Since then, the ILC industry has experienced  significant asset growth and evolved from small, limited-purpose  institutions to a diverse group of insured financial institutions with a  variety of business models. Most notably, as shown in figure 1, from 1987  to March 31, 2006, ILC assets have grown over 3,900 percent, from $3.8  billion to over $155 billion, while the number of ILCs declined about 42  percent from 106 to 61. Federal banking law permits  FDIC-insured ILCs to engage in the same activities as other insured  depository institutions. In addition, ILCs generally are subject to the same federal  regulatory safeguards that apply to commercial banks and thrifts. This authority is  limited with respect to certain types of subsidiaries, such as those  regulated by the Securities and Exchange Commission or state insurance  regulators, but even those subsidiaries may be examined by the Board  under appropriate circumstances 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 depository institution. However, FDIC’s general  examination authority is less extensive than a consolidated supervisor’s. 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. ILCs May Offer Commercial Holding Companies a Greater Ability to Mix Banking and Commerce than Other Insured Depository Institutions, but Views on Competitive Implications Are Mixed

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. In addition, there are a number  of pending applications for deposit insurance with FDIC involving  commercial firms, including one of the largest retail firms. We have previously reported that  the potential risks that may result from greater mixing of banking and  commerce 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. 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. While 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. However, FDIC’s supervisory  approach over ILC holding companies and affiliates has not been tested by  a large ILC parent during periods of economic stress. Moreover, we are  concerned that insured institutions posing similar risks to the Deposit  Insurance Fund are not being overseen by bank supervisors that possess  similar powers. Because of these differences in supervision, we 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. In addition, we find it  unusual that this limited exemption for ILCs would be the primary means  for expanding the mixing of banking and commerce than afforded to the  holding companies of other financial institutions. Because it has been a  long time since Congress has focused on the potential advantages and  disadvantages of mixing banking and commerce and given the rapid  growth of ILC assets and a potential for increased attractiveness of the ILC  charter, we concluded in our 2005 report that 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.
Why GAO Did This Study

Since their origin in the early 1900s, industrial loan corporations (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 testimony is based on our September 2005 report that, among other things, (1) described the growth and permissible activities of the ILC industry, (2) compared the supervisory authority of the FDI--the current federal regulator for ILCs--with consolidated supervisors, and (3) described the extent to which ILC parents could mix banking and commerce. In this testimony GAO is reiterating that Congress should (1) consider options for strengthening the regulatory oversight of ILCs and (2) more broadly consider whether allowing ILCs a greater degree of mixing banking and commerce is warranted or whether other entities should be permitted to engage in this level of activity.

What GAO Found

The ILC industry has experienced significant asset growth and has evolved from once small, limited-purpose institutions to a diverse industry that includes some of the nation's largest and more complex financial institutions. Between 1987 and 2006, ILC assets grew over 3,900 percent from $3.8 billion to over $155 billion. In most respects, ILCs may engage in the same activities as other depository institutions insured by the FDIC and are subject to the same federal safety and soundness safeguards and consumer protection laws. 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 present 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 or control other entities. Although FDIC has supervisory authority over an insured ILC, this authority does not explicitly extend to ILC holding companies and, therefore, is less extensive than the authority consolidated supervisors have over 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 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. Because of an exception in federal banking law, ILC holding companies can mix banking and commerce more than the holding companies of most other depository institutions. In addition, there are a number of pending applications for deposit insurance with FDIC involving commercial firms, including one of the largest retail firms. 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 merits in Congress taking a look at whether ILCs or other entities should be allowed to engage in this level of activity.