By: Oscar Valdés Viera
A cornerstone of U.S. banking law since the New Deal has been that banking and commerce should not mix. But the banking-commerce firewall has been weakened by what’s known as the industrial loan company (ILC) loophole. Now, the Trump administration is considering flinging it open—inviting Big Tech platforms, predatory financial technology apps, and major retailers to purchase or launch their own banks.
Banks receive special privileges—like deposit insurance and access to Federal Reserve lending—because they are essential financial infrastructure and are entrusted with safeguarding our money. In return, they are expected to follow safety-and-soundness rules and regulations that align their profit-seeking activities with the public interest. Commercial corporations, by contrast, are supposed to compete in the marketplace without the benefit of taxpayer-backed subsidies.
Combining banks and businesses creates all sorts of problems. Banks could offer preferred—and imprudent—credit to their affiliates that could imperil the bank’s finances and the broader economy. And businesses backed by the financial muscle of banks would have an unfair advantage over their competitors. Congress barred the combination of banking and commerce to prevent this kind of concentrated economic power. If the Trump administration gives a flood of Big Tech companies, fintech firms, and others their own industrial loan banks these operators will be free to prey upon people with unfair terms, junk fees, and sky-high interest rates.
What is the ILC Loophole
Industrial loan companies or industrial banks are state-chartered banks that enjoy all the perks of traditional banks—FDIC deposit insurance and access to the Fed’s discount window and payments system—while dodging critical regulations and oversight that apply to other bank holding companies.
Industrial loan companies began as small lenders, often created by manufacturers to extend credit to their workers. They played a limited role in the financial system, and for decades they weren’t even eligible for federal deposit insurance.
That changed in the 1980s, when Congress carved out a narrow exemption to the separation of banking and commerce, allowing industrial banks to escape critical Federal Reserve supervision. Over time, this exemption became a powerful backdoor for commercial firms—including fintechs—to sneak into banking without much oversight.
Why Mixing Banking and Commerce is Dangerous
Allowing commercial firms to own banks opens the door to serious conflicts of interest. A company could use its captive bank to funnel cheap, federally-insured money into its own operations, prop itself up during downturns, or deny credit to competitors. If the commercial firm collapsed, it also could pull down its captive bank.
Industrial loan companies get the benefits of deposit insurance with far lower oversight than other bank holding companies—including systemic risk safeguards designed to prevent a parent company’s financial distress from bleeding into the bank subsidiary. That leaves the FDIC’s insurance fund—and ultimately the public—more exposed if the parent company stumbles or mismanages risk.
The legal restrictions on intermingling banking and commerce are intended to prevent the concentration of economic power and conflicts of interest. But when Big Tech or retail companies are allowed to own ILCs, they could use privileged access to consumer financial data to favor their own affiliates, disadvantage competitive firms, or offer preferential credit.
The 2008 Financial Crash Proved the Perils of ILCs
Before the financial crisis, some of the biggest ILCs were tied to giant corporations—and many of these either collapsed or required federal bailouts. For example, GMAC—the financing arm of General Motors—expanded beyond auto-financing to fuel the risky subprime mortgage lending that eventually blew up the economy. When the bubble burst, GMAC needed over $40 billion in financial assistance from the government and a conversion to a full bank holding company to survive (now known as Ally Bank).
And GMAC wasn’t alone. In the runup to the crisis, the four largest securities firms—Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers—all used ILCs and FDIC-insured deposits to bankroll their bets. By 2010, only two of those firms were left standing, and both needed massive bailouts and conversion into traditional banks to survive. The number of ILCs fell from 57 in 2007 to 23 today, demonstrating how ILCs can create hidden risks that can spill into the broader economy and ultimately land on the public.
Fintech: The New Shadow Banks
ILCs no longer focus on helping workers buy washing machines or cars, now the ILC charter is a coveted target of tech platforms and fintech predators. Big Tech companies dominate our economy, collecting massive amounts of data on how we live, shop, and communicate. Making it easier for them to control banks would supercharge that dominance and create new “too-big-to-fail” conglomerates that no regulator could truly supervise. It would also hand them new opportunities to exploit consumer financial data, offer preferential credit to affiliates, and tilt the playing field against competitors—undermining both privacy and fair competition.
In recent years, both fintech and Big Tech firms have sought access to banking privileges—FDIC insurance, payments system access, cheap borrowing—without consolidated oversight of their parent companies.
Without consolidated supervision, enforcement of capital and liquidity requirements, enterprise-wide consumer protections, and affiliate transaction limits becomes weaker or nonexistent. This means risky or abusive practices can develop in unsupervised corners of these firms, then spill into the regulated portions—imperiling financial stability, harming customers, and undermining trust.
Real Concerns About Opening Up ILC Charters
After the financial crisis, regulators were increasingly skeptical of ILCs. The FDIC has approved very few new ILC charters and the Federal Reserve even recommended that Congress repeal the ILC loophole.
The Trump administration’s push to make it easier for companies to obtain these unregulated charters would take us in the opposite direction. Instead of closing loopholes, it would widen them—handing special privileges to the largest and riskiest players in finance and commerce.
The last time policymakers allowed industrial banks to grow unchecked, the result was a wave of failures and bailouts.
The separation of banking and commerce isn’t some outdated relic. It’s about limiting the concentration of economic resources in the hands of a few, avoiding systemic financial instability, limiting conflicts of interests, and protecting our private data. But ultimately it’s about having a financial system that serves the public good, not one that merely subsidizes the most rapacious practices of Wall Street and Big Tech.