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Federal Deposit Insurance Corporation
San Francisco Regional Office
25 Jessie Street at Ecker Square, Suite 2300
San Francisco, CA 94105
Submitted at

To Whom It May Concern:

Americans for Financial Reform (“AFR”) appreciates the opportunity to comment on Square, Inc.’s (“Square”) application to open an FDIC-insured industrial loan company (“ILC”). AFR is a coalition of over 200 national, state, and local groups who have come together to advocate for reform of the financial industry. Members of AFR include consumer, civil rights, investor, retiree, community, labor, faith based, and business groups.[1] AFR opposes Square’s charter application and urges the FDIC to deny it.[2]

ILC charters exploit a loophole in federal banking laws to gain access to the federal deposit-insurance safety net while avoiding critical federal supervision and regulation. ILCs therefore pose unique risks to the financial system. Square’s application comes on the heels of a recent similar request for deposit insurance by Sofi Bank. If these applications are granted, they will be the first new ILCs to secure deposit insurance in over a decade. That will send a clear signal to the marketplace that the FDIC intends once again to approve ILC deposit insurance applications, potentially unleashing a dangerous avalanche of new applications. The FDIC should not grant Square’s application and allow the ILC loophole to be revived.

The risk and supervision issues presented by ILCs are such that the Federal Reserve has recently recommended that Congress act to repeal the exemptions that allow ILCs to operate outside of the supervisory controls applicable to other banks.[3] Unless and until this recommendation is followed, further ILCs should not be chartered. Certainly deposit insurance via an ILC charter should not be granted to an institution such as Square, which is a highly sophisticated financial institution seeking to gain access to the bank safety net through a mechanism that allows it to avoid standard supervision of bank holding companies.

AFR also notes that Square’s Community Reinvestment Act does not commit to expanding access of several of its core products to more low- and moderate-income consumers. We understand other public interest commenters are addressing these concerns in detail.

The ILC Loophole Undermines the Longstanding Separation between Banking and Commerce

Congress has sought to keep banking and commerce separate for decades and has previously acted to close loopholes that would weaken the barrier between the two, most notably in 1987 and 1999. The Competitive Equality Banking Act of 1987 (“CEBA”) expanded the definition of “bank” under the Bank Holding Company Act (“BHCA”) to include a number of institutions referred to as “non-bank banks.” These non-bank banks had been an attractive option for commercial firms looking to operate FDIC-insured depositary institutions without having to contend with the BHCA’s restrictions. In passing the CEBA, Congress reaffirmed that the separation of banking and commerce is a “‘keystone’” of the banking system and that the elimination of non-bank banks would strengthen “‘the safety and soundness of our financial system.’”[4] The 1999’s Gramm-Leach-Bliley Act (“GLBA”) closed the remaining unitary thrift loophole which allowed commercial firms to own and operate a single thrift.

Despite the active effort to stop such end-runs around well-established banking policy, legislators carved out an exception in the CEBA for ILCs and reaffirmed the exception in the GLBA. As a result, aggregate assets at ILCs increased nearly thirtyfold between 1987 and 2006, the year Wal-Mart applied for an ILC charter.[5] By then, several large commercial firms including Target Corp., General Electric, and General Motors were already operating ILCs.

However, the FDIC did not approve Wal-Mart’s application for deposit insurance. Instead, the FDIC issued a one-year moratorium on approving deposit insurance for ILC charters sought by commercial firms. The moratorium was extended for an additional year so Congress would have an opportunity to craft a legislative response to the issue.[6] Although the moratorium has since expired without any action by Congress, the FDIC had not received deposit insurance applications from a newly-chartered ILC, commercial or otherwise, until now.

The Financial Crisis Demonstrates that ILCs Pose Significant Risks to the Financial System

Prior to the 2008 financial crisis, the seven largest ILCs were among the 125 largest FDIC-insured depositary institutions.[7] One, GMAC, the financial arm of General Motors, was owned by a commercial firm.

