billion in total assets. During this time period, most of the growth 

occurred in the state of Utah while the portion of ILC assets in other states 

declined—especially in California. According to Utah officials, ILCs grew in 

that state because its laws are “business friendly,” and the state offers a 

large, well-educated workforce for the financial services industry. Some 

ILCs have evolved into large, complex financial institutions with extensive 

access to capital markets. 

ILCs Have Evolved Over 

Time

ILCs, also known as industrial banks, are state-chartered financial 

institutions that emerged from the Morris Plan banks of the early 20th 

century to provide consumer credit to low and moderate income workers. 

Generally, these workers were unable to obtain noncollateralized 

consumer loans from commercial banks. Since many state laws prevented 

these banks from accepting deposits, the banks issued certificates of 

investment or indebtedness often referred to as thrift certificates and 

avoided using the term “deposit.” Initially, the FDIC determined that ILCs 

were not eligible to be insured. 

Over time, FDIC policy regarding ILC’s eligibility for deposit insurance 

changed. Insurance was initially granted on a case by case basis. However, 

the Garn-St. Germain Depository Institutions Act of 1982 made all ILCs 

eligible for federal deposit insurance.14 This act also authorized federal 

deposit insurance for thrift certificates, a primary funding source for ILCs 

at the time.15 Subsequently, some states required ILCs to obtain FDIC 

insurance as a condition of keeping their charters. As a result, FDIC 

14Depository Institutions Act of 1982, Pub. L. No. 97-320 § 703.

15Id.
Page 17 GAO-05-621 Industrial Loan Corporations

insured most ILCs, and they were subject to safety and soundness 

supervision by the FDIC in addition to the supervision they received from 

their respective states.

In 1987, Congress passed the Competitive Equality Banking Act (CEBA), 

which also impacted the ILC industry.16 One purpose of CEBA was to close 

a provision in the BHC Act under which commercial firms were able to own 

“nonbank banks.” These institutions had some characteristics of banks but 

did not meet the BHC Act’s definition of a bank. Prior to CEBA, the BHC 

Act defined “bank” to mean an institution that both accepted demand 

deposits and engaged in the business of making commercial loans. 

Nonbank banks generally were limited purpose institutions that did not 

both accept demand deposits and make commercial loans. By avoiding the 

BHC Act definition of a bank, commercial firms that owned or controlled 

those institutions were able to provide certain banking services across 

state lines. Additionally, these firms were not subject to supervision by the 

Board as a bank holding company. CEBA prohibited new nonbank banks 

and more stringently defined “banks” under the BHC Act to include 

institutions insured by the FDIC. This new definition of a “bank” contained 

exceptions that allow entities that own or control certain types of insured 

institutions to avoid Board regulation as a bank holding company. One of 

these exceptions applies to ILCs chartered in states that on March 5, 1987, 

had in effect or under consideration a statute requiring ILCs to be FDIC 

insured. An ILC chartered in those states is exempt from the definition of 

“bank” in the BHC Act if it satisfies one or more of the following 

conditions:17

• The ILC does not accept demand deposits that may be withdrawn by 

check or similar means for payment to third parties.

• The ILC has total assets of less than $100 million.

16Pub. L. No. 100-86.

1712 U.S.C. § 1841(c)(2)(H). According to the FDIC, at the time of the 1987 CEBA exemption 

six states—California, Colorado, Hawaii, Minnesota, Nevada, and Utah—had statutes in 

effect or under consideration requiring their ILCs to have federal deposit insurance. 

However, because the exemption for ILCs is in the BHC Act, the Board has primary 

responsibility for determining which states are grandfathered by the BHC Act. Only ILCs 

chartered in “grandfathered” states are eligible for the ILC exemption from the BHC Act.
Page 18 GAO-05-621 Industrial Loan Corporations

• Control of the ILC was not acquired by any company after August 10, 

1987. 

Since the passage of CEBA, the ILC industry has changed significantly and 

is currently a diverse group of insured financial institutions with a variety 

of business models. The majority of the 57 active ILCs, as of December 31, 

2004, are owned and operated by financial services firms, such as the ILCs 

owned by Merrill Lynch, USAA Savings Bank, and American Express. 

These ILCs are complex financial institutions with extensive access to 

capital markets. Other ILCs are part of a business organization whose 

activities are conducted within the financial arm of a larger corporate 

organization that is not necessarily financial in nature, such as the ILCs 

owned by GE Capital Financial and GMAC Commercial Mortgage Bank. In 

addition, other ILCs directly support the holding company organizations’ 

commercial activities, such as the ILCs owned by BMW and Volkswagen. 

Additionally, some ILCs are smaller, community-focused, stand-alone 

institutions such as Golden Security Bank and Tustin Community Bank.

ILCs Have Experienced 

Significant Asset Growth

The total assets of the ILC industry have increased significantly since 1987. 

As shown in figure 1, although the total number of ILCs has decreased by 

nearly half, from 106 to 57, as of December 31, 2004, the total assets in the 

ILC industry have grown by over 3,500 percent, increasing from $3.8 billion 

in 1987 to over $140 billion in 2004. In 2004, 6 ILCs were among the 180 

largest financial institutions in the nation with $3 billion or more in total 

assets, and one institution had over $66 billion in assets. This significant 

growth in ILC assets was primarily concentrated in a few large ILCs owned 

by financial services firms. For example, as of December 31, 2004, 6 ILCs 

owned 85 percent of the total assets for the ILC industry with aggregate 

assets totaling over $119 billion and collectively controlled about $64 

billion in FDIC-insured deposits. 
Page 19 GAO-05-621 Industrial Loan Corporations

Figure 1: Number and Total Assets of ILCs

Today, the vast majority of ILC assets are located in California, Nevada, and 

Utah. Although seven states have active ILCs, three states charter more 

than half, or 49, of the active ILCs that own over 99 percent of the ILC 

industry’s assets, as shown by figure 2. The state of Utah has experienced 

the largest amount of ILC asset growth. As of December 31, 2004, there 

were 29 ILCs, representing 82 percent of the ILC industry assets, with 

headquarters in Utah. According to officials at the Utah Department of 

Financial Institutions, ILC growth in Utah occurred because other state 

laws are not as “business friendly” as Utah. These officials also stated that 

Utah has state usury laws that are more desirable than many other states, 

and the state offers a large well-educated workforce for the financial 

institutions industry. 

Figure 2 also shows that the portion of ILC assets in states other than Utah 

declined significantly. Moreover, California had the largest decline in the 

number of ILCs during this time period. According to state banking 

0

20

40

60

80

100

120

Number of ILCs Assets (Dollars in billions)

1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Source: GAO analysis of FDIC Call Report data.

1987

Year

0

26

52

78

104

130

156

ILCs

Assets
Page 20 GAO-05-621 Industrial Loan Corporations

regulators in California, the decline in the number of ILCs was partially due 

to a state law passed in 1985 requiring all thrifts and loans, including ILCs, 

to obtain federal insurance in order to accept deposits. Because many ILCs 

were unable to get approval from FDIC, they were liquidated. Another 

reason these officials gave for the decline in ILCs in California was that the 

ILC industry in California experienced similar failures as the banking and 

savings and loan industries in the late 1980s and early 1990s. While these 

failures and law changes accounted for much of the decline in the assets 

held by California ILCs, these officials also stated that California’s laws are 

less favorable to business, which may also have restricted the growth of the 

ILC industry in that state. 

Figure 2: Percentage of ILC Assets Held by Individual States

a

The other category may consist of as many as nine states in some years. In 1987, states in this 

category included Arizona, Colorado, Florida, Hawaii, Minnesota, Nebraska and West Virginia. In 

2004, this category included Colorado, Hawaii, and Minnesota.

Figure 3 shows that, although the total amount of estimated insured 

deposits in the ILC industry has grown by over 500 percent since 1999, 

these deposits represent less than 3 percent of the total estimated insured 

11%

26%

63%

10%

7%

82%

1987 2004

California

California

Nevada

1% 

Othera

Utah

Othera

Source: GAO analysis of FDIC Call Report data.

Utah
Page 21 GAO-05-621 Industrial Loan Corporations

deposits in the bank insurance fund for all banks. The significant increase 

in estimated insured deposits since 1999 was related to the growth of a few 

ILCs owned by financial services firms. For example, at the end of 2004, the 

largest ILC, owned by an investment bank, had over $40 billion in FDIC 

insured deposits. 

Figure 3: Percentage of Estimated FDIC Insured Deposits Held by ILCs 

ILC Business Lines and 

Regulatory Safeguards 

Are Similar to Other 

Insured Financial 

Institutions

Federal banking law permits FDIC-insured ILCs to engage in the same 

activities as other insured depository institutions. However, because of 

restrictions in California state law and in order to qualify for exemption 

from the BHC Act, most ILCs, which are owned by non-BHC Act holding 

companies, may not accept demand deposits. Banking laws in California, 

Nevada, and Utah have undergone changes that generally place ILCs on par 

with traditional banks. Thus, like other FDIC-insured depository 

institutions, ILCs may offer a full range of loans such as consumer, 

commercial and residential real estate, and small business loans. Further, 

like a bank, ILCs may “export” their home-state’s interest rates to 

customers residing elsewhere. In addition, ILCs generally are subject to the 

0

1

2

3

4

5

1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Percentage

Source: GAO analysis of FDIC Call Report data.

Year
Page 22 GAO-05-621 Industrial Loan Corporations

same federal regulatory safeguards that apply to commercial banks and 

thrifts, such as federal restrictions governing transactions with affiliates 

and laws addressing terrorism, money laundering, and other criminal 

activities by bank customers. 

ILCs Are Permitted to 

Engage in Most Banking 

Activities

Under the Federal Deposit Insurance Act (FDI Act), FDIC insured 

institutions, including ILCs, generally are permitted to engage only in 

activities as principal that are permissible for a national bank, although the 

FDIC may approve of an additional activity if it determines that the activity 

would pose no significant risk to the bank insurance fund (Fund), and the 

institution complies with applicable federal capital standards. During our 

review, we did not identify any banking activities that were unique to ILCs 

that other insured depository institutions were not permitted to do. Table 1 

shows that, like other insured depository institutions, ILCs are permitted to 

offer a wide variety of loans including consumer, commercial and 

residential real estate, small business, and subprime.18 Like other FDICinsured state charters, an ILC may charge its customers the interest rates 

allowed by the laws of the state where the ILC is located, no matter where 

the customers reside.19 In effect, this permits ILCs offering credit cards to 

charge their state’s maximum allowable interest rates in other states.20 A 

primary difference between ILCs and other FDIC-insured depository 

institutions is that, to remain exempt from the BHC Act, ILCs must be 

chartered in the grandfathered states and generally do not accept demand 

deposits if their total assets are $100 million or more. 

18Subprime loans are a type of lending that relies on risk-based pricing to serve borrowers 

who cannot obtain credit in the prime market.

19See 12 U.S.C. § 1831d(a); see also, FDIC General Counsel's Opinion No. 11, Interest 

Charges by Interstate State Banks, 63 Fed. Reg. 27282 (May 18, 1998).

20Nevada and Utah do not cap the interest rates credit card companies can charge. Their 

usury laws, similar to Delaware and South Dakota, are considered desirable for credit card 

entities.
Page 23 GAO-05-621 Industrial Loan Corporations

Table 1: Comparison of Permissible Activities Between State Nonmember 

Commercial Banks and ILCs in a Holding Company Structure

Source: FDIC.

Note: This table was adapted from FDIC’s Supervisory Insights, Summer 2004. According to the FDIC 

officials, Supervisory Insights was published in June 2004, by FDIC to provide a forum to discuss how 

bank regulation and policy is put into practice in the field, share best practices, and communicate 

emerging issues that bank supervisors are facing. This inaugural issue described a number of areas of 

current supervisory focus at the FDIC, including the ILC charter. According to FDIC officials, 

Supervisory Insights should not be construed as regulatory or supervisory guidance. 

As discussed previously, in order to maintain an exemption from the BHC 

Act, most ILCs with assets of $100 million or more may not accept demand 

deposits that the depositor may withdraw by check or similar means for 

payment to third parties. Representatives from some ILCs told us that 

because demand deposits are an important, often primary source of costeffective funding for some depository institutions, restrictions on ILCs’ 

ability to accept demand deposits is a limitation of the ILC charter. 

However, federal regulation does not restrict ILCs’ use of NOW accounts. 

NOW accounts are similar to demand deposits but give the depository 

institution the right to require at least 7 days written notice prior to 

withdrawal. In addition, NOW accounts can be FDIC insured. Some ILCs 

use NOW accounts as a source of funding, particularly those institutions 

owned by investment banking/brokerage firms. Further, some ILCs finance

Permissible activities

State nonmember 

commercial bank Industrial loan corporation

Ability to offer full range of 

loans, including:

consumer,

commercial real estate,

residential real estate,

small business, and

subprime.

Yes Yes

Ability to export interest 

rates.

Yes Yes

Ability to offer full range of 

deposits including demand 

deposits.

Yes Yes, except in California. 

However, BHC Act-exempt ILCs 

may offer demand deposits if 

either the ILC’s assets are less 

than $100 million or the ILC has 

not been acquired after August 

10, 1987.
Page 24 GAO-05-621 Industrial Loan Corporations

their operations through sources other than FDIC insured deposits and use 

commercial paper, brokered deposits.21

Based on an analysis of the permissible activities of ILCs and other insured 

depository institutions, we and the FDIC-IG found that, from an operations 

standpoint, ILCs do not appear to have a greater risk of failure than other 

types of insured depository institutions. FDIC officials have reported that, 

like other insured depository institutions, the risk of failure and loss to the 

deposit insurance fund from ILCs is not related to the type of charter the 

institution has. Rather, these officials stated that this risk depends on the 

institution’s business plan and the type of business that the entity is 

involved in, management’s competency to run the bank, and the quality of 

the institution’s risk-management process. Further, FDIC officials stated 

that FDIC’s experience does not indicate that the overall risk profile of ILCs 

is different from that of other types of insured depository institutions, and 

ILCs do not engage in more complex transactions than other institutions. 

Some State Banking Laws 

Have Evolved to Make ILCs 

More Like Banks

Despite initial state limitations on certain permissible activities of ILC 

charters, the laws of the states we reviewed have essentially placed ILCs on 

par with other FDIC-insured state banks. For example, officials in 

California told us that ILCs originally were chartered to serve various niche 

lending markets. However, these officials stated that, over time, changes 

were made to California laws governing ILCs because these entities sought 

to be more competitive with other financial institutions and engage in 

different types of lending activities not specified in the charter law. 

According to these officials, in October of 2000, the California legislature 

revised the ILC charter law that contained a variety of outdated and 

artificial lending restrictions. California officials also stated that, at that 

time, ILCs were brought under the state banking laws and, with the 

exception of the restriction against accepting demand deposits, ILCs 

became subject to the same laws and regulations, as well as standards for 

safe and sound lending practices, as commercial banks. According to these 

officials, the laws that were no longer applicable to ILCs contained 

restrictions on, among other things, the

21Commercial paper generally is a short-term, unsecured promissory note issued primarily 

by highly rated corporations. Many companies use commercial paper to raise cash needed 

for current transactions and find it to be a lower-cost alternative to bank loans. Brokered 

deposits are generally deposits obtained by a deposit broker and are considered ratesensitive because consumers are able to withdraw them quickly and without notice. 
Page 25 GAO-05-621 Industrial Loan Corporations

• type of security for an ILC loan,

• amount of loans that could be made out-of-state,

• loan-to-value ratios on loans,22 and

• amount of loans that had to be collateralized by real estate.

Officials at the Utah Department of Financial Institutions (Utah DFI) told 

us that, since 1985, ILCs chartered in Utah have generally been able to 

conduct the same permissible activities as state chartered commercial 

banks. In addition, since at least 1997, Utah ILCs have been permitted to 

use the term “bank” in their name. 

ILCs Must Comply with 

Federal Requirements 

Applicable to Other Insured 

Institutions

ILCs are subject to federal safety and soundness safeguards and consumer 

protection laws that apply generally to FDIC-insured institutions. These 

include restrictions on transactions between an insured institution and its 

affiliates under sections 23A and 23B of the Federal Reserve Act that are 

designed to protect the insured depository institution from adverse 

transactions with holding companies and affiliates. Sections 23A and 23B 

generally limit the dollar amount of loans to affiliates and require 

transactions to be done on an “arms-length” basis.23 Specifically, section 

23A regulates “covered transactions” between a bank and its affiliates and 

permits an institution to conduct these transactions with its affiliates so 

long as the institution limits the aggregate amount of covered transactions 

with a particular affiliate to not more than 10 percent of the bank’s capital 

stock and surplus and, with all of its affiliates, to 20 percent of the

22Loan-to-value ratios are a lending risk ratio calculated by dividing the total amount of the 

mortgage loan by the appraised value of the property or the purchase price of the property.

23Section 18(j) of the FDI Act extends the provisions of sections 23A and 23B of the Federal 

Reserve Act to state nonmember banks. 12 U.S.C. § 1828(j).
Page 26 GAO-05-621 Industrial Loan Corporations

institution’s capital stock and surplus.24 Section 23B essentially imposes the 

following four restrictions: (1) a requirement that the terms of affiliate 

transactions be comparable to terms of similar nonaffiliate transactions; 

(2) a restriction on the extent that a bank may, as a fiduciary, purchase 

securities and other assets from an affiliate; (3) a restriction on the 

purchase of securities where an affiliate is the principal underwriter; and 

(4) a prohibition on agreements and advertising providing or suggesting 

that a bank is responsible for the obligations of its affiliates. 

Examples of other regulatory safeguards that ILCs must comply with 

include provisions of the following Board regulations:

• Regulation O, which governs the extension of credit by a depository 

institution to an executive officer, director, or principal shareholder of 

the institution;25

• Regulation D, which sets reserves a depository institution must hold 

against deposits;26

• Regulation Q, which generally prohibits the payment of interest on 

demand deposits;27 and

• Regulation F, which requires that banks establish policies and 

procedures to prevent excessive exposure to any individual 

correspondent bank.28

24Covered transactions are specifically described in section 23A (b)(7)(A) through (E) but 

generally consist of making loans to an affiliate; purchasing securities issued by an affiliate; 

purchasing nonexempt assets from an affiliate; accepting securities issued by an affiliated 

company as collateral for any loan; and issuing a guarantee, acceptance, or letter of credit 

on behalf of (for the account of) an affiliate. Section 23A also lists several types of 

transactions that are specifically exempted from its provisions. Under the BHC Act, as 

amended by GLBA, a depository institution controlled by a financial holding company is 

prohibited from engaging in covered transactions with any affiliate that engages in 

nonfinancial activities under the special 10-year grandfather provisions in the GLBA. 12 

U.S.C. § 1843 (n)(6).

25See 12 C.F.R. § 337.3 (2005).

26See 12 C.F.R. Part 204.

27See 12 C.F.R. Part 329.

28See 12 C.F.R. Part 206.
Page 27 GAO-05-621 Industrial Loan Corporations

In addition to these safeguards, ILCs must also comply with Bank Secrecy 

Act, Anti-Money Laundering, and Community Reinvestment Act 

requirements. Further, ILCs, like other insured depository institutions, are 

subject to consumer protection laws and must comply with federal 

regulations such as the Board’s 

• Regulation B, which implements the Equal Credit Opportunity Act’s 

antidiscrimination provisions;29

• Regulation Z, which implements the Truth in Lending Act requirements 

relating to disclosures and other consumer protections;30 and

• Regulation CC, which implements the Expedited Funds Availability Act, 

including the Act’s requirements regarding the limits on the length of 

time that a hold may be placed on funds deposited into an account, 

including a NOW account.31

FDIC’s Supervisory 

Authority Over ILC 

Holding Companies 

and Affiliates Is Not 

Equivalent to 

Consolidated 

Supervisors’ Authority 

Because most ILCs exist in a holding company structure, they are 

subjected to risks from the holding company and its subsidiaries, including 

adverse intercompany transactions, operations, and reputation risk, similar 

to those faced by banks and thrifts existing in a holding company structure. 

