GAO Report Summary

New study shows U.S. industrial loan companies “safe, sound and well-regulated” but barriers to expansion prevent significant contribution to economic recovery

Salt Lake City, UT (May 16, 2011) — A new study by the Milken Institute into U.S. Industrial Loan Companies (ILCs) makes a clear case for the easing of regulations that prevent this stable and viable segment of the banking industry from making a full contribution to the nation’s economic recovery, the National Association of Industrial Bankers (NAIB) said today.

The study, Industrial Loan Companies: Supporting America’s Financial System, shows that ILCs – banks owned by commercial firms and also known as Industrial Banks – are consistently more profitable than the banking industry as a whole, with significantly higher ratios of capital to assets and significantly lower percentages of troubled assets. They are also safer and resistant to systemic failure, as illustrated by their strong performance as sources of credit during the recent financial crisis and subsequent recession. Despite this, ILCs are subject to regulation expressly intended to prevent expansion of the sector. The study further notes that the US is unique among G20 nations in denying its borrowers access to this source of credit.

The study lays out the current regulatory framework for ILCs, noting that they are subject to all of the regulation and oversight of traditional banks plus a raft of additional laws which apply only to them. Of particular significance is a 2007 moratorium on new ILC charters, recently extended by the Dodd-Frank Wall Street Reform Act. The study questions the need to block the expansion of this “…safe, sound and well capitalized

segment of the banking industry” and notes that doing so “limits the ability of the U.S. banking industry to enlarge its capital base and thereby maintain its role as a major player in the competitive global banking industry”.

The Milken Institute study findings are in line with those of previous investigations into ILC. As far back as 1992 the U.S. Treasury Department, indicated that, “the development of these broadly diversified firms has often proven beneficial to the economy at large and financial markets in particular. Most important has been the ability and willingness of such firms to strengthen the capital positions of their financial services subsidiaries. The stability brought to the financial markets in this way is a net benefit to the economy overall.”

Commenting on the study, Ray Specht, Vice Chairman of Toyota Financial Services, an Industrial Bank owned by the Toyota auto company, said,

“This is a timely study which illustrates the huge benefit commercial companies bring to bank ownership. Viable parent companies not only allow ILCs to access significant capital but they also make them less susceptible to systemic failure. There’s no doubt that the time has come for the U.S. to align its banking sector with those in other developed countries.”

The authors of the Milken Study cautioned legislators, regulators and other policymakers not to put the U.S. financial sector at a further competitive disadvantage by subjecting ILCs to “any additional costly and unnecessary regulation”. Echoing this, Frank Pignanelli, Executive Director of NAIB, said,

“This thorough study puts to bed, once and for all, the myth that the U.S. financial system and economy would be on a sounder footing if commercial companies were prevented from owning ILCs. Its findings lead us to the inescapable conclusion that the U.S. is on

the wrong track. Rather than regulate ILCs to the point of extinction, policymakers should remove barriers to expansion and allow these safe and valuable entities to make a full and worthwhile contribution to U.S. prosperity and global competitiveness.”

The study was commissioned by the Development Corporation of Utah and the Nevada Development Authority.  James R. Barth, senior finance fellow at the Milken Institute and Lowder Eminent Scholar in Finance at Auburn University was the lead author of the study. The full study is available online at www.milkeninstitute.org  ENDS

About the National Association of Industrial Bankers (NAIB)

NAIB is the national trade group for industrial banks. NAIB champions the innovation of industrial banks to expand access to credit, guarantee consumer choice, and providing unique banking services to Americans (www.industrialbankers.com)

About the Milken Institute

The Milken Institute is a nonprofit, independent economic think tank whose mission is to improve the lives and economic conditions of diverse populations around the world by helping business and public policy leaders identify and implement innovative ideas for creating broad-based prosperity. It is based in Santa Monica, CA. (www.milkeninstitute.org)

Contact:

Kristen Potter (904) 755 9722 or Simon Keymer (904) 434 3186

Time to Take Shackles off Industrial Banks — May 16, 2011 _News Release_

The Dodd-Frank bill imposes a three year moratorium on deposit insurance applications for new credit card banks, industrial banks, and trust banks owned by “commercial” companies.  A company is a “commercial firm” if the annual gross revenues derived by the company and all of its affiliates from activities that are financial in nature (as defined in section 4(k) of the Bank Holding Company Act of 1956) represent less than 15% of the consolidated annual gross revenues of the company”.

