Utah already is a hotbed for industrial banks, and a financial services industry leader wants to see the state do more to attract companies in another banking sector.

Utah already is a hotbed for industrial banks, and a financial services industry leader wants to see the state do more to attract companies in another banking sector.

Frank Pignanelli, executive director of the National Association of Industrial Bankers and the Utah Association of Financial Services, is pushing for Utah to be a center for unregulated banks — one of two sectors, along with financial technology, representing the next phase of financial services, he says.

Pignanelli recently made a pitch to the Governor’s Office of Economic Development (GOED) board to study the matter.

“How can we bring companies in that want to conduct these very valuable, very necessary and very safe financial services here in the state of Utah?” he asked the board.

The issue has grown because the FDIC has severely limited the number of banks getting FDIC insurance — Pignanelli pegged the number at only two banks in the past eight years. As a result, more individuals and businesses — he said it’s 65 percent — are getting financing outside the regulated sector.

“Small businesses and families are now paying more for mortgages and more for loans because they’re [going] outside the regulations and that’s probably not going to end for a while,” Pignanelli said. “So I think there’s a really good place for responsible lenders and Utah would be a great place to attract them.”

GOED board member Jerry Oldroyd said community banks, especially those in small communities, are “essential for economic development.”

“What we have now is companies outside that are unregulated providing those services at a higher cost, and the money goes out of state rather than staying within the community,” Oldroyd said. “That’s a serious problem for the state and for the country. … I think there’s a real opportunity there for some of these unregulated companies, to bring them in and to help spur economic development.”

Pignanelli envisions GOED and the Economic Development Corporation of Utah funding a study on the matter, much in the same way that a 2011 GOED-commissioned study of industrial banks by the Milken Institute kept industrial banks operating and also established Utah as a center for financial services. Utah now is the fourth-largest center in the U.S. in terms of assets, he said.

Industrial banks (IBs) are financial institutions funded by companies. Often called industrial loan companies (ILCs) outside of Utah, they are authorized to make consumer and commercial loans and to accept federally insured deposits but not demand deposits if they have total assets greater than $100 million. They are subject to the same regulatory and supervisory oversight as commercial banks. The Utah Department of Financial Institutions, which regulates 17 industrial banks, says that “in many respects, however, IB activities and powers are not as restricted as commercial banks.”

The GOED website says that Utah “has proven to be a particularly attractive place” to operate industrial banks and hosts the most such banks in the country. IBanknet.com recently listed the 26 largest industrial banks in the U.S., and 16 are chartered in Utah, including the top six and 14 of the top 18.

That 2011 study thwarted critics of industrial banks, Pignanelli said. About 10 years ago, the outcry was strong because Walmart applied to have an industrial bank. Ultimately, “those disparaging us were making up facts and figures,” and the Milken study provided statistical ammunition to combat those against industrial banks, he said.

“People still grumble about industrial banks, but they no longer create these fabricated studies,” he said. “It’s because they know there’s something out there that they have to deal with, which is the Milken study. So in the vacuum of research that existed, you placed something in there that said, ‘You’ve got to deal with this if you’re going to come after the ILCs in Utah.’ And that has been such an added benefit.”

Aiding the Milken study has been the establishment of the Center for Innovation in Banking and Financial Services at the Lassonde Institute at the University of Utah, he said. The center is a source for industry data, provides guidance on the regulatory issues associated with new financial products and technologies, and examines and supports the deployment of new financial products and services.

“You’re going to hear more and more about this center at the Lassonde Institute,” Pignanelli said. “Because of this vacuum of research, they’re now filling that vacuum and that’s going to even drive more and more interest into Utah as being the center of state-chartered institutions.”

The center “will be the main focal point” as academics and banking institutions nationwide “will be focused on Utah and the research we’re developing,” he said. “That will help us maintain our presence as one of the leading centers of financial services in the country.”

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