However, FDIC’s authority over the holding companies and affiliates of 

ILCs is not as extensive as the authority that consolidated supervisors have 

over the holding companies and affiliates of banks and thrifts. For example, 

FDIC’s authority to examine an affiliate of an insured depository institution 

exists only to disclose the relationship between the depository institution 

and the affiliate and the effect of that relationship on the depository 

institution. Therefore, any reputation or other risk from an affiliate that has 

no relationship with the ILC could go undetected. In contrast, consolidated 

supervisors, subject to functional regulation restrictions, generally are able 

to examine a nonbank affiliate of a bank or thrift in a holding company 

regardless of whether the affiliate has a relationship with the bank. FDIC 

officials told us that with its examination authority, as well as its abilities to 

impose conditions on or enter into agreements with an ILC holding 

29See 12 C.F.R. Part 202.

30See 12 C.F.R. Part 226.

31See 12 C.F.R. Part 229.
Page 28 GAO-05-621 Industrial Loan Corporations

company in connection with an application for federal deposit insurance, 

terminate an ILC’s deposit insurance, enter into agreements during the 

acquisition of an insured entity, and take enforcement measures, FDIC can 

protect an ILC from the risks arising from being in a holding company as 

effectively as with the consolidated supervision approach. However, we 

found that, with respect to the holding company, these authorities are 

limited to particular sets of circumstances and are less extensive than 

those possessed by consolidated supervisors of bank and thrift holding 

companies. As a result, FDIC’s authority is not equivalent to consolidated 

supervision of the holding company. 

FDIC and Consolidated 

Supervisors Use Different 

Supervisory Approaches

With some exceptions, companies that own or control FDIC insured 

depository institutions are subject to a consolidated—or top-down—

supervisory approach that is aimed at assessing the financial and 

operations risks within the holding company structure that may pose a 

threat to the safety and soundness of the depository institution. 

Consolidated supervision is widely recognized throughout the world, 

including Asia, Europe, and in North America, as an accepted approach to 

supervising organizations that own or control financial institutions and 

their affiliates. The European Union also requires consolidated supervision 

for financial institutions operating in its member states, and this approach 

is recognized by the Basel Committee as an essential element of banking 

supervision.32 According to this committee, consolidated supervision 

“includes the ability to review both banking and nonbanking activities 

conducted by the banking organization, either directly or indirectly 

(through subsidiaries and affiliates), and activities conducted at both 

domestic and foreign offices. Supervisors need to take into account that 

nonfinancial activities of a bank or group may pose risks to the bank. In all 

cases, the banking supervisors should be aware of the overall structure of 

the banking organization or group when applying their supervisory 

methods.” 

In contrast to the top-down approach of bank consolidated supervision, 

which focuses on depository institution holding companies, FDIC’s 

32The Basel Committee on Banking Supervision, established in 1974, is composed of 

representatives from the central banks or supervisory authorities of various countries in 

Europe, North America, and Asia. This committee has no formal authority but seeks to 

develop broad supervisory standards and promote best practices in the expectation that 

each country will implement the standards in ways most appropriate to its circumstances. 

Implementation is left to each nation’s regulatory authorities. 
Page 29 GAO-05-621 Industrial Loan Corporations

supervision focuses on depository institutions. FDIC’s authority extends to 

affiliates of depository institutions under certain circumstances, thus FDIC 

describes its approach to examining and taking supervisory actions 

concerning depository institutions and their affiliates (including holding 

companies), as bank-centric or bottom-up. According to FDIC officials, the 

objective of this approach is to ensure that the depository institution is 

insulated and isolated from risks that may be posed by a holding company 

or its subsidiaries. This objective is similar to the objectives of 

consolidated supervision. While FDIC officials assert that the agency’s 

bank-centric approach can go beyond the insured institution, as discussed 

later in this report, this approach is not as extensive as the consolidated 

supervisory approach in assessing the risks a depository institution faces in 

a holding company structure. 

Consolidated Supervisors 

Have More Explicit 

Supervisory Authority Over 

Holding Company Affiliates 

than FDIC

As consolidated supervisors, the Board and OTS have authority to examine 

bank and thrift holding companies and their nonbank subsidiaries in order 

to assess risks to the depository institutions that could arise because of 

their affiliation with other entities in a consolidated structure. The Board 

and OTS may examine holding companies and their nonbank subsidiaries, 

subject to some limitations,33 to assess, among other things, the nature of 

the operations and financial condition of the holding company and its 

subsidiaries; the financial and operations risks within the holding company 

system that may pose a threat to the safety and soundness of any 

depository institution subsidiary of such a holding company; and the 

systems for monitoring and controlling such risks.34 The Board’s 

examination authority is limited to certain circumstances, such as where 

the Board “has reasonable cause to believe that such subsidiary is engaged 

in activities that pose a material risk to an affiliated depository institution” 

or the Board has determined that examination of the subsidiary is 

necessary to inform the Board of the systems the company has to monitor 

and control the financial and operational risks within the holding company 

system that may threaten the safety and soundness of an affiliated

33See 12 U.S.C. § 1831v(b).

34See 12 U.S.C. §§ 1844(c)(2)(A), 1467a.
Page 30 GAO-05-621 Industrial Loan Corporations

depository institution.35 OTS’s examination authority with respect to 

holding companies is subject to the same limitation.36 Also, the focus of 

Board and OTS examinations of all holding company nonbank subsidiaries 

must, to the fullest extent possible, be limited to subsidiaries that could 

have a materially adverse effect on the safety and soundness of a 

depository institution affiliate due to either the size, condition, or activities 

of the subsidiary or the nature or size of transactions between the 

subsidiary and any affiliated depository institution.37 FDIC examinations of 

affiliates having a relationship with an institution are not subject to the 

same limitations where the examination is to determine the condition of 

the institution for insurance purposes.38

As a result of their authority, consolidated supervisors take a systemic 

approach to supervising depository institution holding companies and their 

nonbank subsidiaries. Consolidated supervisors may assess lines of 

business, such as risk management, internal control, IT, and internal audit 

across the holding company structure in order to determine the risk these 

operations may pose to the insured institution. These authorities enable 

consolidated supervisors to determine whether holding companies that 

own or control insured depository institutions, as well as holding company 

nonbank subsidiaries, are operating in a safe and sound manner so that 

their financial condition does not threaten the viability of their affiliated 

depository institutions.39 Thus, consolidated supervisors can examine a 

holding company subsidiary to determine whether its size, condition, or 

activities could have a materially adverse effect on the safety and 

soundness of the bank even if there is no direct relationship between the 

two entities. Although the Board’s and OTS’s examination authorities are 

subject to some limitations, as previously noted, both the Board and OTS 

maintained that these limitations do not restrict the supervisors’ ability to 

detect and assess risks to an insured depository institution’s safety and 

35See 12 U.S.C. § 1844(c)(2)(B).

36See 12 U.S.C. §§ 1467a(b)(4), 1831(a). 

37See 12 U.S.C. §§ 1844(c)(2)(C), 1831v(a).

38See 12 U.S.C. § 1831v(b).

39See “Framework for Financial Holding Company Supervision,” Letter from the Division of 

Banking Supervision and Regulation, Board of Governors of the Federal Reserve System, to 

the Officer in Charge of Supervision and Appropriate Supervisory Staff at Each Federal 

Reserve Bank and to Financial Holding Companies (August 15, 2000).
Page 31 GAO-05-621 Industrial Loan Corporations

soundness that could arise solely because of its affiliations within the 

holding company.

The Board’s and OTS’ consolidated supervisory authorities also include the 

ability to require holding companies and their nonbank subsidiaries to 

provide reports in order to keep the agencies informed about matters that 

include the holding company’s or affiliate’s financial condition, systems for 

monitoring and controlling financial and operations risks, and transactions 

with affiliated depository institutions.40 These authorities are subject to 

restrictions designed to encourage the agency to rely on reports made to 

other supervisors, publicly available information, and externally audited 

financial statements. The Board requires that bank holding companies 

provide annual reports of the company’s operations for each year that it 

remains a bank holding company; OTS has the authority to require an 

independent audit of, among other things, the financial statements of a 

holding company, at any time.41 According to Board’s and OTS’ examination 

manuals, examiners may also use additional reports of holding company 

and affiliate activities that are not publicly available, such as the holding 

company’s financial statements, budgets and operation plans, various risk 

management reports, and internal audit reports. 

In addition to examination authority, as consolidated supervisors, the 

Board and OTS have instituted standards designed to ensure that the 

holding company serves as a source of strength for its insured depository 

institution subsidiaries. The Board’s regulations for bank holding 

companies include consolidated capital requirements that, among other 

things, can help protect against a bank’s exposure to risks associated with 

its membership in the holding company.42 The OTS does not impose 

consolidated regulatory capital requirements on thrift holding companies. 

Although there is no specific numerical requirement (ratio), OTS’s policy is 

that regulated holding companies should have an adequate level of capital 

to support their risk profile. OTS examiners are instructed to consider all 

aspects of an organization’s risk profile, on a case by case basis, to 

determine if capital is adequate with respect to both the holding company 

and its affiliate thrift. 

40See 12 U.S.C. §§ 1844(c)(1), 1467a(b)(2), 1844(c)(1)(B), 1831v(a)(1).

4112 C.F.R. § 225.5(b) (Board); 12 C.F.R. § 562.4(a) (OTS).

4212 C.F.R. Part 225, Appendices B & C.
Page 32 GAO-05-621 Industrial Loan Corporations

In addition to consolidated capital requirements, the Board has, by 

regulation, instituted the “source of strength” doctrine, which states that a 

bank holding company shall serve as a source of financial and managerial 

strength to its subsidiary banks.43 According to Board officials, the source 

of strength doctrine can be invoked to require a bank holding company to 

take affirmative action, for example, by providing capital infusions to an 

affiliate depository institution in financial distress, in order to enhance the 

safety and soundness of the institution. Some banking experts have 

expressed concern that the Board’s authority to require a transfer of assets 

from the holding company to a troubled affiliate bank is unclear.44 In 

amendments to the BHC Act and FDI Act enacted as part of GLBA, 

Congress indicated its understanding that the Board has such authority.

These amendments refer to (1) limiting the Board’s authority to require the 

transfer of funds or other assets to a subsidiary bank by bank holding 

companies or affiliates that are insurance companies or are registered as 

brokers, dealers, investment companies or investment advisers; (2) 

granting the Board authority to require a functionally regulated subsidiary 

of a holding company to provide capital or other funds or assets to a 

depository institution affiliate of the holding company; and (3) prohibiting 

a bank holding company from engaging in expanded activities as a financial 

holding company unless, among other things, all of its depository 

institutions are well capitalized.45 The third of these provisions suggests 

that the Board has authority to order the holding company to maintain the 

bank’s capital as a condition of its status as a financial holding company. 

OTS officials stated that OTS has the same authority as the Board with 

respect to requiring a capital infusion.

43See 12 C.F.R. § 225.4(a).

44The concern is based upon differing views about the effect of the Supreme Court’s ruling in 

Board of Governors v. MCorp. Financial, Inc., 502. U.S. 32 (1991). In MCorp, the Court 

reversed a federal circuit court’s holding that federal courts had jurisdiction to consider and 

enjoin an administrative action by the Board alleging MCorp’s violation of the Board’s 

source of strength regulation. The Court observed that MCorp ultimately could seek judicial 

review of the validity of the source of strength regulation and its application “if and when 

the Board finds that MCorp has violated that regulation.” 502 U.S. at 43-44. The judicial 

action subsequently was dismissed for lack of jurisdiction. MCorp. Financial v. Board of 

Governors, 958 F.2d 615 (5th Cir. 1992). Questions about the validity and enforcement of the 

regulation were unresolved. 

45See, e.g., 12 U.S.C. §§ 1844(g), 1831v(a)(2), and 1843(l), respectively.
Page 33 GAO-05-621 Industrial Loan Corporations

The Board and OTS also have enforcement authority over holding 

companies and their nonbank subsidiaries which, among other things, 

allows the agencies to order the termination of any activity, or ownership, 

or control of any noninsured subsidiary, if there is reasonable cause to 

believe that the continuation of the activity or ownership or control of the 

uninsured affiliate constitutes a serious risk to the financial safety, 

soundness, or stability of an affiliated insured depository institution. For 

example, if a subsidiary exposed the holding company to reputation risk 

that constituted a serious risk to the financial safety and soundness of an 

affiliated bank, these authorities could be used to force the holding 

company to divest of the subsidiary in order to prevent any negative impact 

from spreading to the insured institution.46

In contrast to the consolidated supervisory approaches of the Board and 

OTS, FDIC’s authority does not specifically address the circumstances of 

an ILC holding company or its nonbank subsidiaries except in the context 

of a relationship between the ILC and an entity affiliated with it through the 

holding company structure. Specifically, FDIC’s authority to examine state 

nonmember banks, including ILCs, includes the authority to examine some, 

but not all, affiliates of the ILC in a holding company structure. Under 

section 10(b) of the FDI Act, FDIC may, in the course of examining an 

institution, examine “the affairs of any affiliate of (the) institution as may 

be necessary to disclose fully—( i) the relationship between such 

depository institution and any such affiliate; and (ii) the effect of such 

relationship on the depository institution.”47 FDIC’s use of this authority to 

determine the condition of an institution for insurance purposes is not 

limited by the functional regulation restrictions that apply to examinations 

by the Board and OTS.48 Also, according to FDIC officials, FDIC can use its 

subpoena and other investigative authorities to obtain information from 

any affiliate, as well as any nonaffiliate, to determine compliance with 

applicable law and with respect to any matter concerning the affairs or

46See 12 U.S.C. § 1818(b)(3) (enforcement authority regarding nonbank subsidiaries includes 

authority to impose cease and desist orders for unsafe or unsound practices); see also, 12 

U.S.C. § 1467(g) (OTS enforcement authority regarding thrift holding companies); 12 C.F.R. 

§ 225.4(b) (Board regulation providing for divestiture of holding company affiliates); 12 

U.S.C. § 1467a(g)(5) (OTS divestiture authority).

47See 12 U.S.C. 1820(b)(4)(A).

48See 12 U.S.C. 1831v(b). 
Page 34 GAO-05-621 Industrial Loan Corporations

ownership of an insured institution or any of its affiliates.49 According to 

FDIC officials, such an investigation would be triggered by concerns about 

the insured institution. 

Because FDIC does not regulate institutions affiliated with depository 

institutions on a consolidated basis, it has no direct authority to impose 

consolidated supervision requirements, such as capital levels and reporting 

obligations, on ILC holding companies. However, FDIC does have 

authorities that it can use for certain purposes to address risk to depository 

institutions in a holding company structure. For example, FDIC can initiate 

an enforcement action against an insured ILC and, under appropriate 

circumstances, an affiliate that qualifies as an institution-affiliated party 

(IAP) of the ILC if the ILC engages in or is about to engage in an unsafe or 

unsound practice.50 An ILC affiliate is an IAP if, among other things, it is a 

controlling stockholder (other than a bank holding company), a 

shareholder who participates in the conduct of the affairs of the institution, 

or an independent contractor who knowingly or recklessly participates in 

any unsafe or unsound practices.51 However, FDIC’s ability to use this 

authority to, for example, hold an ILC holding company responsible for the 

financial safety and soundness of the ILC is less extensive than application 

of the source of strength doctrine by the Board or OTS under consolidated 

supervision. As we will discuss later, FDIC officials assert that FDIC can 

use its supervisory power over an ILC under certain circumstances to 

achieve similar results as under consolidated supervision.

Figure 4 compares some of the differences in explicit supervisory authority 

between FDIC and consolidated supervisors, specifically the Board and 

OTS. The table shows that in two of the eight areas FDIC has examination 

authority with respect to ILC affiliates that have a relationship with the ILC, 

as do the Board and OTS. However, we identified six areas where FDIC’s 

explicit authority with respect to ILC holding company affiliates is not as 

extensive as the explicit authorities of consolidated supervisors to 

examine, impose capital-related requirements on, or take enforcement 

49See 12 U.S.C. § 1820(c). 

50FDIC has no authority to take action against an ILC affiliate whose activities weaken the 

holding company, and potentially the ILC, unless the affiliate is an IAP and the IAP 

participated in conducting the ILC’s business in an unsafe or unsound manner, violated a 

legal requirement or written condition of insurance, or otherwise engaged in conduct 

subject to enforcement. See 12 U.S.C. § 1818(b).

51See 12 U.S.C. § 1813(u).
Page 35 GAO-05-621 Industrial Loan Corporations

actions against holding companies and affiliates of an insured institution. 

In general, FDIC’s supervisory authority over holding companies and 

affiliates of insured institutions depends on the agency’s authority to 

examine certain affiliates and its ability to enforce conditions of insurance 

and written agreements, to coerce conduct based on the prospect of 

terminating insurance, and to take enforcement actions against a holding 

company or affiliate that qualifies as an IAP.52 

Figure 4: Comparison of Explicit Supervisory Authorities of the FDIC, Board, and OTS

a

FDIC may examine an insured institution for interaffiliate transactions at any time and can examine the 

affiliate when necessary to disclose the transaction and its effect on the insured institution. 

52In addition to these authorities, we note that measures under the prompt corrective action 

provisions of the FDI Act based on an institution’s undercapitalized status include a parental 

capital maintenance guarantee and the possibility of divestiture of a significantly 

undercapitalized depository institution or any affiliate. See 12 U.S.C. § 1831o. These 

measures apply equally to all FDIC insured institutions and their respective regulators.

Examine the relationships, including specific transactions, if any, between the insured institution and its parent or affiliates.

Examine beyond specific transactions when necessary to disclose the nature and effect of the relationship between the insured institution 

and the parent or affiliate.

Examine the parent or any affiliate of an insured institution, including a parent or affiliate that does not have any relationships with the insured 

institution or concerning matters that go beyond the scope of any such relationships and their effect on the depository institution.

Take enforcement actions against the parent of an insured institution.

Take enforcement actions against affiliates of the insured institution that participates in the conduct of affairs of, or acts as agent for, the 

insured institution.

Take enforcement action against any affiliate of the insured institution, even if the affiliate does not act as agent for, or participate in the conduct 

of, the affairs of the insured institution.

Compel the parent and affiliates to provide various reports such as reports of operations, financial condition, and systems for monitoring risk.

Impose consolidated or parent-only capital requirements on the parent and require that it serve as a source of strength to the insured 

depository institution.

Description of explicit supervisory authority

Sources: GAO analysis of the supervisory authorities of the FDIC, Board, and OTS.

