S. 3734 — Close the Shadow Banking Loophole Act

This section defines terms related to industrial banks—including "industrial bank" as an entity described in section 2(c)(2)(H) of the Bank Holding Company Act of 1956 (BHCA) (12 U.S.C. 1841(c)(2)(H)), as in effect the day before enactment—and amends the BHCA to limit the exception from the definition of "bank" to industrial banks approved for Federal Deposit Insurance Corporation (FDIC) deposit insurance on or before September 23, 2021 (or compliant with section 2(c) of the Close the Shadow Banking Loophole Act). (As background, the BHCA exception allows nonbank companies to own industrial banks—state-chartered depository institutions similar to industrial loan companies—without registering as bank holding companies subject to Federal Reserve supervision; this amendment excludes industrial banks approved for deposit insurance after September 23, 2021, from the exception.) The section further (1) requires the FDIC, for deposit insurance applications pending on the date of enactment that were submitted on or before September 23, 2021, to provide a 90-day public comment period, a public hearing, and approval by a two-thirds vote of its Board of Directors, with a decision required by September 30, 2026 (or deemed denied); (2) authorizes the primary financial regulatory agency for the parent company of an industrial bank approved for deposit insurance after September 23, 2021 (termed a covered industrial loan company), to examine the parent and its nonbank subsidiaries, require reports, and impose conditions or restrictions—including on transactions with depository institution subsidiaries—to promote safety and soundness; and (3) directs the appropriate federal banking agency to disapprove changes in control of an industrial bank under BHCA section 7(j) (12 U.S.C. 1817(j)), except when (A) the bank is in danger of default and the acquirer is a supervised entity, (B) the change results from a passive acquisition of less than 25% of voting shares in a listed issuer controlling the bank, or (C) the bank will be controlled by a bank holding company, savings and loan holding company, or foreign bank treated as a bank holding company under the International Banking Act of 1978 (12 U.S.C. 3101 et seq.) as of July 1, 2020, provided all other required approvals are obtained.

This section establishes Federal Deposit Insurance Corporation (FDIC) supervisory authority over parent companies of industrial loan companies (ILCs)—i.e., state-chartered, FDIC-insured depository institutions that are not banks under the Bank Holding Company Act and whose parents are typically commercial firms exempt from Federal Reserve oversight. Specifically, the FDIC gains the same authority as the Federal Reserve has over bank holding companies to require reports from and conduct examinations of such parent companies (or their subsidiaries), with requirements tailored to the parent company's size, complexity, and business nature if deposit insurance for the ILC was approved on or before September 23, 2021; enforces compliance using its powers under section 8 of the Federal Deposit Insurance Act (e.g., cease-and-desist orders, civil money penalties); and authorizes FDIC rulemaking to implement these provisions without reducing its existing authorities.

This section provides that this Act and its amendments do not affect or impair (1) the Federal Deposit Insurance Corporation's (FDIC) authority to enter into agreements with a parent company of an industrial loan company (i.e., an industrial loan company, industrial bank, or similar institution, as defined in the newly added section 6 of the Bank Holding Company Act of 1956) or such a company, or to impose conditions on FDIC application approvals; or (2) the validity of any such pre-enactment agreement.