Commercial firm ownership of Industrial Loan Corporations played no role whatsoever in causing or exacerbating the current or previous financial crises. The current crisis arose within the financial sector, not the commercial sector, and no government official or credible analyst disputes this.
Criticisms of ILCs, such as those levied by the Cambridge Winter paper, do not reflect mainstream academic or legal thinking. Rather they conflate the problems experienced by AIG and investment banks in the financial crisis with the practices of institutions like GE, Pitney Bowes and Target simply because they own ILC subsidiaries -- ignoring the tremendous differences in regulatory structure, economics, use of leverage, product offerings, customers, and business model. The authors themselves state clearly that "the crisis had surprisingly little to do with use or abuse by commercial enterprises."
ILCs are well regulated. ILCs are subject to state and FDIC regulation at the bank level and to holding company oversight by federal regulators. The FDIC's supervisory program for the largest, most complex ILC parents is in substance parallel and comparable to supervisory programs used by the Federal Reserve. In fact, there has not been a single failure of a Utah ILC, ever. The FDIC's "source of strength" test assesses ILC parent capital, often requiring support of banks at levels well above the "well-capitalized" standard.
Moreover, the rules governing the relationship of ILC's to their parent companies -- in terms of lending to parents and affiliates -- are the same rules that apply to commercial banks and require arms-length transactions and restrictions on the size of affiliate transactions. An ILC can provide no significant funding to affiliates absent regulatory approval.
Neither facts nor logic support any assertion of causality between ILC ownership and the financial institutions that faced the greatest pressure during the crisis last fall. Some of the institutions that failed or required extraordinary government assistance had ILCs, while some did not. Meanwhile, all had exposure to laxly underwritten mortgages that have been widely recognized as the cause of the crisis. There is no proof that ILC parents failed more frequently than non-ILC parents. To assert causality between ILC ownership and the financial crisis is like seeing a group of school kids who all got sick after eating lunch in the school cafeteria and attributing their illness to the fact that half of them had eggs for breakfast.
There is no question that the financial crisis revealed significant failings in consolidated supervision as implemented by all the banking agencies and the SEC. But ownership of an ILC had nothing to do with the effectiveness of supervision of their parent companies. In fact, all 12 of the largest bank holding companies, whether or not they owned ILCs, received TARP capital and TLGP support, and while one year ago there were large investment banks under consolidated regulation by the SEC, today there are none.
We support improvements in consolidated regulation, and are engaging constructively with Congress to eliminate the gaps in our regulatory structure that allowed excessive risk-taking, while preserving ILCs as a vital source of credit to consumers and to small and mid-sized
businesses that drive our economy. We support creation of a systemic risk regulator, and expect that all large financial institutions, including those owning ILCs, will come under the supervision of this new regulator.
Advocates of eliminating the ILC charter are throwing a red herring into the financial reform debate, as a means of pursuing self-interested agendas such as protecting banks from competition. Any requirement to separate banking and commerce is not only contrary to the practices of the European Union and most other industrialized economies, it also would severely hamper the flow of credit to consumers and businesses across the nation -- at a time when commercial bank lending is already impaired, and affordable financing is crucial to revitalizing our economy and putting Americans back to work.