Explicit authority

Less extensive authority

No authority

FDICa Board OTS

b b

b

b

b

b,d

b,c

b

d

Compel the parent to divest of an affiliate posing a serious risk to the safety and soundness of the insured institution. e

b

b

b

b

b

b

b b

b b

b
Page 36 GAO-05-621 Industrial Loan Corporations

b

The authority that each agency may have regarding functionally regulated affiliates of an insured 

depository institution is limited in some respects. For example, each agency, to the extent it has the 

authority to examine or obtain reports from a functionally regulated affiliate, is generally required to 

accept examinations and reports by the affiliates’ primary supervisors unless the affiliate poses a 

material risk to the depository institution or the examination or report is necessary to assess the 

affiliate’s compliance with a law the agency has specific jurisdiction for enforcing with respect to the 

affiliate (e.g., the Bank Holding Company Act in the case of the Board). These limits do not apply to the 

Board with respect to a company that is itself a bank holding company. These restrictions also do not 

limit the FDIC’s authority to examine the relationships between an institution and an affiliate if the FDIC 

determines that the examination is necessary to determine the condition of the insured institution for 

insurance purposes. 

c

FDIC may take enforcement actions against institution-affiliated parties of an ILC. A typical ILC 

holding company qualifies as an institution-affiliated party. FDIC’s ability to require an ILC holding 

company to provide a capital infusion to the ILC is limited. In addition, FDIC may take enforcement 

action against the holding company of an ILC to address unsafe or unsound practices only if the 

holding company engages in an unsafe or unsound practice in conducting the affairs of the depository 

institution. 

d

FDIC maintains that it can achieve this result by imposing an obligation on an ILC holding company as 

a condition of insuring the ILC. FDIC also maintains it can achieve this result as an alternative to 

terminating insurance. FDIC officials also stated that the prospect of terminating insurance may 

compel the holding company to take affirmative action to correct violations in order to protect the 

insured institution. According to FDIC officials, there are no examples where FDIC has imposed this 

condition on a holding company as a condition of insurance.

e

In addition to an enforcement action against the holding company of an ILC in certain circumstances 

(see footnote b), as part of prompt corrective action the FDIC may require any company having control 

over the ILC to (1) divest itself of the ILC if divestiture would improve the institution's financial condition 

and future prospects, or (2) divest a nonbank affiliate if the affiliate is in danger of becoming insolvent 

and poses a significant risk to the institution or is likely to cause a significant dissipation of the 

institution’s assets or earnings. However, the FDIC generally may take such actions only if the ILC is 

already significantly undercapitalized.

While FDIC’s Authority is 

Less Extensive Than 

Consolidated Supervision, 

FDIC Officials Assert Its 

Authority Could Achieve 

Similar Results

Although FDIC’s authority over an insured ILC permits FDIC to take certain 

measures with respect to some ILC holding company affiliates under 

certain circumstances, this authority is not equivalent to consolidated 

supervision of the holding company. However, FDIC officials stated that it 

can adequately protect an ILC from the risks arising from being in a holding 

company without adopting a consolidated supervision approach. The 

officials stated that FDIC has various authorities, including the following: 

• examining certain ILC affiliates that have a relationship with the ILC; 

• imposing requirements on an ILC holding company in connection with 

an application for deposit insurance, as a condition of insuring the ILC;

• terminating deposit insurance or entering into written agreements with 

the holding company to correct conditions that would warrant 

termination of the ILC’s insurance;
Page 37 GAO-05-621 Industrial Loan Corporations

• obtaining written agreements from the acquiring entity in connection 

with a proceeding to acquire an ILC; and

• taking enforcement measures against ILCs and certain ILC affiliates.

FDIC may be able to use these authorities in many instances to supervise 

ILCs and their holding company and affiliates. However, because these 

authorities can be used in connection with concerns about a particular ILC 

only under specific circumstances, they do not provide FDIC with a 

comprehensive supervisory approach designed to detect and address the 

ILC’s exposure to all risks arising from its affiliations in the holding 

company, such as reputation risk from an affiliate that has no relationship 

with the ILC. These limitations are most significant with respect to existing 

ILC holding companies that are not subject to conditions or written 

agreements made in connection with the ILC’s application for insurance 

and whose ILCs are not currently financially troubled or exposed to risks 

from relationships with their affiliates. 

Table 2 provides a summary of what FDIC officials told us about their 

authority over holding companies and affiliates of insured depository 

institutions and our analysis of the limitations of these authorities.
Page 38 GAO-05-621 Industrial Loan Corporations

Table 2: The Extent of Selected FDIC Authorities

Source: GAO analysis of the supervisory authorities stated by FDIC officials. 

a

FDIC’s ability to examine ILC affiliates is limited by the meaning of the term “relationship,” which is 

unclear in situations where the ILC and the affiliate do not engage in transactions or share operations. 

In this respect, FDIC’s authority is less extensive than consolidated supervision because (1) the 

examination authority of consolidated supervisors does not depend on the existence of a relationship 

and (2) without a relationship, FDIC generally needs the consent of the affiliate to conduct an 

examination of its operations.

b

FDIC’s ability to obtain written agreements from the acquiring entity in connection with a proceeding to 

acquire an ILC is limited because certain types of risks, such as reputation risk, could be unrelated to 

any of the grounds for disapproval of a CIBA notice. Moreover, this ability would not be related to 

concerns arising after the acquisition is made. Further, some experts stated that it is unlikely that FDIC 

could require capital-related commitments from a financially strong, well managed commercial 

enterprise that seeks to acquire an ILC.

c

In accordance with 12 U.S.C. §§1848a, 1831v(a), FDIC’s authority to take action against a functionally 

regulated IAP is limited to where the action is necessary to prevent or redress an unsafe or unsound 

practice or breach of fiduciary duty that poses a material risk to the insured institution and the 

protection is not reasonably possible through action against the institution.

FDIC’s Examination Authority Is 

Less Extensive Than a 

Consolidated Supervisor

FDIC officials stated that its examination authority is sufficient to address 

any significant risk to ILCs from holding companies and entities affiliated 

with the ILC through the holding company structure. For example, FDIC 

officials told us that it has established effective working relationships with 

ILC holding companies and has conducted periodic targeted examinations 

FDIC authority Extent of authorities

Examine certain ILC affiliates.a Only to determine whether the affiliate has a relationship with the ILC and, if so, to disclose the 

effect of the relationship on the ILC. The authority does not extend to determining how the 

affiliate’s involvement in the holding company alone might threaten the safety and soundness of 

the ILC.

Impose conditions on or enter into 

agreement with an ILC holding 

company in connection with an 

application for deposit insurance. 

Only in connection with an application for deposit insurance and cannot be used to unilaterally 

impose conditions on an ILC holding company after the application has been approved.

Terminate deposit insurance. Only if certain notice and procedural requirements (including a hearing on the record before the 

FDIC Board of Directors) are followed after FDIC determines that

• the institution, its directors or trustees have engaged in unsafe or unsound practices;

• the institution is in an unsafe or unsound condition; or 

• the institution, its directors or trustees have violated an applicable legal requirement, condition 

of insurance, or written agreement between the institution and FDIC.

Obtain written agreements from the 

acquiring entity in connection with a 

proceeding to acquire an ILC.b

Could be used if grounds for disapproval exist with respect to the acquirer. 

Take enforcement actions against ILC 

affiliates.c

Only if an affiliate is an IAP; and

Only if the IAP engages in an unsafe or unsound practice in conducting the business of the ILC 

or has violated a legal requirement. If the IAP is functionally regulated, FDIC’s enforcement 

grounds are further limited. 
Page 39 GAO-05-621 Industrial Loan Corporations

of some ILC holding companies and material affiliates that have 

relationships with the ILC, which includes those affiliates that are 

providing services to or engaging in transactions with the ILC. FDIC 

officials also told us that these targeted reviews of holding companies and 

affiliates help to assess potential risks to the ILC and include the following: 

• assessing the holding company’s value-at-risk model used at its affiliate 

banks;53

• assessing the internal control and review processes developed at the 

holding company level and understanding how those processes are 

applied to the bank, including how the holding company’s internal audit 

function is designed, scoped, and implemented with respect to the bank;

• reviewing information about the holding company’s asset quality and its 

processes for analyzing risk such as: stress testing, review of 

commercial, industrial, and international loans and country risk ratings, 

and loan underwriting procedures developed at the holding company 

level and implemented at the bank; and

• assessing IT systems and controls related to the bank. 

The scope of FDIC’s general examination authority may be sufficient to 

identify and address many of the risks that holding company and affiliate 

entities may pose to the insured ILC. However, FDIC’s general examination 

authority is less extensive than a consolidated supervisor’s. Because FDIC 

can examine an ILC affiliate only to determine whether it has a relationship 

with the ILC and, if so, to disclose the effect of the relationship on the 

financial institution, FDIC cannot examine ILC affiliates in a holding 

company specifically to determine how their involvement in the holding 

company alone might threaten the safety and soundness of the ILC. When 

there is no relationship between the ILC and the affiliate, FDIC generally 

would need the consent of the affiliate to conduct an examination of its 

operations. According to its officials, FDIC could use its subpoena powers 

and other authorities under section 10(c) of the FDI Act to obtain 

53Value-at-risk is an estimate of the potential losses that might occur in a portfolio due to 

changes in market rates, based on a specified period of time during which the rates change, 

and at a specified probability level. For example, a firm may generate a value at risk 

estimate for a 10-day period at 99 percent probability and arrive at a figure of $1 million. 

This means that 99 percent of the time it would expect its losses during a 10-day move of 

rates to be less than $1 million.
Page 40 GAO-05-621 Industrial Loan Corporations

information, but the use of these powers appears to be limited to 

examinations or investigations relating to the insured depository 

institution.54 In contrast, the examination authorities of the Board and OTS 

focus on the operations and financial condition of the holding company and 

its nonbank subsidiaries and specifically on financial and operations risks 

within the holding company system that can threaten the safety and 

soundness of a bank subsidiary.55 To the extent that an affiliate’s size, 

condition, or activities could expose the depository institution to some 

type of risk, such as reputation risk, where no direct relationship with the 

bank exists, the consolidated supervisory approach is more able to detect 

the exposure.56 FDIC’s authority does not permit it to examine an affiliate 

based solely on its size, condition, or activities. However, FDIC officials 

told us that it is unlikely that any serious risk could come from an affiliate 

that does not have a relationship with the insured institution. According to 

these officials, there have been no bank failures in the United States from 

reputation risk in the past 20 years. We agree that the most serious risk to 

an ILC would come from holding companies or affiliates that have a 

relationship with the ILC. However, the possibility that risks could come 

from affiliates with no relationship with the ILC cannot be overlooked. 

While no recent bank failures may have resulted from reputation risk, it 

continues to attract the attention of the FDIC and the Board. 

Unlike the specific examination authority of the Board, the full extent of 

FDIC’s examination authority over affiliates is unclear because there is no 

established definition of the term “relationship” in the context of FDIC’s 

examination authority. Further, we are not aware of any judicial or 

legislative clarification of this term as it relates to FDIC examinations. 

According to FDIC officials, determining whether a relationship exists can 

be routine in cases where an insured institution and an affiliate engage in a 

transaction or share operations. However, in less obvious cases, the 

determination might involve circumstances that may be unique or 

unprecedented.

54See 12 U.S.C. § 1820(c).

55See, for example, the focus of bank holding company examinations as prescribed in the 

BHC Act. 12 U.S.C. § 1844(c)(2). 

56See 12 U.S.C. 1844(c)(1)(C) (Board examinations, to fullest extent possible, are to be 

limited to examinations of holding company subsidiaries whose “size, condition, or 

activities” could adversely affect the affiliated bank’s safety and soundness or where the 

nature and size of transactions between the affiliate and the bank could have that effect.)
Page 41 GAO-05-621 Industrial Loan Corporations

However, both the Board and FDIC officials, as well as an expert we 

interviewed, generally agreed that the term connotes an arrangement in 

which there exists some level of interaction, interdependence or mutual 

reliance between the ILC and the affiliate, such as a contract, transaction, 

or the sharing of operations. Board officials expressed the view that the 

term has a limiting effect on affiliate examinations. FDIC officials told us 

that its use of this authority to examine ILC holding companies or entities 

affiliated with an insured institution in a holding company has never been 

challenged. 

FDIC’s Authority to Impose 

Conditions or Written 

Agreements Can Be Used in 

Certain Circumstances 

FDIC officials also stated that it can use its authority to approve 

applications for deposit insurance as a means of requiring an ILC holding 

company to adopt commitments, operations and procedures that enhance 

the safety and soundness of the ILC. When reviewing an application for 

insurance, FDIC must consider the following seven statutory factors:57

• financial history and condition of the depository institution,

• adequacy of the institution’s capital structure,

• future earnings prospects of the institution,

• general character and fitness of the institution’s management,

• risk the institution presents to the deposit insurance fund,

• convenience and needs of the community to be served by the institution, 

and 

• whether the institution’s corporate powers are consistent with the FDI 

Act.

57See 12 U.S.C. §§ 1815(a)(4), 1816.
Page 42 GAO-05-621 Industrial Loan Corporations

FDIC officials stated that because its primary mission is to protect the bank 

insurance fund, the FDIC’s incidental powers and other authorities under 

the FDI Act authorize the FDIC to impose conditions on insurance where 

those conditions are warranted by the statutory factors.58 Under its 

enforcement authority, FDIC can initiate proceedings against an IAP for 

violation of a condition imposed in writing by FDIC in connection with the 

granting of any application or request by the depository institution or any 

written agreement with the agency.59 In March 2004, FDIC issued guidance 

that identified nonstandard conditions that might be imposed when 

approving applications for deposit insurance involving financial 

institutions to be owned by or significantly involved in transactions with 

commercial or financial companies. For example, among other things, 

FDIC can require that the majority of ILC management be independent of 

its holding company and affiliates, and that all arrangements to share 

management staff, personnel, or resources with the holding company or 

any affiliate be governed by written contracts giving the bank authority to 

govern its own affairs. FDIC officials told us that the approval of insurance 

could be conditioned upon the holding company’s adhering to prescribed 

capital levels, adopting a capital maintenance plan for the ILC, and/or other 

measures such as submitting reports about affiliates to FDIC. For example, 

FDIC’s policy is to favor capital commitments from holding companies of 

applicants for insurance.60 However, FDIC officials were unable to provide 

examples where FDIC has imposed conditions on an application for 

insurance that required the holding company to provide specific reports of 

58FDIC’s incidental powers are set forth at 12 U.S.C. 1819(a)(Seventh).

59See 12 U.S.C. § 1818(b)(1).

60FDIC’s Policy Statement on Applications for Deposit Insurance provides, in pertinent part, 

that: Where the proposed depository institution will be a subsidiary of an existing bank or 

thrift holding company, the FDIC will consider the financial and managerial resources of the 

parent organization in assessing the overall proposal and in evaluating the statutory factors 

prescribed in section 6 of the Act. . . . If the applicant (for deposit insurance) is being 

established as a wholly owned subsidiary of an eligible holding company, . . . the FDIC will 

consider the financial resources of the parent organization as a factor in assessing the 

adequacy of the proposed initial capital injection. In such cases, the FDIC may find 

favorably with respect to the adequacy of capital factor, when the initial capital injection is 

sufficient to provide for a Tier 1 leverage capital ratio of at least 8 percent at the end of the 

first year of operation, based on a realistic business plan, or the initial capital injection 

meets the $2 million minimum capital standard set forth in this Statement of Policy, or any 

minimum standards established by the chartering authority, whichever is greater. The 

holding company shall also provide a written commitment to maintain the proposed 

institution’s Tier 1 leverage capital ratio at no less than 8 percent throughout the first 3 years 

of operation. See 67 Fed. Reg. 79276-79278 (Dec. 27, 2002).
Page 43 GAO-05-621 Industrial Loan Corporations

operations, financial condition, and systems of monitoring risk at the 

holding company and affiliates. Although FDIC officials and examiners told 

us that no ILC holding company has refused to provide all of the reports 

and supporting documents that the examiners needed, our review found 

that FDIC examiners rely upon information about holding company and 

affiliate operations that is voluntarily provided by ILC holding companies 

during the course of an examination to assess the various types of risk from 

the holding company and affiliate operations, including various types of 

nonpublic information such as asset quality and loan underwriting. Further, 

FDIC officials told us that it has never imposed capital requirements on a 

holding company; rather, officials gave an example where a legally 

enforceable agreement to maintain a certain level of capital was obtained 

from the holding company. In addition to imposing conditions, FDIC could, 

according to its officials, enter into a written agreement with the holding 

company of an institution to establish a supervisory system similar to 

consolidated supervision. For example, the agreement could call for the 

holding company to correct conditions at the affiliate that presents risks to 

the ILC, provide reports about affiliates, or even a capital infusion into the 

ILC. According to FDIC officials, whether to impose capital and reporting 

requirements as conditions on insurance or achieve the same result 

through agreements with the holding company depends upon the 

circumstances of the application for insurance. 

FDIC’s authority does not permit it to impose conditions on an ILC holding 

company after the application has been approved. Should the ILC face risks 

from the holding company that are not adequately covered by insurance 

conditions or a written agreement with the holding company and do not 

arise from any relationship that the ILC has with an affiliate, FDIC would 

have to resort to some other means to achieve corrective action by the 

holding company, such as persuading the holding company to take action 

to avoid termination of the depository institution’s insurance. FDIC 

officials also referred to procedures under the prompt corrective action 

(PCA) provisions of the FDI Act for undercapitalized institutions that can 

require action by a holding company, such as a guarantee to maintain the 

depository institution’s capital at prescribed levels and divestiture of a 

significantly undercapitalized institution or any affiliate.61 FDIC’s PCA 

authority cannot be used unless the institution violates capital standards 

and is triggered only by a bank’s capital deficiency. In contrast, under 

consolidated supervision, capital and reporting requirements are imposed 

61See 12 U.S.C. § 1831o(e)(2)(C), (f)(I)(ii).
Page 44 GAO-05-621 Industrial Loan Corporations

on holding companies of depository institutions to address the potential for 

risks arising from the holding company system. Moreover, consolidated 

supervision requirements can address risks that might not be discernible at 

a particular point in time, whereas FDIC can exercise its authorities only 

under certain circumstances, such as when an application for insurance is 

granted.

FDIC’s Authority to Terminate 

Insurance Can Be Exercised in 

Certain Circumstances 

FDIC officials stated that, even if conditions or agreements were not 

established in connection with the issuance of an ILC’s insurance, the 

prospect of terminating an institution’s insurance can serve to compel the 

holding company to take measures to enhance the safety and soundness of 

the ILC. Under the FDI Act, FDIC can initiate an insurance termination 

proceeding only if certain notice and procedural requirements are followed 

after a determination by the FDIC that (1) an institution, its directors, or 

trustees have engaged in or are engaging in an unsafe or unsound practice; 

(2) an institution is in an unsafe or unsound condition; or (3) the institution, 

its directors, or trustees have violated an applicable legal requirement, a 

condition imposed in connection with an application by the depository 

institution, or a written agreement between the institution and FDIC.62 In 

addition, termination proceedings must be conducted in a hearing on the 

record, documented by written findings in support of FDIC’s 

determination, and are subject to judicial review.63 FDIC officials told us 

that if the grounds for termination exist, FDIC can provide the holding 

company of a troubled ILC with an opportunity to avoid termination by 

agreeing to measures that would eliminate the grounds for termination. 

These measures could include an agreement to infuse capital into the ILC 

or provide reports about the holding company and its affiliates. According 

to FDIC officials, the prospect of terminating insurance is usually sufficient 

to secure voluntary corrective action by a holding company to preclude the 

occurrence of an unsafe or unsound practice or condition or restore the 

institution to a safe and sound financial condition. FDIC officials stated 

that FDIC has notified insured institutions that it intended to terminate 

deposit insurance 184 times. Between 1989 and 2004, FDIC initiated formal 

proceedings to terminate deposit insurance in 115 of these cases because 

necessary corrections were not immediately achieved. In 94 of these 115 

62The procedural requirements include notifying the appropriate federal or state banking 

supervisor of FDIC’s determination for the purpose of securing a correction by the 

institution. 12 U.S.C. § 1818(a)(2)(A).

63See 12 U.S.C. § 1818(a)(3),(5).
Page 45 GAO-05-621 Industrial Loan Corporations

instances, corrective actions were taken, and the deposit insurance was not 

terminated. For the remaining 21 of the 115 cases, FDIC terminated deposit 

insurance. FDIC officials told us that, after terminating deposit insurance, 

17 of these institutions implemented appropriate corrective actions, and 

the insurance was subsequently reinstated. 

