Industrial loan companies: a growing industry sparks a public policy debate

Industrial loan companies, or ILCs, are a small, but rapidly growing part of the financial industry. These state-chartered institutions operate in seven states and have nearly all of the same powers as commercial banks. However, ILCs differ greatly from banks in one characteristic--the type of companies that may own them. ILCs meeting certain conditions may be owned and operated by firms engaged in commercial activities, thus skirting the prohibitions on mixing banking and commerce that apply to virtually all other depository institutions. ; From a public policy standpoint, the proponents of commercially owned ILCs claim that such ownership will bring a new source of capital, innovation, and competition into banking, thus providing the public with a broader range of financial services. Critics, though, contend that ILCs owned by commercial entities may face significant conflicts of interest. Such ILCs, it is argued, would have strong incentives to lend to customers of the parent company on a favorable basis and without due regard for standards of creditworthiness. Another common argument is that the parent companies might be able to exploit their size and existing customer relationships in a manner that would give them a dominant role in banking markets, thereby reducing financial competition. ; Spong and Robbins examine the public policy issues that arise from mixing banking and commerce. First, they review the history of ILCs and the basic legal and supervisory frameworks under which they operate. Next, they look at the reemergence of ILCs under their new forms of ownership and take a close look at individual ILCs and the types of business they conduct. Finally, they explore the public policy issues.