When a Bank Is Not a Bank: The Case of Industrial Loan Companies

What is a “bank”? There are commercial banks and savings banks as well as river banks, snow banks, telephone banks, blood banks, and many more. Dictionaries list a large number of alternative definitions. The definition matters not only for purposes of semantics, so that we understand each other, but also because some types of banks—commercial and savings banks, for example—are perceived to be sufficiently vital to the economy that they are regulated by the government to promote their safe and efficient operation. But, for effective regulation, it is necessary to carefully define the entity to be regulated. The issue of what constitutes a bank for regulatory purposes metamorphosed in 2005 from being an arcane subject of interest primarily to a small number of regulatory attorneys to being of interest to a much larger and broader group. This interest was sparked when the large retailer Wal-Mart applied to the Federal Deposit Insurance Corporation (FDIC) to obtain federal deposit insurance for a newly chartered “bank” in Utah that was not subject to the ownership restrictions applicable to most other “banks.” This chapter examines the definition of “bank” for financial regulatory purposes, traces and explains the evolution of the definition, and explores the controversy surrounding the attempt by Wal-Mart in 2005 to establish its own bank. Wal-Mart has since withdrawn its application.