As demonstrated by the number of institutions that took measures to 

enhance the safety and soundness of the insured depository institution, the 

threat of insurance termination has been an effective supervisory measure 

in many instances. However, FDIC’s ability to use the possibility of 

insurance termination to compel the holding company to enhance the 

safety and soundness of the insured institution is limited. For example, 

because the statutory grounds for termination relate to the condition of the 

institution and practices of its directors or trustees, the prospect of 

termination would not be based solely on the condition or operations of an 

institution’s affiliate. While conditions could exist in the holding company 

that might threaten the holding company and thereby indirectly threaten an 

ILC, these conditions would not serve as grounds for termination of 

insurance unless they caused the institution to be in an unsafe or unsound 

condition. Further, unlike the consolidated supervision approach, FDIC 

insurance termination authority does not give it power to require a holding 

company or any of its nonbank affiliates to change their operations or 

conditions in order to rehabilitate the ILC. The extent to which FDIC could 

enter into an agreement with a holding company would depend on whether 

the holding company has an incentive to retain the institution’s insured 

status and/or the resources to take the action FDIC seeks.

In Certain Circumstances, FDIC 

May Enter Into Agreements in 

Connection with the Acquisition 

of an Insured Institution

FDIC officials also stated that if an entity sought to acquire an ILC, the 

regulatory process for such a transaction could afford FDIC an opportunity 

to seek an agreement from the prospective acquirer relating to matters 

such as capital maintenance, examinations, and reporting. Provisions of 

the Change In Bank Control Act (CIBA) set forth the reasons for which 

FDIC can disapprove the proposed acquisition of an insured ILC.64 These 

include proposed acquisitions where (1) the financial condition of the 

acquiring company might jeopardize the financial stability of the depository 

institution; (2) the competence, experience, or integrity of the acquirer or 

proposed management personnel do not satisfy statutory standards; and 

where (3) FDIC determines that the acquisition would have an adverse 

64FDIC’s authority in connection with the acquisition of an insured institution is set forth at 

12 U.S.C. §§ 1817(j).
Page 46 GAO-05-621 Industrial Loan Corporations

effect on the deposit insurance fund. According to FDIC officials, it could 

use the prospects of disapproval on these or other grounds to force a 

potential acquirer to enter agreements that would address potential risks to 

an ILC arising from its presence in a holding company. FDIC officials 

described an instance where officials obtained an agreement from an 

acquirer to correct potential problems even before issuing disapproval of 

the CIBA notice to address the acquirer’s request to avoid negative 

publicity. 

FDIC’s ability to reach an agreement in connection with an acquisition 

appears to be helpful in mitigating some of the risks that could arise at this 

time. However, FDIC’s ability to obtain agreements in connection with a 

CIBA notice is limited when a prospective acquirer of an ILC does not 

trigger the statutory concerns described above. For example, some experts 

we talked with said it is unlikely that FDIC could use its CIBA authority to 

require capital-related commitments from a financially strong, wellmanaged commercial enterprise that seeks to acquire an ILC. Moreover, 

certain types of risk to a depository institution that can arise from its 

affiliations in a holding company, such as reputation risk arising from an 

affiliate of the acquirer, could be unrelated to any of the grounds for 

disapproval set forth in CIBA or could arise after the acquisition has been 

approved. 

FDIC’s Authority to Take 

Enforcement Actions Is Less 

Extensive Than a Consolidated 

Regulator

FDIC officials also stated that it can use its enforcement authority to 

compel certain institution affiliated parties of ILCs (a group that typically 

would include the ILC’s holding company) to take measures relating to the 

safety and soundness of the ILC. However, FDIC has no enforcement 

authority over ILC affiliates that are not IAPs, and its ability to require an 

IAP to infuse capital into a troubled ILC appears to be limited. As discussed 

previously, FDIC has no authority to take action against an ILC affiliate 

whose activities weaken the holding company, and potentially the ILC, 

unless the affiliate is an IAP. If grounds for an enforcement action exist, 

FDIC can initiate an action against the insured institution or an IAP to 

obtain, among other things, a cease and desist order or civil money 

penalties.65 

65Grounds for an enforcement action against an IAP include the occurrence or potential 

occurrence of an unsafe or unsound practice by the insured institution caused by the IAP’s 

conducting the business of the institution or the violation of a law, regulation or other 

regulatory requirements by the institution or IAP. See 12 U.S.C. § 1818(b)(1).
Page 47 GAO-05-621 Industrial Loan Corporations

FDIC officials told us that it could use its enforcement authority, under 

appropriate circumstances, to require an ILC holding company to take 

action necessary to protect or restore the safety and soundness of its 

affiliate insured institution, which action could include transferring capital 

into the institution or making a guarantee to do so. However, FDIC’s ability 

to impose such requirements against a functionally regulated affiliate is 

limited.66 Moreover, FDIC’s authority to require an asset transfer in an 

administrative enforcement action may be limited. In a decision 

interpreting OTS’ authority to require a holding company to comply with a 

written condition requiring the company to maintain the net worth of a 

savings bank affiliate, the District of Columbia Circuit Court (Court) held 

that OTS had no authority to require an asset transfer absent proof of the 

holding company’s unjust enrichment or reckless disregard of its legal 

obligations.67 In that decision, the Court observed that this same provision 

governs enforcement actions by other federal banking agencies, including 

FDIC. According to this decision, FDIC has no authority to require an ILC 

holding company to transfer assets to a troubled ILC solely because of the 

ILC’s unsafe or unsound condition, unless the condition is the result of the 

holding company’s use of the ILC for unjust enrichment or reckless 

disregard of a legal obligation to make the transfer. The Court’s decisions in 

these cases also may limit the authority of the Board and OTS to require an 

asset transfer without proving unjust enrichment or reckless disregard of a 

legal requirement. In this regard, a bank holding company’s reckless 

disregard of its obligation to maintain the financial safety and soundness of 

a subsidiary bank might satisfy the Court’s requirements for a capital 

infusion.

66See 12 U.S.C. §§ 1831v, 1848a.

67Wachtel v.Office of Thrift Supervision, 982 F.2d 581 (D. Cir. 1993) (OTS lacks authority to 

require majority shareholder of a savings and loan to inject capital into the institution 

pursuant to a written agreement where OTS failed to prove unjust enrichment.); see also, 

Rapaport v. Office of Thrift Supervision, 59 F.3d 212 (1995). 
Page 48 GAO-05-621 Industrial Loan Corporations

FDIC Actions May Help 

Mitigate Potential 

Risks, but Supervision 

of ILC Holding 

Companies and 

Affiliates Has Only 

Been Tested on a 

Limited Basis in 

Relatively Good 

Economic Times

FDIC’s bank-centric, supervisory approach has undergone various 

modifications to its examination, monitoring, and application processes, 

designed to help mitigate the potential risks that FDIC-examined 

institutions, including ILCs in a holding company structure, can be exposed 

to by their holding companies and affiliates. For example, FDIC revised the 

guidance for its risk-focused examinations to, among other things, provide 

additional factors that might be considered in assessing a holding 

company’s potential impact on an insured depository institution affiliate. 

These changes may further enhance FDIC’s ability to supervise the 

potential risks that holding companies and affiliates can pose to insured 

institutions in a holding company structure, including ILCs. In addition, 

FDIC’s application process may also help to mitigate risks to ILCs with 

foreign holding companies and affiliates. While FDIC has provided some 

examples where its supervisory approach effectively protected the insured 

institution and mitigated losses to the bank insurance fund, questions 

remain about whether FDIC’s supervisory approach and authority over 

BHC Act-exempt holding companies and affiliates addresses all risks to the 

ILC from these entities. Further, FDIC’s supervision of large, rapidly 

growing ILCs and authority over BHC Act-exempt holding companies and 

nonbank affiliates has been refined during a period of time described as the 

“golden age of banking” and has not been tested during a time of significant 

economic stress or by a large, troubled ILC. 

FDIC Examination and 

Monitoring Procedures May 

Help to Mitigate Risks to 

ILCs from Holding 

Companies and Affiliates 

According to FDIC, its process for conducting safety and soundness 

examinations for ILCs is risk-focused and generally the same as for other 

banks under its oversight. These officials believed that an examiner’s 

ability to exercise judgment to determine the depth of review in each 

functional area is crucial to the success of the risk-focused supervisory 

process. FDIC officials and examiners told us that, at every examination, 

FDIC reviews an institution’s relationships with affiliated entities. 

According to FDIC’s Supervisory Insights, in an examination of a 

depository institution with affiliates, including an ILC, FDIC examiners 

assess the bank’s corporate structure, the bank’s interactions with 

affiliates—which include a review of intercompany transactions and 

interdependencies—as well as the financial risks that may be inherent in 

the affiliate relationship. Once each on-site examination is initiated, the 

FDIC requests information from bank management to obtain items that 

serve as the starting point for reviewing the institution’s relationships with 

affiliated entities. The requested information may include items such as the 

following: 
Page 49 GAO-05-621 Industrial Loan Corporations

• a list of officers and directors of affiliates, including organizational 

chart, if available; 

• a list of affiliated organizations and their financial statements as of the 

financial statement date, or most recent date available; 

• the most recent annual report, SEC 10-K report, and/or SEC 10-Q report 

(annual and quarterly financial filings to the SEC); 

• a tax allocation agreement with the holding company; 

• contracts for all business relationships with affiliates that provide 

services to the ILC; and 

• the fee structure of transactions with the holding company and/or 

affiliates. 

FDIC’s examination manual notes that an institution’s relationship with its 

affiliates is an important part of the analysis of the condition of the bank 

itself. The manual further states that, because of common ownership or 

management, transactions with affiliates may not be subject to the same 

sort of objective analysis by bank management that is used to analyze 

transactions between independent parties and that affiliates offer an 

opportunity to engage in types of business endeavors that are prohibited 

for the bank itself, yet may impact the condition of the bank. In March 2004, 

the FDIC updated the Related Organizations section of its examination 

manual to, among other things, expand the discussion of management’s 

fiduciary responsibilities to ensure that an insured depository institution 

maintains a separate corporate existence from its affiliates; to provide 

additional factors that might be considered in assessing a holding 

company’s potential impact on an insured depository institution affiliate, 

such as the independence of the bank’s management from the holding 

company; and to emphasize examiners’ authority under Section 10(b) and 

(c) of the FDI Act to examine affiliates of state nonmember banks, if 

deemed warranted.

Table 3 lists some of the examination procedures performed during a 

review of an institution with affiliates, including ILCs.
Page 50 GAO-05-621 Industrial Loan Corporations

Table 3: Affiliate Related Examination Procedures

Source: FDIC.

Note: Adapted from Supervisory Insights, June 2004.

While the FDIC lacks specific authority to require that holding companies 

serve as a source of strength to affiliate financial institutions, FDIC officials 

told us that examination activities to assess the holding company’s source 

of strength to the insured institution are performed at each examination. 

The examination manual also states that a sound, well-managed holding 

company can be a source of strength for unit banks and provide strong 

financial support because of its greater ability to attract and shift funds 

from excess capital areas to capital deficient areas. Moreover, the 

examination manual states that, when the financial condition of the holding 

company or its nonbanking affiliates is tenuous, pressures can be exerted 

on the affiliate bank by payment of excessive dividends, investing in high 

risk assets, purchase and/or trade of high quality assets for affiliates lower 

quality assets, purchase of unnecessary services, or payment of excessive 

management or other fees. 

In its recent report on FDIC’s approach to supervising limited-charter 

institutions, including ILCs, the FDIC-IG recommended that FDIC further 

revise its examination manual and policies to expand the discussion of the 

source of strength provided to an affiliate bank by the managerial and 

financial capabilities of the holding company and provide guidance and 

procedures to examiners for analyzing the holding company’s source of 

strength. FDIC officials told us that, in December 2004, FDIC further 

Assessing the bank’s corporate structure.

Reviewing intercompany transactions to determine how the bank interacts with the 

affiliates.

Reviewing the interdependencies of the bank and affiliates.

Evaluating any financial risks that may be inherent in the relationship.

Reviewing the current written business plan and evaluating any changes.

Reviewing any arrangements of shared management or employees.

Reviewing services provided to an affiliate to determine whether the same terms and 

conditions are in place as would be for nonaffiliated entities.

Reviewing the services purchased from an affiliate to determine whether the same terms 

and conditions are similar to those that would be applied to a nonaffiliated entity.

Assessing whether written agreements are in place for all service relationships.

Reviewing relevant documents to determine whether the bank has a contingency plan for 

all critical business functions performed by affiliated companies.
Page 51 GAO-05-621 Industrial Loan Corporations

revised its manual to include more specific suggestions for analyzing 

whether a holding company, including a holding company of an ILC, may 

serve as a potential “source of strength.” Currently, FDIC’s manual provides 

specific guidance to examiners on: (1) measuring the ability of the holding 

company to cover its interest expense; (2) testing the holding company’s 

cash availability to meet not only interest expenses, but also operating 

expenses, taxes, shareholders dividends, and debt maturities; and (3) 

assessing the risk to a bank through the use of dual-employee 

arrangements. FDIC officials told us that if the management or financial 

capacity of the holding company provides a significant source of strength 

to the ILC, this finding would typically be incorporated into the summary 

examination report. The FDIC-IG’s report also stated that establishing 

uniform and complete policies and procedures for assessing a bank’s 

corporate structure or relationships with affiliated entities, including the 

holding company, should help ensure that examiners adequately identify 

risks that may be inherent in the ILC-holding company relationship. The 

FDIC-IG concluded that FDIC could further improve its examination 

policies and procedures by (1) including specific procedures for examiners 

to follow in assessing dual-manager and dual-employee arrangements; (2) 

clarifying procedures with respect to reviewing business plans, operating 

budgets, or strategic planning documents to ensure that procedures are 

consistently applied; and (3) requiring examiners to calculate and provide 

financial ratios in the summary examination report, especially for ILCs. The 

report further states that, in the absence of Board holding company 

reports, these ratios could provide examiners with important insights 

about the impact that affiliates are having on the ILC. 

Other aspects of FDIC’s examination approach also help mitigate the risk 

that holding companies and affiliates may pose to insured institutions, 

including ILCs. For example, some ILCs are included in FDIC’s Large State 

Nonmember Bank Onsite Supervision or “Large Bank” and Dedicated 

Examiner programs and receive continuous supervision. The Large Bank 

program provides an on-site presence at depository institutions through 

visitations and targeted reviews throughout the year as opposed to the 

traditional annual point-in-time examination. State nonmember banks with 

total assets of $10 billion or more are eligible. Institutions that do not meet 

the asset threshold can qualify for the Large Bank program based upon 

their size, complexity, and risk profile. Some of the major areas covered in 

the targeted reviews can include: capital markets activities, lending, risk 

management, operations, internal controls and audit, management 

supervision, capital, earnings, and liquidity. Three ILCs that represent 

nearly 75% of total ILC assets are currently part of the Large Bank program. 
Page 52 GAO-05-621 Industrial Loan Corporations

In addition, according to the FDIC-IG report, the FDIC established the 

Dedicated Examiner program in 2002 to appoint eight dedicated examiners 

to work closely with the primary federal supervisors of the eight largest 

insured depository institutions in the United States. Currently there are 

three holding companies that are monitored as part of the Dedicated 

Examiner program and, together, they own a total of four ILCs. These 

dedicated examiners work with examination staff from the Board, OTS, 

and OCC to obtain real-time access to information about the risk and 

trends in these organizations. According to FDIC officials, currently 

dedicated examiners for two of the three holding companies had not been 

assigned. 

Examiners also use Call Report68 data to monitor the condition of financial 

institutions and assist in prioritizing on-site safety and soundness 

examination efforts. In addition, according to FDIC officials and examiners 

we spoke with, examiners often obtain information, including holding 

company financial reports and monthly board of directors’ meeting 

minutes, voluntarily provided by ILC management that can assist an 

examiner’s ability to assess risks to the ILC. This documentation can 

include information regarding existing and planned transactions and 

contracts with its holding company and affiliates and can further assist in 

an examiner’s ability to identify and assess potential risks to the ILC 

stemming from these relationships. 

FDIC also works with state banking supervisors to examine ILCs, including 

assessing the risks that ILC holding companies and affiliates may pose to 

the insured institution. In May 2004, FDIC jointly developed recommended 

practices for state and federal supervisors to communicate and coordinate 

the planning and execution of supervisory activities.69 Recommendations 

included: involving both the state and federal banking supervisors in 

meetings with bank management and directors; sharing reports produced 

through off-site monitoring or targeted supervisory activities; discussing 

and preparing supervisory plans at least once during the examination cycle, 

68All commercial banks insured by the FDIC and all FDIC-supervised savings banks are 

required to submit quarterly Call Reports. The Call Report contains a variety of financial 

information that shows a bank’s condition and income and is used for multiple purposes 

including assessing the financial health and risk of the institution.

69FDIC jointly developed the recommended practices as documented by the State Federal 

Working Group Supervisory Agreement together with the Board and the Conference of 

State Banking Supervisors.
Page 53 GAO-05-621 Industrial Loan Corporations

or more frequently, as appropriate; and jointly discussing, coordinating, 

and executing all corrective action plans such as memoranda of 

understanding and cease and desist orders.

In addition, FDIC established a goal, as part of its 2004 Performance Plan, 

to develop an on-site examination program for nonbank holding 

companies. The program would establish procedures for examination of a 

nonbank or commercial holding company that owns an insured institution, 

beyond what is currently done to determine the holding company’s 

potential effect on the insured institution. According to FDIC officials, a 

preliminary draft outline of the examination program had been provided to 

FDIC’s legal and management divisions for comment in September 2004. 

FDIC officials also told us that proposals for the program are still being 

drafted. At this time, it is too early to determine how this program will 

enhance FDIC’s ability to protect an insured depository institution from the 

potential risks that holding company and affiliate entities may pose.

FDIC’s Application Process 

May Help to Mitigate Risks 

to ILCs from Foreign 

Holding Companies and 

Affiliates 

As previously discussed, FDIC’s authority to impose conditions on a 

holding company is limited to the circumstances previously discussed. 

However, its application process may help mitigate potential risks to ILCs 

from foreign holding companies. For example, deposit insurance 

applications from foreign owners are subject to the same approval and 

review processes as all other applications. While foreign banking 

organizations chartered in the European Union are already subject to 

consolidated supervision, FDIC officials told us that not all foreign-owned 

ILC holding companies are designated as foreign banking organizations (as 

defined by the Board) and, therefore, are not subject to consolidated 

supervision in their home country. According to FDIC, currently, only one 

of the five foreign-owned ILCs is owned by a foreign banking organization 

that is subject to comprehensive consolidated supervision in its home 

country. We reviewed an order approving an application for insurance from 

a foreign holding company of an ILC in which FDIC indicated that the 

proposed ownership structure presented some concerns because it had 

potential to present supervisory concerns similar to those posed by chain
Page 54 GAO-05-621 Industrial Loan Corporations

banking organizations70 and because part of the “chain” was located in 

another country and not subject to U.S. supervision. According to FDIC, 

chain banks present opportunities to shift low-quality assets and other 

funds between banks to avoid being detected by supervisors and auditors. 

FDIC’s concerns were mitigated, in part, because of its ability to review 

publicly available information about the publicly traded holding company 

and the foreign bank affiliates’ location in countries that appeared to have 

adequate supervisory regimes. 

In addition, FDIC may impose conditions in foreign applications for deposit 

insurance when it is deemed necessary to insulate the ILC. For example, 

we reviewed an order approving an application for deposit insurance from 

a foreign holding company of an ILC in which FDIC imposed several 

conditions, including the following:

• requiring the holding company to establish a designated agent in the 

United States, prior to receiving deposit insurance;

• entering into a written agreement with FDIC whereby the holding 

company agrees to be subject to United States Court jurisdiction on 

domestic banking issues;

• prohibiting the bank from engaging in any transactions with non-U.S. 

affiliates without the prior written approval of the regional Director of 

the FDIC; and

• requiring the holding company to obtain and maintain current financial 

information on any non-U.S. financial affiliate prior and subsequent to 

entering into any transactions with the non-U.S. financial affiliate and 

making the information available for examiner review at the holding 

company’s main office in the United States.

