" basket " of commercial activities or that would have allowed commercial firms to acquire a small bank without becoming subject to the bhc act. 3 it also is unclear what activities would be considered " commercial " or " financial " for ilc owners under h. r. 698. the bill does not define " financial " activities by reference to the glb act and, thus, would allow the development of a different definition of " financial " activities than the definition established for financial holding companies in the glb act. this potentially would allow the owners of ilcs to engage in activities that would be " financial " under h. r. 698, but that would be considered commercial under the glb act. the question of whether to allow firms engaged in commercial activities to own or acquire an insured ilc is one that has potentially far - reaching implications for the structure and soundness of the american economy and financial system. this is especially true because pressures likely will build to expand to banking organizations more generally any new policy applied to the owners of ilcs. once permitted, any general mixing of banking and commerce also is likely to be difficult to disentangle. we believe it is important that congress, as it has in the past, set the nation's policies with respect to the proper mixing of banking and commerce and consider carefully and deliberately whether any changes to the nation's policies on this important issue should be made. once these decisions are made, we see no reason to generally exempt the owners of insured ilcs from the policies established by congress : these policies should be applied to all owners of full - service insured banks. bank affiliations with financial firms besides restricting the mixing of banking and commerce, congress also has placed preconditions on the ability of banks to affiliate with firms that are purely financial. the glb act allows a bank holding company to engage in a broad range of financial activities, including securities underwriting, various insurance activities and merchant banking, only if the holding company keeps all of its subsidiary depository institutions well capitalized and well managed and achieves and maintains at least a satisfactory community reinvestment act ( cra ) record at all of the company's subsidiary insured depository institutions. these requirements help ensure that banks operating within a diversified financial company remain financially and managerially strong and help meet the credit needs of their entire communities, including low and moderate - income families and communities. the ilc exception undermines these requirements by allowing financial firms

donald l kohn : industrial loan companies testimony by mr donald l kohn, vice chairman of the board of governors of the us federal reserve system, before the committee on financial services, us house of representatives, washington dc, 25 april 2007. * * * chairman frank, ranking member bachus, and members of the committee, i am pleased to appear today to provide the views of the board of governors of the federal reserve system on industrial loan companies ( ilcs ) and h. r. 698, the industrial bank holding company act of 2007. the board commends the committee for holding this hearing and for considering ways of addressing the important public policy implications raised by the special exception for ilcs in federal law. ilcs are state - chartered banks that have virtually all of the powers and privileges of other insured commercial banks, including the protections of the federal safety net – deposit insurance and access to the federal reserve's discount window and payments system. nonetheless, ilcs operate under a special exception to the federal bank holding company act ( bhc act ). this special exception allows any type of firm, including a commercial firm or foreign bank, to acquire and operate an ilc chartered in one of a handful of states without complying with the standards that congress has established for bank holding companies to maintain the separation of banking and commerce and to protect insured banks, the federal safety net and, ultimately, the taxpayer. we believe it is critical for congress to consider and address the important public policy implications raised by the ilc exception, particularly in light of the dramatic recent growth and potential future expansion of banks operating under this special exception. if left unchecked, this recent and potential future growth of firms operating under the exception threatens to undermine the decisions that congress has made concerning the separation of banking and commerce in the american economy and the proper supervisory framework for companies that own a federally insured bank. the ilc exception also creates an unlevel competitive playing field by allowing both financial and commercial firms to own an insured bank but avoid the prudential limitations, supervisory framework and restrictions on affiliations that apply to corporate owners of other insured banks. the board appreciates the steps that the federal deposit insurance corporation ( fdic ) recently has taken regarding ilcs. these include extending the temporary moratorium on the acquisition of ilcs by commercial firms and seeking ways to help address the supervisory gaps caused by the ilc exception. however, only congress can craft a solution that addresses