Understanding Industrial Banks
Industrial banks, which might sound like financial institutions for manufacturing robots, are actually state-chartered entities usually owned by commercial firms. These banks—also referred to as industrial loan companies or ILCs—dabble in the banking playground without federal supervision, making them the proverbial “cool kids” who don’t necessarily follow all the usual rules.
Originally sprung up in the early 20th century, industrial banks were the knights in financial armor for low-to-moderate-income workers, who found traditional banking doors slammed in their faces. These institutions offered a new credit horizon to those traditionally seen as non-viable clients by conventional banks.
Regulated by state entities and supervised minimally by the Federal Deposit Insurance Corp (FDIC), industrial banks hold similar powers to their conventional cousins but come under fire due to their potential mix of commercial and banking endeavors without the stringent oversight generally provided by the Federal Reserve.
Criticism and Controversy Surrounding Industrial Banks
Flashback to 2005, when the retail giant Walmart dipped its toes into these waters attempting to reduce transaction fees via its own industrial bank. The application sparked a fireworks show of opposition leading the FDIC to halt new industrial bank approvals temporarily in 2006. This delay acted like a dam, attempting to hold back the rising tide of similar applications from other non-banking entities eager to siphon off banking privileges.
Fast forward to 2019, a year notable for Senator John Kennedy’s proposed “Eliminating Corporate Shadow Banking Act,” aiming to place industrial banks into the annals of history. Supporters of the bill cheered for a closer alignment of banking and regulatory oversight, highlighting the ongoing tension between innovation in financing and maintaining systemic financial health.
In Defense of Industrial Banks
Despite criticisms, it’s not all doom and gloom. Proponents argue that industrial banks stir up competition and innovation within the banking sector, providing more choices to consumers and businesses. Companies like Square Inc., motivated by the potentials of ILCs, plunged into the banking domain, advocating that such models could democratize access to financial services for underrepresented groups.
Conclusion
In the labyrinth of finance, industrial banks serve as both minotaurs and potential innovators, embodying the perpetual conflict between commercial interests and regulatory prudence. As they continue to evolve and impact various vectors of commerce and banking, the debate remains: should commercial giants have their own money vaults without traditional oversight?
Related Terms
- Federal Deposit Insurance Corporation (FDIC): Provides deposit insurance to depositors in U.S. commercial banks and savings institutions.
- State-Chartered Bank: Operates under the state’s charter and regulations, distinguishing it from nationally chartered banks.
- Commercial Bank: A bank that offers services such as accepting deposits, providing business loans, and offering basic investment products.
Suggested Books
“The Ascent of Money: A Financial History of the World” by Niall Ferguson - Explore the historical development of money and banking and how it shaped the world.
“Lords of Finance: The Bankers Who Broke the World” by Liaquat Ahamed - A compelling look into the role of bankers and their decisions which influenced the Great Depression.
Certainly, industrial banks are like those somewhat dubious ‘inventions’ that your uncle pitches at family gatherings: intriguing, potentially useful, but, as many argue, not entirely necessary—or safe—under the existing frameworks.