70According to FDIC, a chain banking organization is a group of two or more banks or 

savings and loan associations and/or their holding companies that are controlled directly or 

indirectly by an individual or company acting alone or through or in concert with any other 

individual or company. The linkage of several banks or holding companies into a chain 

creates a concentration of banking resources that can be susceptible to common risks 

including poor loan participation practices, common deficiencies in lending and/or 

investment policies, domineering or absentee ownership, insider abuses, or other selfserving practices. Further, FDIC has noted that chain banking organizations do not have to 

report financial information on a consolidated basis, thereby making offsite monitoring 

difficult. 
Page 55 GAO-05-621 Industrial Loan Corporations

State Supervisors 

Contribute to ILC 

Supervision, but Resources 

Vary

The state chartering authorities also play a role in supervising ILCs and 

their holding companies and affiliates. The states of California, Nevada, 

and Utah collectively supervise 49 of the 57 active, FDIC-insured ILCs. Like 

FDIC, they examine transactions and agreements that the ILCs may have 

with their holding companies and affiliates for compliance with sections 

23A and 23B of the Federal Reserve Act. In addition, according to these 

state banking supervisors, they have authority to conduct examinations of 

holding companies and affiliates, although the scope of these authorities 

varies.71 Utah officials also maintain that the Commissioner of Financial 

Institutions can, under general supervisory authority over financial 

institution holding companies, impose capital requirements on the holding 

company in order to protect the insured institution.72 We also found that 

FDIC has written, formal information sharing agreements with all three 

states and has an agreement to accept examination reports prepared by 

California on alternate examination years and to conduct examinations 

jointly with Nevada and Utah. 

Table 4 compares the examination resources and organizational structure 

of the state banking supervisory offices in all three states. As shown in the 

table, more than half of the institutions supervised by the state of Utah are 

ILCs while this percentage is significantly less in California and Nevada. 

71Under Nevada Law, the Commissioner of Financial Institutions has authority to examine 

ILC affiliates for limited purposes. Nev. Rev. Stat. § 677.440 (2004). The laws of Utah and 

California provide for full examinations of ILC affiliates. Utah Code Ann. §§ 7-1-314, 7-1-510 

(2004); Cal. Fin. Code § 3704 (2004).

72See Utah Code Ann. § 7-1-510.
Page 56 GAO-05-621 Industrial Loan Corporations

Table 4: Comparison of Examination Resources and Organizational Structure of State Banking Supervisory Office

Sources: GAO and FDIC data.

Note: All data reported are as of December 31, 2004.

Table 4 also demonstrates that the supervisory resources available in each 

state and the organizational structure of each banking supervisory office 

vary. Further, the number of examination staff per regulated entity is 

similar for California and Utah while Nevada has fewer examiners per 

institution supervised. Additionally, Utah has supervisory oversight over 

almost half of the active ILCs, 29 out of the 57, and employs 33 examiners 

that are responsible for examining 56 state-supervised banking institutions, 

including ILCs. The Utah DFI reports directly to the state Governor. The 

Utah DFI recently provided ILCs in its jurisdiction the opportunity to 

voluntarily submit to continuous supervision by FDIC and Utah state 

supervisors, as part of FDIC’s Large Bank program.73 As a result, according 

to Utah officials, 4 ILCs have volunteered to participate.74 California has 

supervisory oversight over 190 state-supervised banking institutions, 

including 15 ILCs and employs 120 examiners. The California Department 

(Dollars in billions)

State banking 

supervisory office

Total number of

insured

institutions

supervised

Number of ILCs

supervised Total ILC assets

Number of

examination staff

Organizational 

structure

California 

Department of 

Financial Institutions

190 15 $13.7 120 Reports directly to the 

state Business, 

Transportation and 

Housing Agency 

Nevada 

Division of Financial 

Institutions 

29 5 $10.2 12 Reports directly to the 

state Department of 

Business and Industry

Utah

Department of 

Financial Institutions

56 29 $115.0 33 Reports directly to the 

Governor of Utah

73FDIC’s Large Bank program provides an onsite presence at depository institutions through 

visitations and targeted reviews throughout the year as opposed to the traditional annual 

point-in-time examination. FDIC Regional Directors or their designees are to determine 

which institutions qualify for the program, however FDIC guidance indicates that all state 

nonmember banks with total assets of $10 billion or more should be considered. 

74Four Utah ILCs are eligible to participate in the Large Bank program. As of the date of this 

report, FDIC has approved three of these ILCs and the fourth is awaiting approval to 

participate.
Page 57 GAO-05-621 Industrial Loan Corporations

of Financial Institutions reports directly to the state Business, 

Transportation and Housing Agency. Nevada has supervisory oversight 

over 29 state-supervised banking institutions, including 5 ILCs, and 

currently employs 12 examiners. As of the time of our review, the Nevada 

Division of Financial Institutions (Nevada DFI) was not accredited, largely 

due to limited staff resources. As a result, the Nevada DFI is unable to 

examine insured depository institutions without partnership with FDIC or 

other federal supervisors.75 The Nevada DFI reports directly to the state 

Department of Business and Industry. 

Questions Exist Regarding 

Whether the Bank-Centric 

Approach Addresses All 

Risks to the ILC 

Officials from the FDIC and the Board disagree over whether the bankcentric approach to supervision, without the added components of the 

consolidated supervisory approach, effectively identifies all of the potential 

risks that holding companies and ILC may pose to the ILC. FDIC officials 

told us that its current supervisory approach focuses not only on the 

insured institution but also on the risks that holding companies and 

affiliates could pose to an insured institution in a holding company 

structure. FDIC notes in Supervisory Insights that its experience with ILCs 

reinforces the agency’s position that effective bank-level supervision is 

essential in safeguarding institutions from risk posed by holding 

companies. However, officials from the Board told us that the bank-centric 

approach alone was not sufficient to protect banks from all the risks that 

holding company and affiliate entities could pose. These officials stated 

that consolidated supervision of holding companies is essential to ensuring 

the safety and soundness of institutions, like ILCs, that exist in a holding 

company structure.

According to FDIC officials, consolidated supervision of the holding 

company is not a superior method for protecting the insured entity; rather, 

these officials stated that the primary source of strength for the holding 

75In June 1995, the Federal Financial Institutions Examination Council (FFIEC) issued 

guidelines for federal supervisors to use to determine whether to rely upon state 

examinations. The guidelines stipulate that the federal banking agencies will “accept and 

rely on State reports of examination in all cases in which it is determined that State 

examinations enable the Federal banking agencies to effectively carry out their supervisory 

responsibilities.” According to FFIEC and FDIC criteria, the FDIC should consider the 

adequacy of state budgeting and examiner staffing in determining reliance placed on state 

examinations. In addition to FFIEC criteria, FDIC uses a number of other factors, including 

the state bank supervisor’s accreditation through the Conference of State Bank Supervisors 

(CSBS). CSBS is the professional association of state banking departments responsible for 

chartering, regulating, and supervising the nation’s state chartered banks.
Page 58 GAO-05-621 Industrial Loan Corporations

company is usually the insured institution. FDIC officials told us that its 

bank-centric approach is not limited in its focus and that examiners have 

access to whatever they need in order to assess potential risks to the 

insured institution. As noted previously, FDIC officials provided examples 

of where examiners conducted targeted reviews of selected operations of 

the holding company and material affiliates of several ILCs. In addition, 

officials stated that the bank-centric approach has effectively mitigated 

losses to the bank insurance fund stemming from troubled banks. For 

example, FDIC officials told us about its efforts to protect Conseco Bank—

an insured ILC whose assets, at one point, totaled $3 billion—from 

operations and reputation risk from its parent company that eventually 

filed for bankruptcy after experiencing financial difficulty from acquiring a 

business with a poor loan portfolio. In this instance, FDIC, the state 

supervisor, and the bank developed a mutually agreed upon plan to protect 

Conseco Bank by implementing policies that placed more control in the 

hands of bank management. For example, the plan prohibited the bank 

from paying dividends to any affiliate, including the parent, and required 

Conseco Bank to sell its problem loans to the parent. Also, since loan 

servicing for Conseco Bank was provided by an affiliate of the parent, the 

agreement required the parent to sell the loan servicing affiliate to Conseco 

Bank to improve the independence and continuity of the bank's operations. 

The FDIC and state supervisor closely monitored Conseco Bank 

throughout the parent’s bankruptcy proceedings. Eventually, Conseco 

Bank was marketed and ultimately sold for full value with no loss to the 

Fund.

FDIC told us of three other examples where its bank-centric approach 

effectively managed the risks being posed by holding companies and their 

subsidiaries to ILCs that were troubled. In one example, the FDIC 

established a written agreement with the ILC prohibiting it from paying 

dividends to its holding company or its affiliates without FDIC approval or 

engaging in transactions covered under the limitations set forth in sections 

23A and 23B of the Federal Reserve Act. In two other examples, FDIC 

enforced corrective actions that were applicable to the ILC, as well as the 

holding company and the ILC’s affiliates. Specifically, in one instance, a 

cease and desist order to end unsafe and unsound banking practices and 

enforce sections 23A and 23B transaction limits were applicable to the ILC, 

as well as the holding company and its subsidiary organizations. In the 

other example, FDIC entered into a written agreement with the ILC 

because of declines in its asset quality, as well as a capital and liquidity 

assurance agreement with the holding company. As a result, the holding 

company provided the ILC with a capital infusion and purchased its low 
Page 59 GAO-05-621 Industrial Loan Corporations

quality assets. None of these troubled ILCs failed and no losses were 

incurred by the Fund.

According to the FDIC-IG, two recent ILC failures, Pacific Thrift and Loan 

in 1999 and Southern Pacific Bank in 2003, resulted in material losses to the 

Fund totaling more than $105 million.76 As a result of the failures, the FDICIG made several recommendations to revise FDIC’s supervisory approach, 

which FDIC implemented. According to FDIC officials, other conditions in 

the banking industry that occurred at the same time of the ILC failures 

were also contributing factors to the changes that FDIC made to its 

supervisory approach. Specifically, since 1999, FDIC has, among other 

things, modified its risk focused examination procedures; issued guidance 

to examiners on topics such as risk from examining subprime lending 

programs and real estate lending standards; and hosted a symposium to 

discuss the lessons learned from these failures. According to FDIC, both 

failures were generally the result of ineffective risk management and poor 

credit quality. Table 5 provides a summary of the causes of the ILC failures 

and a description of the various corrective actions that FDIC officials told 

us were taken in response to the failures and other conditions in the 

banking industry that occurred during the same time period.

76From 1985 through year-end 2003, a total of 21 ILCs failed, including those discussed 

above. The other 19 failures did not result in material losses to the bank insurance fund; 

therefore, the FDIC-IG did not conduct a review. A material loss review by the Inspector 

General of the principal federal regulator of a failed institution is required when the 

estimated loss to the bank or savings association insurance funds exceeds the greater of $25 

million or 2 percent of the institution’s total assets at the time the FDIC was appointed 

receiver. These 19 ILCs were operated as finance companies, and their average total assets 

were $23 million. According to FDIC, most of the failures were small California ILCs that 

failed during the banking crisis of the late 1980s and early 1990s. 
Page 60 GAO-05-621 Industrial Loan Corporations

Table 5: Causes of Material ILC Failures and FDIC’s Response to Failures and Other Industry Conditions

Sources: GAO, FDIC, and FDIC-IG.

Note: This table is based on information from FDIC-IG’s material loss reviews and interviews with and 

documentation from FDIC.

a

Mortgage derivative and asset backed securities refer to securities created from securitized assets. 

Structured notes are debt securities whose principal and interest payments vary according to specific 

formulas or as a result of changes in exchange rates or equity and commodity prices, they may also 

contain derivatives or financial contracts based on, or derived from, an underlying market, such as 

stocks, bonds, or currencies. 

Name of ILC

(year of failure)

assets at closing Cause of failure

Amount of loss to 

the fund FDIC’s response

Pacific Thrift & Loan; 

Woodland Hills, Calif. 

(1999)

Total assets: 

$117.6 million at 

closing

Poor corporate governance.

Poor risk management.

Lack of risk diversification.

Annual financial statement audit did not 

identify the actual financial condition of 

the bank.

Inappropriate accounting for estimated 

future revenue from high risk assets.

Auditors did not provide a written report 

of internal control weaknesses to the 

bank audit committee and examiners.

Auditors did not provide examiners 

access to workpapers and supporting 

documentation.

$42 million

(as of 01/01/02)

Modified risk focused examination 

procedures.

Issued internal guidance on: 

• subprime lending programs, and

• real estate lending standards.

Modified guidance for examining high-risk 

residual assets (e.g., Modifications to Capital 

Markets Examination handbook, specifically 

mortgage derivative securities, asset-backed 

securities, structured notes, and 

securitization).a

Issued a proposed rule to revise risk-based 

capital requirements (e.g., Financial Institution

Southern Pacific Bank;

Torrance, Calif. (2003)

Total assets: 

$1.1 billion at closing

Poor corporate governance.

Poor risk management.

Lack of risk diversification.

Annual financial statement audit did not 

identify the actual financial condition of 

the bank.

Auditors did not provide a written report 

of internal control weaknesses to the 

bank audit committee and examiners.

$63.4 million

(as of 12/31/04)

Letter, Capital Treatment of Residual Interest 

in Asset Securitizations, issued 9/2000).

Hosted a symposium for FDIC regional 

management on “Lessons Learned” from 

bank failures.

Required that contracts with third parties 

providing audit services include a provision to 

provide examiners access to audit 

workpapers and supporting materials.
Page 61 GAO-05-621 Industrial Loan Corporations

Board officials told us that they had a different view of the FDIC-IG reports 

concerning the two ILC failures that resulted in material losses to the bank 

insurance fund. According to Board officials, the lack of consolidated 

supervision at the holding company level contributed to the problems that 

impacted the ILCs. For example, these officials stated that the failure of 

Pacific Thrift and Loan was, in part, due to problems at the holding 

company level that were affecting the bank. To support their view, Board 

officials highlighted that the FDIC-IG reported that the holding company 

accumulated more debt than could be supported by the dividends it 

received from the ILC, thereby allowing the ILC to generate loans without 

reliable and stable funding sources. Officials from the Board stated that, as 

a result, the holding company implemented an aggressive high-risk strategy 

to boost profitability and pay these debt instruments, which resulted in 

significant losses and the holding company’s inability to raise enough 

capital to help the ILC. Board officials told us that, because the holding 

company of Pacific Thrift and Loan was exempt from the BHC Act, no 

federal supervisor had examined the holding company, and the regulatory 

capital requirements that would have limited the borrowings of the holding 

company did not apply. While the lack of federal supervision of the holding 

company was not explicitly stated as a cause of failure in the FDIC-IG’s 

material loss review of Pacific Thrift and Loan, the FDIC-IG’s review 

discusses this matter in detail. Board officials told us that the ability to see 

a broader picture of, and take enforcement action against, the holding 

company would have enabled FDIC to identify and correct problems at the 

holding company before the ILC failed. Further, the FDIC-IG’s material loss 

review recommended that FDIC remind its examiners of the agency’s 

authority to examine holding companies and affiliates. Subsequently, FDIC 

examiners performed two on-site visitations of the holding company of 

Southern Pacific Bank, before it failed in 2003, to determine the overall 

condition of the holding company and its ability to support the ILC.

Board officials told us that the bank-centric approach alone is not sufficient 

to assess all the risks that a holding company and affiliates can pose to an 

insured financial institution. Board officials also stated that consolidated 

supervision has a long, successful history of assessing the potential risks 

that holding company and affiliate organizations may pose to insured 

depository institutions. According to Board officials, in order to understand 

the risks within a holding company structure and how they are dispersed, 

bank supervisors must assess risks across business lines, by legal entity, 

and on a consolidated basis. Board officials note that consolidated 

supervision provides its examiners with both the ability to understand the 

financial strength and risks of the overall holding company—especially 
Page 62 GAO-05-621 Industrial Loan Corporations

operations and reputation risk—and the authority to address significant 

management, operations, capital, and other deficiencies throughout the 

organization before these deficiencies pose a danger to affiliate insured 

banks and the bank insurance fund. 

Further, Board officials stated that focusing supervisory efforts on 

transactions covered by sections 23A and 23B will not cover the full range 

of risks that insured institutions are exposed to from holding companies 

and their subsidiaries. Board officials told us that sections 23A and 23B 

violations most often occur in smaller organizations, and the risks posed by 

large organizations are more often related to other issues such as internal 

controls and computer systems problems. These officials stated that FDIC 

would likely not be able to detect these problems in a large holding 

company unless it was able to supervise the entire organization on a 

consolidated basis. In addition, Board officials stated that operations and 

reputation risk cannot be effectively assessed by focusing on sections 23A 

and 23B limitations. Board officials told us, for example, that these risks 

could come from a lending affiliate in the holding company that has loans 

outstanding to the same borrower as the ILC, but the affiliate does not do 

any business with the ILC. If this lending affiliate engaged in improper 

lending practices, it could impact the reputation of the holding company 

and ultimately affect the ILC. Further, the lending limits of both the ILC and 

the affiliate could be within an acceptable range, based upon a review of 

each individual organization’s financial statements. However, based upon a 

consolidated view of the holding company’s financial statement, the 

amount of loans from the ILC and the affiliate to the borrower could 

expose the consolidated entity to risk from a concentration of credit, which 

could ultimately impact the ILC. According to Board officials, it is unclear 

whether the FDIC’s bank-centric approach would be able to detect either 

condition given that the ILC does not do business or otherwise have a 

relationship with the lending affiliate. 

In our 1995 testimony to the House Committee on Banking and Financial 

Services, we presented our views on the need for consolidated supervision 

of bank holding companies. Based upon our work evaluating the 

effectiveness of bank supervision and examination during the 1980s and 

1990s, we discussed specific safeguards that are necessary to protect
Page 63 GAO-05-621 Industrial Loan Corporations

against undue risks.77 These safeguards included a comprehensive 

regulation of financial services holding companies on both a functional and 

consolidated basis. We stated that an umbrella supervisory authority needs 

to exist to adequately assess how risks to insured banks may be affected by 

risks in the other components of the holding company structure. In 

addition, we also stated that capital standards for both insured banks and 

financial services holding companies that adequately reflect all major risks, 

including market and operations risk, were a necessary safeguard. Because 

our past work on failed banks and thrifts found that capital can erode 

quickly in times of stress, we stated that supervisors should also be 

required to conduct periodic assessments of risk management systems for 

all the major components of the holding company, as well as for the holding 

company itself. 

Our belief in the importance of consolidated supervision and consolidated 

capital standards is partly based on the fact that most bank holding 

companies are managed on a consolidated basis, with the risks and returns 

of various components being used to offset and enhance one another. In 

addition, past experience has shown that, regardless of whether regulatory 

safeguards—such as sections 23A and 23B limitations—are set properly, 

even periodic examinations cannot ensure that regulatory safeguards can 

be maintained in times of stress. However, the consolidated supervisory 

approach is flexible enough to account for and recognize the contagion or 

systemic risks inherent in a holding company structure. Further, it appears 

that, in some instances, FDIC also embraces this concept. For example, in 

an order approving a foreign organization’s application for deposit 

insurance in January 2004, FDIC expressed concerns over the difficulty of 

monitoring foreign affiliates that were not subject to U.S. supervision.78 

The order states that FDIC has embraced the concept of effective, 

comprehensive, consolidated supervision.

77For the 1995 testimony, see Financial Regulation: Modernization of the Financial 

Services Regulatory System (GAO/T-GGD-95-121, Mar. 15, 1995). In addition to this 

testimony, other GAO products present similar views on consolidated supervision. See, for 

example, Separation of Banking and Commerce (GAO/OCE/GGD-97-61R); the U.S. Bank 

Oversight: Fundamental Principles for Modernizing Structure (GAO/T-GGD-96-117, May 

2, 1996); Bank Oversight Structure: U.S. and Foreign Experience May Offer Lessons for 

Modernizing U.S. Structure (GAO/GGD-97-23, Nov. 20, 1996); Bank Powers: Issues Related 

to Repeal of the Glass-Steagall Act (GAO/GGD-88-37, Jan. 22, 1988).