GMAC began life as a straightforward auto-financing operation but by 2008 had become involved in originating subprime mortgage-backed securities. As the subprime mortgage crisis unfolded, GMAC and its parent company found themselves exposed to massive losses.[8] As the primary provider of floorplan financing to GM and Chrysler dealerships, GMAC’s failure could have certainly meant a total collapse of the domestic auto industry.[9] To avoid bankruptcy and save the automakers, the only option was for GMAC to convert to a Bank Holding Company (“BHC”) so it could qualify for federal aid.[10] It took $17.2 billion in three rounds of bailout payments to save GMAC. By 2010, the federal government owned over seventy percent of GMAC, which had rebranded itself as Ally Bank.[11]

The GMAC failure and subsequent bailout was a manifestation of the many unregulated risks created by ILCs. During the 2006 debate surrounding Wal-Mart’s ILC charter application, a number of commenters noted that allowing banking and commerce to comingle could lead to an unprecedented extension of the federal safety net to commercial firms.[12] And so it did.

Significant safety-and-soundness—and even systemic—risks can be created by non-commercial ownership of ILCs as well. In 2008, the four largest securities firms (at that time)—Goldman Sachs, Morgan Stanley, Merrill Lynch, and Lehman Brothers—each operated a Utah ILC. Only two of those firms survive independently today, while none of the ILCs do. Each firm sought to take advantage of the FDIC-insured deposit accounts at their ILCs to fund their lending operations.[13] While the securities firms’ crises remained relatively quarantined from their ILC operations, it is not difficult to imagine reciprocal contagion between financial firms and their ILCs in the future; which could put the Deposit Insurance Fund and the safety and soundness of the financial system in jeopardy. To prevent such unacceptable risks from occurring, ILC parents should not be allowed to escape the rules applied to BHCs. Goldman Sachs and Morgan Stanley have since converted to BHCs and converted their ILCs to banks.[14]

Square and its Stakeholders Should be Regulated as Bank Holding Companies

As it stands, if Square’s application is granted, Square and its parent companies will remain outside the established framework for BHCs. For instance, although ILCs are subject to the Community Reinvestment Act (“CRA”), ILC parents remain unaffected even if the subsidiary institution’s CRA rating falls below satisfactory. In comparison, BHCs may be prevented from commencing new activities if they do not maintain satisfactory CRA ratings.[15] ILC parents are also immune from the GLBA’s requirement that BHCs wishing to conduct non-banking financial activities maintain well-capitalized, well-managed, and CRA-compliant depositary subsidiaries.[16] There seems to be little reason for FDIC to grant deposit insurance to an ILC that would arbitrarily exempt Square, a financial company, and its investors from rules placed on functionally equivalent organizations.

ILC parent companies also appear to remain outside the scope of the Source of Strength Doctrine. Section 616(d) of Dodd-Frank amended the Federal Deposit Insurance Act to require BHCs and Savings and Loan Holding Companies (“SLHCs”) to act as sources of financial strength to their subsidiary depository institutions. But no mention is made of ILC parent companies; even the blanket clause meant to cover FDIC-insured depositary institutions not controlled by a BHC or SLHC does not appear to extend to ILC parent companies.[17] Even if Dodd-Frank § 616(d) does apply to ILCs and their parent companies, ILC parents are not subject to consolidated capital requirements; consequently, there is no certainty that ILC parents would be capable of serving as sources of financial strength to their subsidiary depository institutions. History has shown that the opposite is more likely to be true and that ILCs, with their access to the Deposit Insurance Fund, can come to serve as sources of financial strength for their parent institutions, as in the case of GMAC.

The essence of Square’s application is a request to seek the benefits of federal deposit insurance without subjecting Square itself to the well-founded requirements for bank holding companies. The FDIC should not approve the application to facilitate this regulatory arbitrage.

Square Financial Services and its Parents Should be Subject to The Full Range of Regulation Imposed on Other Banks, Including Consolidated Supervision

Speaking in 2009, then-Federal Reserve chair Ben Bernanke summarized a key lesson of the 2008 financial crisis for bank supervision:

First, recent experience confirms the value of supervision of financial holding companies—especially the largest, most complex, and systemically critical institutions—on a consolidated basis, supplementing the supervision that takes place at the level of the holding company’s subsidiaries. Large financial institutions manage their businesses in an integrated manner with little regard for the corporate or national boundaries that define the jurisdictions of functional supervisors in the United States and abroad…. Because financial, operational, and reputational linkages span large and complex financial firms, the risks borne by such firms cannot be adequately evaluated through supervision focused on individual subsidiaries alone. Instead, effective supervision must involve greater coordination among consolidated and functional supervisors and an integrated assessment of risks across the holding company and its subsidiaries.[18]

In response to the gaps in consolidated supervision permitted prior to the financial crisis, the Dodd-Frank Act granted the Federal Reserve enhanced powers for the consolidated supervision of bank holding companies. However, these powers are not fully applicable to ILCs.

