Blog Post

By: Andrea Thomas Brandley

Note: The opinions expressed are those of the author alone and do not reflect an institutional position of the Gardner Institute. We hope the opinions shared contribute to the marketplace of ideas and help people as they formulate their own INFORMED DECISIONS™.

In 2019, Utah’s 14 industrial banks held $140.6 billion in assets, such as loans, 93.5% of the total for all industrial banks in the United States. That large majority caught my eye as I’ve lived in Utah my whole life, and up until last month I had no idea what an industrial bank even was! Industrial banks (also known as industrial loan companies) are state-chartered institutions that provide financial services to individuals and organizations. However, they differ from the average bank in a few important ways:

1. They are usually branchless – You can’t walk in and set up a checking account like you would at your local bank. All Utah industrial banks are branchless although a few out-of-state industrial banks have branch locations.
2. They can be owned by nonfinancial companies – Commercial businesses can own industrial banks, examples include BMW Bank of North America and Pitney Bowes Bank. Goldman Sachs and American Express also began as industrial banks.
3. They offer operational flexibility – Regulation for industrial banks can vary based on the bank’s ownership and purpose, offering flexibility. However, all industrial banks are regulated by the state in which they reside and insured by the Federal Deposit Insurance Corporation (FDIC).

Industrial banks were named more than a century ago. Their original purpose was to make loans available to industrial workers who could not find credit elsewhere. Today, industrial banks offer a wider variety of financial services, some still catering to a narrower group of customers than a typical bank (e.g., student loans, business loans, and healthcare).

Utah is currently one of only six states home to industrial banks and holds more than 90% of all industrial bank assets. This begs the question: why Utah? One reason began with the federal Competitive Equality Banking Act of 1987 (CEBA), a policy change that broadened the definition of “bank” to include industrial banks. CEBA prohibited ownership by commercial businesses, with two exceptions. First, existing industrial banks were exempt. Second, industrial banks could be commercially owned in states that required them to be FDIC-insured. This included only seven states: Colorado, California, Hawaii, Indiana, Minnesota, Nevada, and Utah. The last industrial bank in Colorado became inactive in 2009, leaving only six states with industrial banks.

Still, among these six states, Utah ranks a clear first in both number of institutions and total assets. Why does Utah hold such a large share? There are a few potential explanations. First, Utah has a strong financial sector. Utah’s financial sector’s share of all jobs in the state is well above (45.5% higher than) the national average. Utah is also known for its supportive business and regulatory climate. Owing to industrial banks’ high performance and demonstrated financial soundness, Utah has consistently approved the establishment of well-qualified industrial banks when the opportunity has arisen. This financial strength and continued support of industrial banks likely contributes to the state’s large share of the industry.

Utah’s industrial banking sector provides significant benefits to the state economy:

• Well-paying jobs – Industrial banks provide more than 1,800 Utah jobs with an average employee compensation of $105,400, 67.5% above the state’s $63,000 average.
• Community development – In the most recent 12-month reporting period, industrial banks provided $1 billion in investments and donations to lower-income communities, and bank employees gave 6,500 hours of volunteer service.
• Economic impact – Industrial banks support nearly 6,500 jobs and more than $400 million dollars in personal earnings.

The FDIC approved the last industrial bank more than a decade ago. However, on March 18, 2020, while I was shaken awake during a 5.7 magnitude earthquake and my colleague was naming her newborn baby Richter, 2,000 miles away in Washington D.C. the FDIC approved new industrial banks for Square and Nelnet – both to be headquartered in Utah. This points to the continued importance the state of Utah has in industrial banking. So now I am happy to report that I not only know what an industrial bank is, but I also recognize the important role they play in the Utah economy.

Learn more about the economic impact of industrial banks on Utah’s economy here.