78In Re: Toyota Financial Savings Bank Henderson, Nevada, Application for Federal Deposit 

Insurance, Federal Deposit Insurance Corporation, January 2004.
Page 64 GAO-05-621 Industrial Loan Corporations

FDIC’s Supervisory Model 

and Authority Over BHC 

Act-Exempt Holding 

Companies and Nonbank 

Affiliates Has Been Tested 

on a Limited Basis in 

Relatively Good Economic 

Times

Although there have been material losses to the bank insurance fund 

resulting from two ILC failures in the past 6 years, the remaining 19 ILC 

failures occurred during the banking crisis in the late 1980s and early 1990s. 

Most of these ILCs were small California Thrift and Savings and Loan 

companies that, according to FDIC, had above-average risk profiles. FDIC’s 

analysis of bank failures during this time period indicates that California 

experienced deteriorating economic conditions and a severe decline in the 

real estate industry, which contributed to the failure of 15 ILCs in that state. 

As previously discussed, FDIC has since implemented changes to its 

supervisory approach and has told us about some recent examples where, 

according to FDIC, its supervisory approach—including its influence and 

authority as the provider of deposit insurance—has effectively protected 

the insured institution and prevented losses to the Fund. However, all of 

the ILCs that failed since the late 1980s, as well as those ILCs that became 

troubled and FDIC took corrective action, were relatively small in size 

compared with some of the large ILCs that currently dominate the industry. 

FDIC has not provided any examples where its supervisory approach was 

used to mitigate potential losses from troubled ILCs that would qualify for 

supervision under its Large Bank program. 

As previously discussed, because FDIC has established positive working 

relationships with ILC holding companies, examiners are able to obtain 

information about holding company and affiliate operations, supplied by 

ILC holding companies on a voluntary basis, from large, complex ILCs. 

According to examiners we spoke with, this information enhances FDIC’s 

ability to monitor the potential risks posed by holding companies and 

affiliates to the insured ILC and, in some instances, this information is not 

publicly available. Further, according to FDIC, its requests for information 

about holding company and affiliate organizations have not been 

challenged in court. Therefore, it is not clear whether FDIC would be able 

to successfully obtain needed information about holding company and 

affiliate organizations in the absence of consent by the holding company or 

affiliate.

FDIC’s supervisory model and authority over BHC Act-exempt ILC holding 

companies and affiliates has emerged during a time when banking has not 

confronted an adverse external environment. FDIC Chairman Donald 

Powell has described the past decade as a “golden age” of banking. The 

past 10 years can be characterized by stable economic growth, which has 

contributed to strong industry profitability and capital positions. During 

the past 7 years, only 35 financial institutions protected by the Fund have 

failed, and FDIC has reported that insured institutions’ earnings for 2004 
Page 65 GAO-05-621 Industrial Loan Corporations

set a new record for the fourth consecutive year and that the industry’s 

equity capital ratio is at its highest level since 1938.79 In contrast, 1,373 

financial institutions protected by the Fund failed between 1985 and 1992 

due to, among other things, poor management and poor lending practices. 

How FDIC’s supervisory approach would fare for large, troubled ILCs 

during an adverse external environment is not clear.

ILCs May Offer 

Commercial Holding 

Companies a Greater 

Ability to Mix Banking 

and Commerce Than 

Other Insured 

Depository Institution, 

but Views on 

Competitive 

Implications Are Mixed

Because most ILC holding companies and their subsidiaries are exempt 

from business activity limitations that generally apply to the holding 

companies and affiliates of other FDIC-insured depository institutions, 

ILCs may provide a greater means for mixing banking and commerce than 

ownership or affiliation with other insured depository institutions. During 

our review, we found other more limited instances where the mixing of 

banking and commerce previously existed or currently exists, such as 

unitary thrift holding companies, certain “nonbank banks,” and certain 

activities permitted under GLBA, such as merchant banking and 

grandfathered, limited nonfinancial activities by securities and insurance 

affiliates of financial holding companies. However, federal law significantly 

limits the operations and product mixes of these entities and activities as 

compared with ILCs. Additionally, with the exception of a limited creditcard-only bank charter, ownership or affiliation with an ILC is today the 

only option available to nonfinancial, commercial firms wanting to enter 

the insured banking business. The policy generally separating banking and 

commerce is based primarily on potential risks that integrating these 

functions may pose, such as the potential expansion of the federal safety 

net provided for banks to their commercial entities, potential increased 

conflicts of interest, and the potential increase in economic power 

exercised by large conglomerate enterprises. While some industry 

participants state that mixing banking and commerce may offer benefits 

from operational efficiencies, empirical evidence documenting these 

benefits is mixed.

79Equity capital or financing is money raised by a business in exchange for a share of 

ownership in the company. Financing through equity capital allows a business to obtain 

funds without incurring debt or without having to repay a specific amount of money at a 

particular time. The equity capital ratio is calculated by dividing total equity capital by total 

assets.
Page 66 GAO-05-621 Industrial Loan Corporations

ILC Charter May Offer 

Commercial Holding 

Companies More 

Opportunity to Mix Banking 

and Commerce Than Other 

Insured Depository 

Institution Charters

ILC holding companies and their affiliates may be able to mix banking and 

commerce more than other insured depository institutions because the 

holding companies and affiliates of ILCs are not subject to business activity 

limitations that generally apply to insured depository institution holding 

companies. Except for a limited category of firms, such as grandfathered 

unitary thrift holding companies and companies that own limited purpose 

credit card banks (CEBA credit card banks), entities that own or control 

insured depository institutions generally may engage, directly or through 

subsidiaries, only in activities that are financial in nature.80 Because of a 

provision in the BHC Act excluding certain ILCs from the act’s coverage, an 

entity can own or control a qualifying ILC without facing the activities 

restrictions imposed on bank holding companies and nonexempt thrift 

holding companies. As a result, the holding companies and affiliates of 

some ILCs and other subsidiaries are allowed to engage in nonfinancial, 

commercial activities. Today, nonfinancial, commercial firms in the 

automobile, retail, and energy industries, among others, own ILCs. 

According to the FDIC officials, as of December 31, 2004, 9 ILCs with total 

assets of about $3 billion directly support their parent’s commercial 

activities. However, these figures may understate the total number of ILCs 

that mix banking and commerce because 5 other ILCs are owned by 

commercial firms that were not necessarily financial in nature. Because 

these corporations, on a consolidated basis, include manufacturing and 

other commercial lines of business with the financial operations of their 

ILC, we determined that these entities also mixed banking and commerce. 

Thus, we found that, as of December 31, 2004, approximately 14 of the 57 

active ILCs were owned or affiliated with commercial entities, representing 

about $9.0 billion, (about 6.4 percent) and $4.6 billion (about 6.2 percent) 

of total ILC industry assets and estimated insured deposits, respectively.81

80See 12 U.S.C. §§ 1843, 1467a(c). As previously discussed, grandfathered unitary thrift 

holding companies are not subject to these activities restrictions. Limited purpose credit 

card banks also are exempt from the BHC Act. See 12 U.S.C. § 1841(c)(2)(F).

81When determining the current levels of mixed banking and commerce within the ILC 

industry, we considered only ILCs owned or affiliated with explicitly nonfinancial, 

commercial firms. Because some owners and operators of ILCs are engaged in business 

activities that are generally financial in nature, but still may not meet the statutory 

requirements of a qualified bank or financial holding company, officials from the Federal 

Reserve Board noted that they interpret the level of mixed banking and commerce among 

ILCs may be greater than 6.4 percent of industry assets and 6.2 percent of industry estimated 

insured deposits.
Page 67 GAO-05-621 Industrial Loan Corporations

During our review, regulators and practitioners we spoke with highlighted 

other, more limited, historical exceptions to the policy generally separating 

banking and commerce, such as unitary thrift holding companies and 

“nonbank banks”—both of which at one time allowed for instances where 

insured banks could be owned by or affiliated with nonfinancial, 

commercial firms. Regulators also provided us with other current 

examples of limited mixed banking and commerce in the financial system, 

such as the merchant banking operations of financial holding companies 

and CEBA credit card banks, which offer limited opportunities to attract 

insured deposits and no commercial lending opportunities, but are 

permitted to be owned by or affiliated with commercial firms. However, 

because of the wide variety of products and services that ILCs offer and the 

continued availability of this charter type in certain states,82 ILCs may offer 

commercial holding companies a greater opportunity to mix banking and 

commerce than these other exempted insured depository institutions and 

currently more limited situations of mixed banking and commerce. 

Additionally, with the exception of the more limited CEBA credit card only 

bank charter, ownership or affiliation with an ILC is today the only option 

available to nonfinancial, commercial firms wanting to enter the insured 

banking business. 

Unitary thrift holding companies or unitary savings and loan holding 

companies are firms that own or control a single FDIC-insured thrift or 

savings and loan and typically own or control other subsidiaries. The 

Savings and Loan Holding Company Act of 1967 (HOLA) established the 

regulatory framework for unitary thrift holding companies. Unitary thrift 

holding companies were at one time permitted to own one thrift 

association and engage, without limitation, in other activities, including 

commercial activities, as long as the thrift complied with requirements 

intended to maintain its function as a thrift.83 In 1999, as previously 

discussed, GLBA prohibited new unitary thrift holding companies from 

being chartered after May 4, 1999.84 GLBA also “grandfathered” existing 

unitary thrift holding companies and limited the existing commercial 

82In 2003, California and Colorado enacted laws restricting ownership or control of ILCs to 

financial firms. As a result, greater mixed banking and commerce for the holding company’s 

affiliates of ILCs is not available to owners of California and Colorado ILCs.

83In 1967, Congress enacted the current version of the Savings and Loan Holding Company 

Act, Pub. L. No. 90-255, 82 Stat. 5 (1968). In that legislation, Congress permitted unitary thrift 

holding companies to engage in nonthrift business.

84Pub. L. No. 106-102 § 401 (1999).
Page 68 GAO-05-621 Industrial Loan Corporations

powers of a unitary thrift holding company to the owners at that time. 

Thus, after this date, new owners of a unitary thrift would be unable to 

engage in commercial, nonfinancial activities. While many of the original 

commercial owners of unitary thrift holding companies have since sold 

their insured thrifts, several “grandfathered” commercially owned or 

affiliated unitary thrift holding companies remain active. As of December 

31, 2004, there were 17 commercially owned or affiliated unitary thrift 

holding companies representing $38.7 billion in assets and $15.0 billion in 

estimated insured deposits.

Officials from the OTS highlighted several limitations of unitary thrift 

holding companies that made this charter more restrictive in its ability to 

mix banking and commerce than ILCs. These limitations for unitary thrift 

holding companies include the following: 

• prohibitions on lending to commercial affiliates of the insured thrift;85

• restrictions on commercial lending to 20 percent of assets, provided any 

amount over 10 percent is in small business lending;86 and 

• restrictions under the qualified thrift lender test (QTL), including 

holding at least 65 percent of its assets in qualified thrift investments, 

which are primarily mortgage related assets.87 

OTS officials told us that the restrictions on extending credit to commercial 

affiliates in the unitary thrift holding company structure prevents a unitary 

thrift holding company from using the insured thrift to fund nonbanking 

activities of the holding company. Unlike qualified thrifts, ILCs are not 

subject to restrictions on extending credit to commercial affiliates, 

limitations on the amount of commercial lending activity they can engage 

in, or restrictions on the mix of assets in their loan portfolios. 

A similar, but even more limited, historical exception to the policy 

generally separating banking and commerce was, at one time, granted to 

“nonbank banks”—generally financial institutions that either accepted 

demand deposits or made commercial loans but did not engage in both 

85See 12 U.S.C. § 1468(a).

86See 12 U.S.C. § 1464(c)(2)(A).

87See 12 U.S.C. § 1467a(m).
Page 69 GAO-05-621 Industrial Loan Corporations

activities. Because the BHC Act defined a bank as a firm that did both of 

these activities, a company could own or control a “nonbank bank” and 

avoid federal supervision as a bank holding company. Similar to ILCs, the 

owners and affiliates of “nonbank banks” were able to mix banking and 

commerce prior to 1987 when CEBA was enacted. In effect, CEBA ended 

the ability to mix banking and commerce through the “nonbank bank” 

charter, because activity limitations on bank holding companies limit the 

holding companies’ ability to own a bank and commercial affiliates. CEBA 

grandfathered the organizations that acquired a nonbank bank prior to 

March 5, 1987, provided that the organization did not undergo a change in 

control after that date and the organization and its nonbank bank abide by 

various restrictions contained in the BHC Act. Currently, only eight 

grandfathered nonbank banks remain in existence.

In addition to these historical exemptions, other more limited 

opportunities to mix banking and commerce currently exist, such as 

merchant banking and portfolio investing by the securities and insurance 

affiliates of financial holding companies and CEBA credit card only banks. 

Merchant banking refers to the practice where a financial institution makes 

a passive equity investment in a corporation with a view toward working 

with company management and operating partners to enhance the value of 

the equity investment over time. Merchant banking can result in ownership 

of significant portions of a firm's equity. GLBA relaxed long-standing 

restrictions on the merchant banking activities of banking organizations by 

permitting qualified financial holding companies to own and operate 

merchant banking entities. However, GLBA contains several provisions 

that are designed to distinguish merchant banking investments from the 

more general mixing of banking and commerce.88 For example, merchant 

banking investments may only be held for a period of time to enable the 

resale of the investment, and the investing financial holding company may 

not routinely manage or operate the commercial firm except as necessary 

or required to obtain a reasonable return on the investment on resale.89 

Similarly, CEBA credit card banks, which are exempt from the BHC Act, 

offer limited opportunities to mix banking and commerce because they can 

88In the GLBA, Congress authorized FHCs to engage in merchant banking activities through 

nondepository institution subsidiaries under specific conditions, thus allowing an FHC to 

acquire or control, directly or indirectly, any kind of ownership interest in any entity 

engaged in any kind of trade or business, subject to rules to be promulgated by the FRB and 

the Secretary of the Treasury. See H. Rep. No. 106-434 at 154.

89See 12 U.S.C. § 1843(k)(4)(H).
Page 70 GAO-05-621 Industrial Loan Corporations

be owned by or affiliated with nonfinancial, commercial firms but, because 

of the nature of their charter, are limited scope banking entities. CEBA 

credit card banks are FDIC-insured institutions whose only business is 

credit cards. A CEBA credit card bank is not allowed to offer demand 

deposits or NOW accounts, can accept only “jumbo deposits” ($100,000 

minimum), may have only one office that accepts deposits, and cannot 

make any commercial loans.90

Industry practitioners we spoke with also highlighted examples of 

commercial firms providing bank-like services through finance 

subsidiaries, such as the credit card operations of selected retailers or the 

financing subsidiaries of manufacturing firms—often referred to as captive 

finance subsidiaries because their business operations generally focus on 

providing credit to support the sale of a holding company or affiliate’s 

products. For example, selected manufacturers of furniture, tractors, 

boats, and automobiles may offer credit through financing subsidiaries. 

However, banking regulators told us that captive financing subsidiaries are 

generally limited scope operations that must rely on the capital markets, 

their commercial holding companies, or banks for funding, and may not 

offer insured deposits. Banking regulators also stated that insured 

depository institutions generally can offer a broader range of banking 

services and can attract insured deposits as an attractive source of funding. 

Because the noninsured finance subsidiaries of commercial firms are not 

permitted to offer insured deposits, noninsured finance subsidiaries do not 

represent risk to the federal bank insurance fund.

Additionally, several developed countries allow greater mixing of banking 

and commerce than the United States. For example, in European countries 

there are generally no limits on a nonfinancial, commercial firm’s 

ownership of a bank. However, the European Union has mandated 

consolidated supervision. Japan has allowed cross-ownership of financial 

services firms, including banks and commercial firms, permitting 

development of industrial groups or keiretsu that have dominated the 

Japanese economy. These groups generally included a major or “lead” bank 

that was owned by other members of the group, including commercial 

firms, and that provided banking services to the other members. The 

experience of these nations provides some empirical evidence of the 

effects of increased affiliation of banking and commercial businesses, 

particularly pointing to the importance of maintaining adequate credit 

90See 12 U.S.C. § 1841(c)(2)(F).
Page 71 GAO-05-621 Industrial Loan Corporations

underwriting standards for loans to affiliated commercial businesses. 

Problems in Japan’s financial sector, notably including nonperforming 

loans, often to commercial affiliates of the banks, have contributed in part 

to the persistent stagnation of the Japanese economy beginning in the 

1990s. However, important differences between the financial and 

regulatory systems of these nations and the United States, and limitations 

in research into the effects of these affiliations, limit many direct 

comparisons. 

Mixing Banking and 

Commerce Presents Both 

Risks and Potential Benefits 

The mixing of banking and commerce can potentially come about in many 

different forms. For example, banks may want to enter nonfinancial 

activities, and commercial firms may want to enter banking. A bank may 

also want to take an equity stake in a commercial firm, or a commercial 

firm may want to make an ownership investment in a bank. The forms of 

mixing banking and commerce differ depending on the firms’ and banks’ 

motivations. In the ILC industry, mixing banking and commerce has 

primarily been in the form of commercial, nonfinancial firms owning and 

operating insured banks.

The policy generally separating banking and commerce is based primarily 

on limiting the potential risks that may result to the financial system, the 

deposit insurance fund, and taxpayers. As discussed more fully below, we 

have previously reported that the potential risks that may result from 

greater mixing of banking and commerce91 include the (1) expansion of the 

federal safety net provided for banks to their commercial entities, (2) 

increased conflicts of interest within a mixed banking and commercial 

conglomerate, and (3) increased economic power exercised by large 

conglomerate enterprises. However, generally the magnitudes of these 

risks are uncertain and may depend, in part, upon existing regulatory 

safeguards and how effectively banking regulators monitor and enforce 

these safeguards. 

The federal government provides a safety net to the banking system that 

includes federal deposit insurance, access to the Federal Reserve’s 

discount window, and final riskless settlement of payment system 

transactions. According to Federal Reserve officials, the federal safety net 

in effect provides a subsidy to commercial banks and other depository 

91GAO, Separation of Banking and Commerce, GAO/OCE/GGD-97-16R (Washington, D.C.: 

Mar. 17, 1997).
Page 72 GAO-05-621 Industrial Loan Corporations

institutions by allowing them to obtain low-cost funds because the system 

of federal deposit insurance shifts part of the risk of bank failure from bank 

owners and their affiliates to the federal bank insurance fund and, if 

necessary, to taxpayers. The system of federal deposit insurance can also 

create incentives for commercial firms affiliated with insured banks to shift 

risk from commercial entities that are not covered by federal deposit 

insurance to their FDIC-insured banking affiliates. As a result, mixing 

banking and commerce may increase the risk that the safety net, and any 

associated subsidy, may be transferred to commercial entities. The 

potential transfer of risks among insured banks and uninsured commercial 

affiliates could result in inappropriate risk-taking, misallocation of 

resources, and uneven competitive playing fields in other industries. As 

noted by regulators and practitioners we spoke with, these risks may be 

mitigated by regulatory safeguards between the bank and their commercial 

affiliates. For example, requirements for arms-length transactions and 

restrictions on the size of affiliate transactions under sections 23A and 23B 

of the Federal Reserve Act are a regulatory safeguard designed to protect 

an insured institution from adverse intercompany transactions. However, 

during times of stress, these safeguards may not work effectively—

especially if managers are determined to evade them. 

