Testimony of Erik F. Gerding, “Industrial Loan Companies, Fintech Charters, and Eroding the Separation between Banking and Commerce,” for a Hearing before the U.S. House of Representatives Committee on Financial Services, Subcommittee on Consumer Protection and Financial Institutions on “Banking Innovation or Regulation Evasion?: Exploring Modern Trends in Financial Institution Charters”

Abstract

The 2020 Federal Deposit Insurance Corporation reopening of deposit insurance to industrial loan companies (“ILCs”) threatens to: ¶ create risks to financial stability; ¶ distort competition in commercial markets; ¶ distort competition in banking markets and promote greater risk-taking; ¶ generate conflicts of interest in lending; and ¶ compromise consumer protections. The FDIC’s ability to map and respond to these risks is limited by the fact that ILCs and the conglomerates that own them are not subject to consolidated supervision. The Office of the Comptroller of the Currency's new fintech charter contravenes the text, purpose, and structure of the National Bank Act and other core federal banking statutes. Conferring banking privileges on non-deposit taking firms provides them with competitive advantages over commercial rivals that distorts markets. The OCC’s fintech charter seems designed mainly to preempt state financial laws without authorization from Congress. It would also open up exemptions from important federal financial laws for favored firms. Congress should reverse these actions and close destructive loopholes in banking law by: ¶ ending the ILC exemption to the Bank Holding Company; and ¶ removing the Comptroller’s ability to issue future charters to non-deposit taking firms. Congress should reinforce the walls separating commerce from banking, which: ¶ guard against concentrations of financial, economic, and political power in the largest banking, retail, and tech conglomerates; ¶ prevent distortions and unfair competition in commercial markets; ¶ safeguard financial stability; ¶ reduce conflicts of interest in credit; and ¶ protect consumers.