In other words, to be “commercial”  a corporate group must generate more than 85% of gross revenues from non financial activities.  Section 4(k) covers activities permitted for a financial holding company and includes securities, insurance and all activities a bank could engage including affiliated finance companies.

The Act also calls for the Government Accountability Office (the research arm of Congress) to study how financial institutions that are exempt from the Bank Holding Company Act of 1956 impact the safety and soundness of institutions or the stability of the financial system.

The types of banks subject to the study include:

•industrial banks

•credit card banks,

•trust banks,

•thrift holding companies, and

•trust companies and mutual savings banks that have a single bank subsidiary in the same state.

The GAO must report to Congress within 18 months after the date of enactment (January 2012).

The Utah Governor’s Office of Economic Development and the Nevada Development Authority have retained Dr. James Barth of the Milken Institute and Auburn University to study the industrial banking industry.  The two agencies funded the study to analyze:

•The historic impact of Industrial Banks on banking and consumer activities in this country.

•How Industrial Banks have weathered the current economic crisis and their

• safety and soundness compared to other financial institutions.

•The ability of the Industrial Bank model to serve a safe vehicle to dramatically increase investment of  $1.5 trillion of private capital into the American economy.

Dr. Barth is the Lowder Eminent Scholar in Finance at Auburn University and a Senior Finance Fellow at the Milken Institute. His research focuses on financial institutions and capital markets, both domestic and global, with special emphasis on regulatory issues. He recently served as leader of an international team advising the People’s Bank of China on banking reform and travelled to China, India, Russia and Egypt to lecture on various financial topics for the U.S. State Department. He was recently interviewed about the financial crises by the Financial Crisis Inquiry Commission and the Congressional Oversight Panel.

An appointee of Presidents Ronald Reagan and George H.W. Bush, Barth was chief economist of the Office of Thrift Supervision and previously the Federal Home Loan Bank Board. He has also held the positions of professor of economics at George Washington University, associate director of the economics program at the National Science Foundation and Shaw Foundation Professor of Banking and Finance at Nanyang Technological University. He has been a visiting scholar at the U.S. Congressional Budget Office, Federal Reserve Bank of Atlanta, Office of the Comptroller of the Currency and the World Bank.

Barth’s expertise in financial institution and capital market issues has led him to testify before the U.S. House and Senate banking committees on several occasions. He has authored more than 200 articles in professional journals and has written and edited several books.  Barth is the co-editor of The Journal of Financial Economic Policy and overseas associate editor of The Chinese Banker. He has been quoted in publications ranging from The New York Times, The Financial Times and The Wall Street Journal to Time and Newsweek. In addition, he has appeared on such broadcast programs as “Newshour,” “Good Morning America,” “Moneyline,” Bloomberg News, Fox Business News and National Public Radio.

Barth serves on the editorial boards of the Journal of Financial Services Research, Review of Pacific Basin Financial Markets and Policies, Journal of Economics and Finance and Financial Services Review. He is also included in Who’s Who in Economics: A Biographical Dictionary of Major Economists, 1700 to 1995.

Industrial banks rule the statistical measurements in the financial services arena. The fourth-quarter 2009 FDIC reports are now. And once again, they demonstrate that industrial banks are the most secure financial institutions in the country. Other FDIC insured banks cannot compare to the strength of ILCs. Look at the figures:

As a whole, the American banking industry as a capital to assets ratio of 11%. Industrial banks have a capital to assets ratio of 16.4%.

The American banking community has a trouble assets ratio of 25.8%; industrial banks in US 11.2% (commercially owned industrial banks have a total asset ratio of 2.5%!)

American banks have an annualized rate of return of .09% and industrial banks screen pass them with an ROA of .84 %. (Commercially owned industrial banks profitability was 1.39%)

All this nonsense about commercially owned banks causing a threat is just that… nonsense. When even in these troubled times, the profitability of commercially owned industrial banks is 15 times that of the national banking industry.