The mixing of banking and commerce could also add to the potential for 

increased conflicts of interest and raise the risk that insured institutions 

may engage in anticompetitive or unsound practices. For example, some 

have stated that, to foster the prospects of their commercial affiliates, 

banks may restrict credit to their affiliates’ competitors, or tie the provision 

of credit to the sale of products by their commercial affiliates. 

Commercially affiliated banks may also extend credit to their commercial 

affiliates or affiliate partners, when they would not have done so otherwise. 

For example, when a bank extends credit to an affiliate, customers, or 

suppliers of an affiliate, the credit judgment could be influenced by that 

relationship. While current regulatory safeguards are designed to mitigate 

this possibility, advocates of continued separation highlight that the 

potential for more frequent misallocation of credit opportunities is greater 

in a merged banking and commercial environment. These advocates have 

stated that increased conflicts of interest could result in greater numbers of 

loans to commercial affiliates with favorable terms, relaxed underwriting 

standards, preferential lending to suppliers and customers of commercial 

affiliates, and ultimately increased risk exposure to the federal bank 

insurance fund. Additionally, some have also stated that mixing banking 

and commerce could promote the formation of very large conglomerate 

enterprises with substantial amounts of economic power. If these 
Page 73 GAO-05-621 Industrial Loan Corporations

institutions were able to dominate some markets, such as the banking 

market in a particular local area, they could impact the access to bank 

services and credit for customers in those markets.

Other industry observers have stated that there are potential benefits from 

mixed banking and commerce, including allowing banks, their holding 

companies, and customers to benefit from potential increases in the scale 

of operations, which lowers the average costs of production known as 

economies of scale, or from potential reductions in the cost of producing 

goods that share common inputs, known as economies of scope, and 

enhanced product and geographic diversification. Because banks incur 

large fixed costs when setting up branches, computer networks, and raising 

capital, these institutions may benefit from the selected economies of scale 

and scope that could result from affiliations with commercial entities. For 

example, we were told combined entities may be able to generate operating 

efficiencies by sharing computer systems or accounting functions. Mixed 

banking and commercial entities may also benefit from product synergies 

that result from affiliation. For example, firms engaged in both the 

manufacturing and financing of automobiles may be able to increase sales 

and reduce customer acquisition costs by combining manufacturing and 

financing. Other incentives for affiliations between banking and 

commercial firms include enhanced product and geographic 

diversification, which could contribute to reduced risk to the combined 

entity. Additionally, one FDIC staff wrote that increased mixing of banking 

and commerce may help U.S. banks with regard to global competition with 

several other countries that have fewer restrictions than the United States. 

Advocates have also stated that some of these potential revenue and cost 

synergies may be passed on to consumers through lower prices for banking 

or commercial services. 

Divergent Views Exist 

About the Competitive 

Implications of Mixed 

Banking and Commerce 

Continued market interest by commercial firms in mixed banking and 

commerce may indicate that at least some participants believe that 

operational efficiencies and cost synergies may be realized from mixing 

banking and commerce. For example, three of the six new ILC charters 

approved by FDIC after June 30, 2004, are owned by nonfinancial, 

commercial firms. Additionally, recent press reports and conversations we 

had with federal banking regulators indicate one of the nation’s largest 

retailers has expressed continuing interest in owning an insured depository 

institution. However, during our search of academic and other literature, 

we were unable to identify any conclusive empirical evidence that 

documented operational efficiencies from mixing banking and commerce. 
Page 74 GAO-05-621 Industrial Loan Corporations

One primary factor in the lack of empirical evidence may be that, because 

of the policy generally separating banking and commerce, few institutions 

are available for study. 

However, product synergies between banking and commercial firms may 

exist in certain industries. For example, several automobile manufacturers 

own or operate captive financing affiliates that generally provide credit to 

borrowers at competitive rates to facilitate the commercial holding 

company’s efforts to sell automobiles. Some of these affiliates are insured 

depository institutions while others rely on the capital markets, their 

commercial holding companies, or banks for funding. Additionally, other 

regulators and practitioners noted that commercially affiliated insured 

depository institutions might benefit from access to existing commercial 

holding company or affiliate customers. For example, insured banks owned 

or affiliated with commercial firms may be able to attract deposits or 

potential credit card customers through targeted marketing to the 

commercial holding company or affiliate customers. Industry observers we 

spoke with also told us that commercially affiliated banks might benefit 

from stronger brand recognition and, in instances where banks are owned 

by retailers, the banks may benefit from being located in stores that keep 

longer hours of operation. Furthermore, as discussed previously, combined 

firms may generate efficiencies from the sharing of fixed costs, such as 

computer systems or accounting functions. 

One OTS official and industry practitioners we talked with were less 

convinced of potential economic efficiencies from mixing banking and 

commerce and suggested that these firms might not have a competitive 

advantage over other businesses. For example, an OTS official we talked 

with provided us with instances where the commercial owners of insured 

banks operating under the “nonbank bank” exemption had subsequently 

sold their insured banking subsidiaries because these firms may not have 

been able to realize expected operational efficiencies from mixed banking 

and commerce. For instance, a published study we reviewed noted that, in 

the late 1980s, a large retailer’s efforts to cross market its traditional 

product line and financial services failed to generate expected synergies. 

The study highlighted the management challenges associated with linking 

the conglomerate’s insurance, securities, real estate, retail, and catalog 

businesses. The study also mentioned difficulties managing accurate 

customer information and division management concerns about other 

divisions pursuing their customers as reasons for the conglomerate’s 

inability to capture expected synergies. Further, the study noted the 

financial services centers operating inside the traditional retailer’s stores 
Page 75 GAO-05-621 Industrial Loan Corporations

generally proved unprofitable. Eventually, the retailer cited in the study 

abandoned its diversification strategy and sold its financial services 

business. Similarly, a practitioner we spoke with stated that success in the 

banking industry may require skill sets that are different from the expertise 

and business practices in commercial sectors of the economy. 

While there is little direct research assessing the competitive effects of 

mixing banking and commerce, the incentives to mix banking and 

commerce may in some way be linked to research indicating that 

operational efficiencies may result from merging two banks. According to 

this research, there is a general expectation that operational efficiencies 

may be realized from scale and scope economies within the banking 

industry. For example, merging two banks can result in gains from the 

closing of redundant branches, consolidating systems and back offices, and 

marketing products, such as credit cards, to broader customer bases. Some 

of these same operational efficiencies—such as the marketing of credit 

cards to a broader customer base—would presumably be available to 

mixed banking and commercial firms as well. However, empirical studies 

have not found clear evidence that bigger is necessarily better in banking. 

For example one study noted that while large banking operations were 

regarded as advantageous, the conclusions in academic literature on 

economies of scale and scope within merged banks are mixed. Our own 

independent review of academic literature reached similar conclusions. 

Some studies documented economies of scale and scope in banking, but 

others were less conclusive. Additionally, while some recent studies we 

reviewed suggested that recent advances in information technology may be 

contributing to greater opportunities for economies of scale and scope 

within the banking industry, these studies do not provide conclusive 

evidence on the competitive implications of mixing banking and 

commerce.

The mixed findings on scale and scope economies within academic 

literature we reviewed are in many ways consistent with market activity 

post GLBA. Because GLBA removed several restrictions on the extent to 

which conglomerates could engage in banking and nonbanking financial 

activities, such as insurance and securities brokerage, some analysts had 

expected that conglomeration would intensify in the financial services 

industry after GLBA. However, as yet, this does not seem to have happened. 

The reasons vary. Many banks may not see any synergies with insurance 

underwriting. Additionally, it may be that many mergers are not 

economically efficient, the regulatory structure set up under GLBA may not 

be advantageous to these mergers, or, it is simply too soon to tell what the 
Page 76 GAO-05-621 Industrial Loan Corporations

impact will be. Further, a general slowdown occurred in merger and 

acquisition activity across the economy in the early 2000s, which may also 

be a contributing factor to the pace of industry conglomeration post GLBA. 

Recent Legislative 

Proposals May 

Increase the 

Attractiveness of 

Operating an ILC

FDIC-insured banks, including ILCs, are currently not permitted to offer 

interest-bearing business checking accounts. Recent legislative proposals 

would remove the current prohibition on paying interest on demand 

deposits and, separately, authorize insured depository institutions, 

including most ILCs, to offer interest-bearing business NOW accounts.92 

This would, in effect, expand the availability of products and services that 

insured depository institutions, including those ILCs, could offer. ILC 

advocates we spoke with highlighted that including ILCs in these legislative 

proposals maintains the current relative parity between ILC permissible 

activities and those of other insured bank charters. However, Board 

officials and some industry observers we spoke with told us that granting 

grandfathered ILCs the ability to offer business NOW accounts represents 

an expansion of powers for ILCs, which could further blur the distinction 

between ILCs and traditional banks. Another legislative proposal, 

introduced but not passed in the last congressional session, would allow 

banks and most ILCs (those included in a grandfathered provision) to 

branch into other states through establishing new branches—known as de 

novo branching—by removing states’ authority to prevent them from doing 

so.93 Board officials we spoke with told us that, if enacted, these proposals 

could increase the attractiveness of owning an ILC, especially by private 

sector financial or commercial holding companies that already operate 

existing retail distribution networks. 

As previously discussed, in order to remain exempt from the definition of a 

bank under the BHC Act, most ILCs may not accept demand deposits, if 

their total assets are $100 million or more. However, ILCs are not restricted 

from offering NOW accounts, which are insured deposits that, in practice, 

are similar to demand deposits. Current federal banking law prohibits 

insured depository institutions from paying interest on demand deposits 

and does not authorize insured depository institutions to offer NOW 

92See H.R. 1224, 109th Cong. § 3 (2005).

93H.R. 1375 108th Cong. § 401(b) (2004). This bill would permit de novo interstate branching 

by ILCs subject to the grandfathering provisions described later in our discussion of 

legislative proposals to permit interest-bearing business checking accounts.
Page 77 GAO-05-621 Industrial Loan Corporations

business checking accounts. According to a Treasury official, the 

prohibition on paying interest on demand deposits, including those 

maintained by businesses, was enacted in the 1930s because of concerns 

about the solvency of the nation’s banks and the belief that limiting 

competition among banks would reduce bank failures. This ban was 

designed to protect small rural banks from having to compete for deposits 

with larger institutions that could offer higher interest rates and use the 

deposits to make loans to stock market speculators and deprive rural areas 

of financing. 

There have been repeated legislative proposals to repeal this prohibition. 

Supporters of these efforts have stated that the prohibition on paying 

interest on demand deposits, including those maintained by businesses, is 

an unnecessary and outdated law that unfairly affects small businesses. 

According to these supporters, small businesses tend to bank at smaller 

institutions that do not offer sweep accounts which, in effect, circumvent 

the ban on interest bearing demand accounts, because their deposit 

balances may not qualify for these accounts at larger institutions.94 The 

most recent legislative proposals would repeal section 19(i) of the Federal 

Reserve Act and section 18(g) of the FDI Act, which, together with other 

federal laws, effectively prohibit the payment of interest on demand 

deposits, including business checking accounts.95 This would allow insured 

depository institutions to pay interest on their demand deposits, including 

those maintained by businesses, although it would not remove the BHC Act 

provision exempting larger ILCs from the definition of a bank on the 

condition, among others, that they do not accept demand deposits. 

Separate provisions of this legislative proposal would allow qualified ILCs 

(which would include ILCs owned or controlled by a commercial firm 

where the ILC obtained deposit insurance prior to October 1, 2003, and did 

not undergo a change in control after September 30, 2003) to offer business 

NOW accounts. Going forward, other ILCs could offer business NOW 

accounts, provided that their state supervisors determine that at least 85% 

of their holding company and affiliated entities’ gross revenues were from 

activities that were financial in nature or incidental to a financial activity in 

at least three of the prior four calendar quarters. In effect, this amendment 

would make it difficult for nongrandfathered ILCs owned by commercial 

94Generally, sweep accounts use computers to analyze customer accounts and automatically 

transfer funds at the end of each day to higher-interest earning money market accounts.

95H.R. 1224 § 3. See 12 U.S.C. §§ 371a, 1828(g), 1832.
Page 78 GAO-05-621 Industrial Loan Corporations

enterprises to offer interest bearing business NOW accounts. ILC 

advocates we spoke with highlighted that if other insured banks are 

permitted to offer interest bearing demand deposit accounts to businesses, 

granting ILCs the ability to offer interest bearing business NOW accounts 

maintains the current relative parity between ILC permissible activities and 

those of other insured bank charters. Officials at the Board have opposed 

ILCs being able to offer interest bearing business NOW accounts, unless 

ILC holding companies were subjected to consolidated supervision and the 

same activity restrictions applied to the holding companies of most other 

insured depository institutions, because doing so would further enable 

ILCs to become the functional equivalent of full-service banks and expand 

their operations beyond the historical function of ILCs and the terms of 

their exemption in current banking law. 

Federal banking law permits insured state banks and ILCs to expand on an 

interstate basis by acquiring another institution, provided that state law 

does not expressly prohibit an interstate merger.96 However, banks and 

ILCs are not permitted to branch in another state without having an 

established charter in that state and without acquiring another bank--

known as de novo branching—unless the host state enacted legislation that 

expressly permitted this practice.97 Currently, only 17 states have enacted 

this legislation. According to proponents of de novo branching, current 

restrictions make it difficult for small banks seeking to operate across state 

lines and puts banks at a disadvantage compared with savings associations, 

which are permitted to establish interstate de novo branches. A proponent 

also stated that de novo branching would benefit small banks near state 

borders to better serve customers by establishing new branches across 

state lines and would increase competition by providing banks with a less 

costly method for offering their services in new locations.

According to a Utah state bank supervisory official we spoke with, ILCs in 

some states have the ability to establish branches in certain other states 

through reciprocal branching agreements. For example, this official stated 

that ILCs in Utah have reciprocity agreements with 17 other states and are 

able to branch, without federal de novo branching authority, into these 17 

states. However, this Utah state supervisory official and industry 

practitioners told us that many ILC business models do not rely on retail 

96See 12 U.S.C. §§ 1831u.

97See 12 U.S.C. § 1828(d).
Page 79 GAO-05-621 Industrial Loan Corporations

branching to conduct their business operations. For example, currently 

only two Utah ILCs have branches, and they have only two branches each. 

According to Board officials, granting ILCs unrestricted de novo branching 

authority in other states may increase the relative attractiveness of ILCs as 

compared with other financial institution charters. These officials 

highlighted that reduced restrictions on nationwide branching may 

increase private sector interest in ILC ownership by financial or 

commercial holding companies that operate retail distribution networks. 

However, according to at least one industry expert we spoke with, the 

effects of the consequences of de novo branching may be overstated and 

not likely to result in major changes in the ILC industry.

Conclusions ILCs have significantly evolved from the small, limited purpose institutions 

that existed in the early 1900s. In particular, the ILC industry has grown 

rapidly since 1999 and, in 2004, six ILCs were among the 180 largest 

financial institutions with $3 billion or more in total assets, and one 

institution had over $66 billion in assets. Because of the significant recent 

growth and complexity of some ILCs, the industry has changed since being 

granted an exemption from consolidated supervision in 1987, and some 

have expressed concerns that ILCs may have expanded beyond the original 

scope and purpose intended by Congress. 

The vast majority of ILCs have corporate holding companies and affiliates 

and, as a result, are subject to similar risks from holding company and 

affiliate operations as banks and thrifts and their holding companies. 

However, unlike bank and thrift holding companies, most ILC holding 

companies are not subject to federal supervision on a consolidated basis. 

Although FDIC has supervisory authority over an insured ILC, it does not 

have the same authority to supervise ILC holding companies and affiliates 

as a consolidated supervisor. While the FDIC’s authority to assess the 

nature and effect of relationships between an ILC and its holding company 

and affiliates does not directly provide for the same range of examination 

authority, its cooperative working relationships with state supervisors and 

ILC holding company organizations, combined with its other bank 

regulatory powers, has allowed the FDIC, under limited circumstances, to 

assess and address the risks to the insured institution and to achieve other 

results to protect the Fund against ILC-related risks. However, we are 

concerned that insured institutions providing similar risks to the Fund are 

not being overseen by bank supervisors that possess similar powers. 
Page 80 GAO-05-621 Industrial Loan Corporations

FDIC has responded appropriately to the challenges it faces supervising the 

ILC industry by implementing significant enhancements to its examiner 

guidance designed to mitigate the risks that could be posed to insured 

depository institutions, including ILCs, from various sources, such as 

holding companies and affiliates. Within the scope of its authority, FDIC 

has demonstrated that its supervisory approach has, in some instances, 

effectively mitigated losses to the Fund. Some have even stated that, from a 

safety and soundness perspective, FDIC’s approach is an effective 

alternative to the Board’s bank holding company supervision, given that 

FDIC has successfully mitigated losses to the Fund posed by some troubled 

institutions. However, the Board disagrees and stated that FDIC’s 

approach, without the aid of consolidated supervision, cannot effectively 

assess all the risks to a depository institution posed by the holding 

company and affiliates of an ILC. Moreover, the extent of some of FDIC’s 

authorities over ILC holding companies and affiliates is not clear. For 

example, it is unclear under what circumstances FDIC could compel ILC 

affiliates to provide information about their operations when these 

affiliates do not have a relationship with an ILC. As a result, absent a 

cooperative working relationship, FDIC’s supervisory approach may not be 

able to identify or address all potential risks to the insured institution. It is 

also unclear how effective the FDIC’s approach would be if the ILC 

industry incurred widespread and significant losses or if a large complex 

ILC were to become troubled. As a result of differences in supervision, we 

and the FDIC-IG have found that, from a regulatory standpoint, ILCs in a 

holding company structure may pose more risk of loss to the Fund than 

other types of insured depository institutions in a holding company 

structure. 

Although federal banking law may allow ILC holding companies to mix 

banking and commerce to a greater extent than holding companies of other 

types of depository institutions, we were unable to identify any conclusive 

empirical evidence that documented operational efficiencies from mixing 

banking and commerce, and the views of bank regulators and practitioners 

were mixed. Including ILCs in recent legislative proposals to offer business 

checking accounts and operate de novo branches nationwide maintains the 

current relative parity between ILC permissible activities and those of 

other insured bank charters. These legislative proposals may make the ILC 

charter more attractive and encourage future growth. However, the 

potential risks from combining banking and commercial operations 

remain, including the potential expansion of the federal safety net provided 

for banks to their commercial entities, increased conflicts of interest within 

a mixed banking and commercial conglomerate, and increased economic 
Page 81 GAO-05-621 Industrial Loan Corporations

power exercised by large conglomerate enterprises. In addition, we find it 

unusual that this limited exemption for ILCs would be the primary means 

for mixing banking and commerce on a broader scale than afforded to the 

holding companies of other financial institutions. Because it has been a 

long time since Congress has broadly considered the potential advantages 

and disadvantages of mixing banking and commerce and given the rapid 

growth of ILC assets and the potential for increased attractiveness of the 

ILC charter, it would be useful for Congress to review the ILC holding 

company’s ability to mix banking and commerce more than other types of 

financial institutions and whether the holding companies of other financial 

institutions should be permitted to engage in this level of activity.

Matters for 

Congressional 

Consideration

Consolidated supervision is a recognized method of supervising an insured 

institution, its holding company, and affiliates. While FDIC has developed 

an alternative approach that it claims has mitigated losses to the bank 

insurance fund, it does not have some of the explicit authorities that other 

consolidated supervisors possess, and its oversight over nonbank holding 

companies may be disadvantaged by its lack of explicit authority to 

supervise these entities, including companies that own large and complex 

ILCs. To better ensure that supervisors of institutions with similar risks 

have similar authorities, Congress should consider various options such as 

eliminating the current exclusion for ILCs and their holding companies 

from consolidated supervision, granting FDIC similar examination and 

enforcement authority as a consolidated supervisor, or leaving the 

oversight responsibility of small, less complex ILCs with the FDIC, and 

transferring oversight of large, more complex ILCs to a consolidated 

supervisor. 

