GM Wants a Bank

Eakinomics: GM Wants a Bank The news emerged late last week that General Motors was seeking a bank charter. As per The Wall Street Journal: “General Motors Financial Company Inc. has been talking to federal and state banking regulators for months about forming an industrial loan company and could file applications to do so as early as December, the people said. It would be supervised by the Federal Deposit Insurance Corp. and the Utah Department of Financial Institutions, which grants the majority of these charters.” Is this a good idea? At one level, this is fairly innocuous. As explained by AAF’s Thomas Wade, industrial loan companies (ILCs) “emerged in the early 1900s as a source of funding for industrial workers and other wage earners with moderate incomes, to whom traditional commercial banks were at the time not willing to offer uncollateralized loans.” Of note, ILCs did not take deposits and offered a very limited range of products. Nevertheless, they dominated the consumer credit business until commercial banks expanded consumer lending in the 1940s and beyond. From this perspective, GM getting an ILC does not appear problematic. Today’s ILC, however, is not your 1920s ILC. Over time, states expanded their charters of ILCs to permit an ever-growing range of consumer products. In addition, in 1982 an unintended consequence of deposit insurance legislation was to make ILCs eligible for federal deposit insurance, albeit by entering the regulatory oversight of the Federal Deposit Insurance Corporation (FDIC). As a result, ILCs grew dramatically and posed real competition to commercial banks, but without any obligation for oversight by the Federal Reserve. Thus, they had an advantage on the regulatory playing field, and posed the potential for different kinds of risks as a result. This was among the reasons the FDIC denied Walmart a charter in 2006, and further imposed a moratorium on ILC charters. The moratorium was ended earlier this year: “On March 17, the Federal Deposit Insurance Corporation unanimously approved a proposed rule that would 'codify existing practices' used by the FDIC in managing the industrial loan companies​ that it supervises. This proposed rule was closely followed on March 18 by news that the FDIC had approved ILC charters for fintech company Square and student loan servicer Nelnet.” In some sense, GM is just following the crowd. But there is also the nagging thing called history. GM has already had an ILC, the General Motors Acceptance Corporation (GMAC), which failed to survive the 2008 financial crisis and had to be bailed out by the taxpayer. The re-organized entity was sold off in 2010 and became Ally Financial. In principle, the modernized FDIC supervision of ILCs should make this move non-problematic. It was supposed to be non-problematic the last time around as well, however. The jury remains out.