The Federal Reserve itself has recently recommended that Congress take statutory action to bring ILCs within the framework of consolidated regulation.[19] In its report, the Federal Reserve stated:

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, as defined in the BHC Act, are not included within the definition of the term “bank” under the act. As a result, any type of firm, including a commercial firm or foreign bank, may acquire and operate an ILC without complying with the standards that Congress has established for BHCs to maintain the separation of banking and commerce and to protect insured banks, the federal safety net and, ultimately, the taxpayer…. the exemptions foster an unfair and uneven competitive and regulatory playing field by allowing GUSLHCs [Grandfathered Unitary Savings and Loan Holding Companies] and corporate owners of ILCs to operate outside the activity restrictions (and in the case of corporate owners of ILCs, the consolidated supervisory and regulatory framework) that apply to other community-based, regional, and diversified organizations that own a similarly situated bank.”

As this passage emphasizes, permitting ILCs to operate free of consolidated supervision and relevant activity restrictions that govern other insured banks creates an imbalanced competitive playing field and also threatens the integrity of the Federal safety net for banks, creating a threat to the taxpayer. This is likely to be particularly true in the case of Square, which is an aggressive, sophisticated, and fast-growing financial institution at the cutting edge of online lending markets.

It is highly inappropriate to bring this type of institution into the core of the Federal safety net through a mechanism that simultaneously exempts it from central elements of banking regulation. Yet this is exactly what would be done by granting Square deposit insurance through the use of the ILC framework.

* * *

For questions, please contact Marcus Stanley, Policy Director, at or 202-466-3672.

Respectfully submitted,

Americans for Financial Reform

[1] A complete list of AFR’s coalition members is available at

[2] AFR’s opposition is limited to Square’s application for deposit insurance via an ILC. AFR would not necessarily oppose an application from Square for a conventional bank charter or deposit insurance under such a charter.

[3] Board of Governors of the Federal Reserve et. al., Report to the Congress and the Financial Stability Oversight Council Pursuant to Section 620 of the Dodd-Frank Act, Sept. 2016, available at

[4] Arthur E. Wilmarth Jr., Wal-Mart and the Separation of Banking and Commerce, 39 Conn. L Rev. 1539, 1570-71 (2007) (quoting the Senate Committee Report on CEBA).

[5] Christian Johnson & George G. Kaufman, When a Bank is Not a Bank: The Case of Industrial Loan Companies 9, in Financial Institutions and Markets: Current Issues in Financial Markets, eds. Robert R. Bliss & George G. Kaufman (2008).

[6] Id. at 14 (noting a statement by then FDIC Chair Sheila Bair).

[7] Id. at 9.

[8] Saule T. Omarova, From Gramm-Leach-Bliley to Dodd-Frank: The Unfulfilled Promise of Section 23A of the Federal Reserve Act, 89 N.C. L. Rev. 101, 169-70 (2010).

[9] Special Inspector General for the Troubled Asset Relief Program, Taxpayers Continue to Own 74% of GMAC (rebranded as Ally Financial Inc.) from the TARP Bailouts, Jan. 2013, available at

[10] Omarova, supra note 7, at 170.

[11] Special Inspector General for the Troubled Asset Relief Program, supra note 8, at 10.

[12] See e.g., Wilmarth, supra note 3, at 1589.

[13] Arthur E. Wilmarth Jr., Subprime Crisis Confirms Wisdom of Separating Banking and Commerce, 25 Banking & Fin. Services Pol’y Rep. 1, 7 (2008) (discussing how Merrill Lynch used its ILC).

[14] Alston & Bird LLP, Financial crisis drives remaining independent investment banks to Federal Reserve regulation, Sept. 2008, available at


[16] 12 U.S.C. § 1843(l).

[17] 12 U.S.C. § 1831o-1.

[18] Speech of Ben Bernanke, Oct. 2009, available at

[19] Board of Governors of the Federal Reserve, supra note 2.