The long-standing policy of separating banking and commerce has been 

based primarily on mitigating the potential risk that combining these 

operations may pose to the Fund and the taxpayers. GLBA reaffirmed the 

general separation of banking from commerce and providing financial 

services from nonfinancial commercial firms. However, under federal 

banking law, the ILC charter offers commercial holding companies more 

opportunity to mix banking and commerce than other insured depository 

institution charters. Congress should also be aware of the potential for 

continued expansion of large commercial firms into the ILC industry—

especially if ILCs are granted the ability to de novo branch and offer 

interest bearing business checking accounts. In recent years, this policy 

issue has been addressed primarily through exemptions and provisions to 

existing laws rather than assessed on a comprehensive basis. Thus, 
Page 82 GAO-05-621 Industrial Loan Corporations

Congress should more broadly consider the advantages and disadvantages 

of mixing banking and commerce to determine whether continuing to allow 

ILC holding companies to engage in this activity more than the holding 

companies of other types of financial institutions is warranted or whether 

other financial or bank holding companies should be permitted to engage in 

this level of activity. 

Agency Comments and 

Our Evaluation

We provided a draft of this report to the Board, FDIC, OTS, and SEC for 

review and comment. Each of these agencies provided technical comments 

that were incorporated as appropriate. In written comments, the Chairman 

of the Board of Governors of the Federal Reserve System (see app. II) 

concurred with the report’s findings and conclusions. Specifically, the 

Chairman stated that “consolidated supervision provides important 

protections to the insured banks that are part of a larger organization, as 

well as the federal safety net that supports those banks.” The Chairman 

also wrote that our report “properly highlights the broad policy 

implications that ILCs raise with respect to maintaining the separation of 

banking and commerce.” 

In written comments from the Chairman of the Federal Deposit Insurance 

Corporation (see app. III), FDIC concurred with one of the report’s findings 

but generally believed that no changes were needed in its supervisory 

approach over ILCs and their holding companies and disagreed with the 

matters for congressional consideration. Specifically, the FDIC concurred 

that from an operations standpoint, ILCs do not appear to have a greater 

risk of failure than other types of insured depository institutions. However, 

FDIC’s disagreements generally focused on three primary areas—whether 

consolidated supervision of ILC holding companies is necessary to ensure 

the safety and soundness of the ILC; that FDIC’s supervisory authority may 

not be sufficient to effectively supervise ILCs and insulate insured 

institutions against undue risks presented by external parties; and the 

impact that consolidated supervision of ILCs and their holding companies 

would have on the marketplace and the federal safety net. 

First, in its comments about consolidated supervision for ILCs and their 

holding companies, FDIC stated that its bank-centric supervision, 

enhanced by sections 23A and 23B of the Federal Reserve Act and the 

Prompt Corrective Action provisions of the FDIC Improvement Act, is a 

proven model for protecting the deposit insurance funds, and no additional 

layer of consolidated federal supervision of ILC holding companies is 

necessary. As stated in our report, we agree that FDIC’s approach has 
Page 83 GAO-05-621 Industrial Loan Corporations

effectively mitigated the risk of loss to the Fund in some instances. 

However, FDIC’s approach has only been tested on a limited basis in 

relatively good economic times. FDIC also expressed concern that our 

report did not include a comparison of the effectiveness and cost of FDIC’s 

bank-centric approach with the effectiveness and cost of consolidated 

supervision. As stated in our report, the scope of this review did not include 

an assessment of the extent to which regulators effectively implemented 

consolidated supervision or any other type of supervision. Rather, we 

focused on the respective regulators’ authorities to determine whether 

there were any inherent limitations in these authorities. Consolidated 

supervision is widely recognized nationally and throughout the world as an 

accepted approach to supervising organizations that own or control 

financial institutions and their affiliates, and we are not aware of any 

empirical evidence, or a reliable method of gathering such evidence, that 

could be used to draw meaningful conclusions about the costs and benefits 

of either supervisory approach. Further, during our review we did not 

become aware of any significant concerns over the cost of consolidated 

supervision. While we recognize that consolidated supervision would likely 

pose some additional cost to ILC holding companies, determining the 

extent of this cost would be speculative, depending on the scope of 

coverage of consolidated supervision (including whether current ILC 

parents would be grandfathered or whether ILCs below some size 

threshold would be exempt). Further, we believe that as one considers any 

additional costs, consideration should also be given to the benefits 

obtained from the enhanced supervisory tools and authorities that ILC 

regulators could use to better protect the Fund.

Further, FDIC believes that no additional layer of consolidated federal 

supervision of ILC holding companies is necessary and asserts that the 

report inappropriately repeated assertions by the Board which speculated 

that excessive debt at the parent of Pacific Thrift and Loan (PTL), an ILC, 

caused PTL to engage in higher-risk strategies that resulted in the ILC’s 

failure. FDIC further stated that these assertions were not supported by the 

FDIC-IG’s material loss review. We disagree that the information presented 

in the report is not supported by the FDIC-IG’s review of PTL. As we report, 

the IG did not specifically identify PTL’s excessive debt as a cause of 

failure. The IG found that inappropriate valuation of PTL’s residual assets 

(i.e., the assets that PTL retained after it packaged and sold loans) 

ultimately caused the collapse of the bank. As FDIC notes, it and the other 

bank regulators have subsequently tightened rules for this valuation. 

However, the collapse of PTL was not purely an issue of inappropriate 

accounting. The IG found that while PTL’s parent “was incurring 
Page 84 GAO-05-621 Industrial Loan Corporations

monumental amounts of debt, no federal agency was present to regulate 

these activities. The major problem with the borrowing arrangement was 

whether or not [the parent] had the financial wherewithal to repay the debt 

on a stand-alone basis without relying on PTL for financial support.” The 

IG’s report also stated that PTL’s new “management team immediately 

implemented an expansionary program of originating and selling subprime 

mortgage loans...without regard to adequate policies, programs, and 

controls [which] resulted in serious shortcomings.” We believe that one of 

the significant benefits of consolidated supervision is that it may better 

position a regulator to obtain an earlier awareness of possible problems 

within a holding company structure that could have an impact on the 

insured bank than does the FDIC’s bank-centric approach. Had there been 

a greater regulatory presence at the holding company, potentially, problems 

at PTL may have been identified earlier or averted. Further, the Board’s 

view of all of the contributing factors to PTL’s failure is necessary to have a 

balanced discussion of this event. 

Second, FDIC commented that it does not need any additional supervisory 

authority and has an excellent track record of identifying potential 

problems at nonbank subsidiaries and taking appropriate corrective action. 

FDIC further stated that the report too narrowly interpreted its 

examination authority. We agree that within the scope of its authority, FDIC 

has demonstrated that its supervisory approach has, in some instances, 

effectively mitigated losses to the Fund. However, we disagree that the 

report narrowly interprets FDIC’s various authorities and continue to 

believe that consolidated supervision offers broader examination and 

enforcement authorities that may be used to understand, monitor, and, 

when appropriate, restrain the risks associated with insured depository 

institutions in a holding company structure. Further, as stated in the report, 

consolidated supervisors can compel holding companies and nonbank 

subsidiaries to provide key financial and operational reports and can 

impose consolidated or parent-only capital requirements that are important 

tools used to help ensure the safety and soundness of an insured depository 

institution. We continue to be concerned that FDIC’s bank-centric 

approach relies on voluntary participation by regulated and unregulated 

entities to provide this key information, and that this approach has only 

been tested during a favorable economic environment. The ILC industry is 

growing rapidly and some ILCs are becoming increasingly complex. Thus, 

we believe it is important for the Congress to consider whether insured 

institutions providing similar risks to the Fund should also be overseen by 

bank supervisors that uniformly possess similar powers.
Page 85 GAO-05-621 Industrial Loan Corporations

Third, in its comments, FDIC also stated that consolidated supervision of 

ILCs and their holding companies would result in greater federal 

involvement with commercial parents and nonbank subsidiaries. While we 

agree that more commercial entities would be subject to federal oversight, 

we disagree with FDIC’s comment that such oversight “would represent a 

new level of government intrusion in the marketplace” and would “radically 

restructure” the federal government’s role relative to commercial firms. 

Subjecting commercial ILC holding companies to consolidated supervision 

currently would affect a relatively small number of firms that chose to own 

and operate ILCs and provide them with a similar level of oversight 

afforded to other firms owning insured depository institutions. In so doing, 

consolidated supervision could better ensure that there is sufficient 

regulatory authority to effectively supervise these entities. Our report, 

however, raises oversight concerns with not only commercial holding 

company ownership of ILCs, but also discusses the development of a small 

number of more complex ILCs owned by financial-oriented holding 

companies that are currently exempt from consolidated supervision. At 

this time, it is more so because of the advent of these larger institutions—

which increases the potential risk to the Fund—rather than commercial 

ownership of ILCs, that we believe this lack of consolidated supervision 

merits additional congressional scrutiny.

FDIC further stated that such supervision may call into question the 

individual accountability of insured institutions owned by large 

organizations to manage their own capital and could lead to an unintended 

expansion of the federal safety net to these entities. We disagree that 

consolidated supervision would have this effect since many institutions 

currently manage their capital, and regulators assess its adequacy on a 

consolidated basis. Further, the report does not advocate an expansion of 

the federal safety net. Rather, this report advocates that ILCs and their 

holding companies be regulated in a similar manner as other insured 

depository institutions and their holding companies. 

Historically, limited charter entities such as ILCs and nonbank banks were 

exempt from consolidated supervision. However, ILCs have evolved from 

small, limited purpose institutions and are exempt from business activity 

limitations that generally apply to the holding companies and affiliates of 

other FDIC-insured depository institutions offering similar services. 

Further, ILCs may provide a greater means for mixing banking and 

commerce than ownership of or affiliation with other insured depository 

institutions. Given the changes and growth in the ILC industry, we see less 

distinction now between ILC holding companies and other holding 
Page 86 GAO-05-621 Industrial Loan Corporations

companies owning insured depository institutions, and it is unclear why a 

different regulatory approach would be used to supervise ILCs. As a result, 

we continue to believe that Congress should consider various options such 

as eliminating the current exclusion for ILCs and their holding companies 

from consolidated supervision, granting FDIC similar examination and 

enforcement authority as a consolidated supervisor, or leaving the 

oversight responsibility of small, less complex ILCs with the FDIC, and 

transferring oversight of large, more complex ILCs to a consolidated 

supervisor. 

As agreed with your office, unless you publicly announce the contents of 

this report earlier, we plan no further distribution until 30 days from the 

report date. At that time we will send copies of this report to the Chairman 

and Ranking Minority Member of the Senate Committee on Banking, 

Housing, and Urban Affairs; Chairman and Ranking Minority Member of the 

House Committee on Banking, Housing, and Urban Affairs; and other 

congressional committees. We also will send copies to the Federal Deposit 

Insurance Corporation, the Board of Governors of the Federal Reserve, the 

Office of the Comptroller of the Currency, the Office of Thrift Supervision, 

the Securities and Exchange Commission, and make copies available to 

others upon request. In addition, the report will be available at no charge 

on the GAO Web site at http://www.gao.gov. 

This report was prepared under the direction of Dan Blair, Assistant 

Director. If you or your staff have any questions regarding this report, 

please contact me at (202) 512-8678 or hillmanr@gao.gov. Contact points 

for our Offices of Congressional Relations and Public Affairs may be found 

on the last page of this report. Key contributors are acknowledged in 

appendix IV. 

Sincerely yours,

Richard J. Hillman

Managing Director, Financial Markets 

and Community Investment
Page 87 GAO-05-621 Industrial Loan Corporations

Appendix I

Objectives, Scope, and Methodology ApApenednxidexiIs

To describe the history and growth of the industrial loan corporation (ILC) 

industry, we analyzed Federal Deposit Insurance Corporation (FDIC) Call 

Report and Statistics on Depository Institutions (SDI) data on ILCs 

including total assets and estimated insured deposits from 1987 through 

2004 to determine the (1) number of ILCs by year and by state, (2) total ILC 

industry assets by year and by state, and (3) ILC industry estimated insured 

deposits as a percentage of total estimated insured deposits by year. Prior 

to using the Call Report and SDI data, we assessed its reliability by (1) 

reviewing existing information about both data systems (2) interviewing 

agency officials knowledgeable of both data systems to discuss the sources 

of the data variables and the controls in place to ensure the accuracy and 

integrity of the data, and (3) performing various electronic tests of the 

required data elements. Based on our work, we determined that the data 

from both the Call Report and SDI systems were sufficiently reliable for the 

purposes of this report. 

To describe the permissible activities and regulatory safeguards for ILCs as 

compared with state nonmember banks, we reviewed federal and state 

legislation, regulations, and other guidance regarding ILCs and banks. We 

interviewed state bank regulators from the Utah Department of Financial 

Institutions, the California Department of Financial Institutions, and the 

Nevada Financial Institutions Division. We focused on ILCs and regulators 

in these three states because over 99 percent of the ILC industry assets 

exist in these states. We also interviewed key management officials of 

various ILCs in these states that were representative of the various sizes 

and business strategies, including: large businesses with activities that 

were predominantly within the financial services sector; businesses that 

were primarily credit card operations; captive financing arms of 

commercial holding companies; and a small, community-oriented banking 

institution. In addition, we interviewed management officials from the 

headquarters of FDIC, as well as field staff from FDIC’s San Francisco 

Regional Office and the FDIC Salt Lake City Field Office that are 

responsible for the supervision of ILCs located in California, Nevada, Utah, 

and other states. We also interviewed officials from the Board of Governors 

of the Federal Reserve (Board). 

To compare FDIC’s supervisory authority over ILC holding companies and 

affiliates with the consolidated supervisors’ authority over holding 

companies and affiliates, we analyzed legislation and regulations that 

govern the supervision of insured depository institutions, including ILCs 

and their holding companies, banks and their holding companies, and 

thrifts and their holding companies. We focused our comparison from a 
Appendix I

Objectives, Scope, and Methodology

Page 88 GAO-05-621 Industrial Loan Corporations

safety and soundness perspective primarily on the Board’s consolidated 

supervision of bank holding companies and their affiliates because these 

entities may pose similar risks to insured depository institutions as ILCs 

that exist in a holding company structure. However, because the Office of 

Thrift Supervision (OTS) also supervises similar entities that pose similar 

risks to insured depository institutions, we also reviewed OTS’ supervisory 

authority. We also interviewed state banking regulators in California, 

Nevada, and Utah, as well as officials headquartered in the offices of the 

FDIC, the Board, and OTS who are knowledgeable of the supervisory 

approach and authorities of these agencies. 

To determine recent changes FDIC has made to its supervisory approach 

for the risks that holding companies and affiliates could pose to ILCs and 

whether differences in supervision and regulatory authorities pose 

additional risk to the Fund, we interviewed knowledgeable FDIC officials 

and obtained documentation regarding revised agency guidance on safety 

and soundness examination procedures. We also compared agency 

examination manuals and other guidance; interviewed agency officials 

regarding the supervisory approach and supervisory authority of FDIC, the 

Board and OTS; and spoke with state and FDIC regional staff responsible 

for conducting examinations. Additionally, we synthesized and relied, as 

appropriate, upon information from the FDIC Inspector General (FDIC-IG) 

September 30, 2004, report entitled, The Division of Supervision and 

Consumer Protection’s Approach for Supervising Limited-Charter 

Depository Institutions because this report provided information on 

FDIC’s guidance and procedures for supervising limited charter depository 

institutions, including ILCs, and summarized various recent actions that 

FDIC had taken. Prior to relying on the FDIC-IG’s report, we performed 

various due diligence procedures that provided a sufficient basis for relying 

upon their work including obtaining information about the other auditors’ 

qualifications and independence; reviewing the other auditors’ external 

quality control review report; and determining the sufficiency, relevance, 

and competence of the other auditors’ evidence by reviewing the audit 

report, audit program and documentation. We also reviewed and 

synthesized information from the FDIC-IG’s material loss reviews of Pacific 

Thrift and Loan and Southern Pacific Bank, two failed ILCs. To determine 

what actions FDIC had taken as a result of these material loss reviews and 

any other conditions existing in the banking industry at that time, we 

interviewed FDIC management about the status of recommendations made 

by the FDIC-IG in the material loss reviews. 
Appendix I

Objectives, Scope, and Methodology

Page 89 GAO-05-621 Industrial Loan Corporations

To determine whether ILCs allow for greater mixing of banking and 

commerce than other insured depository institutions and whether this 

possibility has any competitive implications, as well as to determine the 

implications of granting ILCs the ability to pay interest on business 

checking accounts and operate de novo branches nationwide, we reviewed 

and synthesized academic, bank regulator, and other studies and literature 

about the historic policy of mixing banking and commerce, potential 

economies of scale and scope in the banking industry, and academic 

literature on mixed banking and commerce in other countries. We also 

interviewed and reviewed studies from academics who have published on 

the subject of regulatory and competitive issues in the banking industry. 

Additionally, we reviewed applicable laws and legislative proposals, press 

reports, and other documents. Furthermore, we assessed the degree to 

which other depository institutions are able to mix banking and commerce, 

such as unitary thrifts, “nonbank banks,” merchant banks, and captive 

finance subsidiaries. In addition, we reviewed applicable laws and 

regulations and interviewed federal banking regulators from the FDIC, 

Federal Reserve, and OTS. We also interviewed state banking regulators in 

Utah, California, and Nevada and key management officials from several 

ILCs in California, Nevada, and Utah, as well as representatives from the 

Independent Community Bankers Association. 

Finally, to more fully understand (1) the significance of the differences 

between consolidated supervision of bank and thrift holding companies 

and FDIC’s supervision of ILCs and the potential risks that their holding 

company and affiliate organizations may pose to the ILC, (2) the potential 

for greater mixing of banking and commerce by ILC holding companies as 

compared with other types of depository institutions, and (3) the potential 

advantages and disadvantages of granting ILCs the ability to pay interest on 

business checking accounts and open de novo branches nationwide, we 

hosted a panel of experts. The panel members were selected from a list of 

well-known and knowledgeable officials from the FDIC and the Board, 

academics, economists, industry practitioners, and independent 

consultants. The panel participants were selected to ensure a robust 

discussion of divergent views on issues facing the ILC industry and bank 

regulators. 
Page 90 GAO-05-621 Industrial Loan Corporations

Appendix II

Comments from the Board of Governors of 

the Federal Reserve System ApendxiI
Appendix II

Comments from the Board of Governors of 

the Federal Reserve System

Page 91 GAO-05-621 Industrial Loan Corporations
Page 92 GAO-05-621 Industrial Loan Corporations

Appendix III

Comments from the Federal Deposit 

Insurance Corporation ApendxiI
Appendix III

Comments from the Federal Deposit 

Insurance Corporation

Page 93 GAO-05-621 Industrial Loan Corporations
Appendix III

Comments from the Federal Deposit 

Insurance Corporation

Page 94 GAO-05-621 Industrial Loan Corporations
Appendix III

Comments from the Federal Deposit 

Insurance Corporation

Page 95 GAO-05-621 Industrial Loan Corporations
Appendix III

Comments from the Federal Deposit 

Insurance Corporation

Page 96 GAO-05-621 Industrial Loan Corporations
Appendix III

Comments from the Federal Deposit 

Insurance Corporation

Page 97 GAO-05-621 Industrial Loan Corporations
Page 98 GAO-05-621 Industrial Loan Corporations

Appendix IV

GAO Contact and Staff Acknowledgments ApendxiIV

GAO Contact Richard J. Hillman (202) 512-8678

Staff 

Acknowledgments

The following individuals made key contributions to this report: 

Dan Blair, Assistant Director

Heather Atkins

Rudy Chatlos

Jordan Corey

Tiffani Humble

James McDermott

Marc Molino

David Pittman

Rhonda Rose

Paul Thompson.

(250202)
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