ILC Charter Holders Add Voices to the Debate: Target, Advanta, Morgan Cite Low Risk, Bankers' Fear of Rivals

Article excerpt

WASHINGTON -- Industrial loan companies -- and those that own them or want to -- are fighting back against community banks and others that say ILCs pose a threat to the banking system.

More than a dozen ILCs, which have been largely silent up to this point, sent the Federal Deposit Insurance Corp. letters saying that those seeking to restrict ownership of ILCs are making specious arguments that cloak an anticompetitive motivation.

"The recent controversy surrounding industrial loan banks appears to be driven largely by fears, trade association politics, and agendas that have little to do with facts," wrote Susan E. Carroll, the president of Morgan Stanley Bank, the securities firm's $13 billion-asset Utah ILC, in an Oct. 10 letter.

The FDIC has received more than 9,000 letters -- many of them form responses -- on a list of questions it released in August to probe the oversight, role, and future of ILCs.

The questions were prompted by the agency's decision to put a six-month moratorium, which expires Jan. 31, on any new ILC approvals. FDIC Chairman Sheila Bair said the agency wanted to move beyond the controversy sparked by individual applications by commercial companies such as Wal-Mart Stores Inc. and Home Depot Inc., which have applied to own Utah industrial banks.

Though Wal-Mart and Home Depot have been open in rebutting charges that commercial ownership of ILCs is dangerous and that the companies are inadequately regulated, many ILCs and their parents have declined to weigh in -- until now.

Frank M. Salinger, an executive with Advanta Bank Corp.'s parent company, wrote in an Oct. 10 letter that the debate spurred by the FDIC's questions "raises a number of public policy questions."

But "we are concerned that it will result in yet another organized outpouring of 'grass roots' letters from those who veil their anticompetitive positions behind a mask of concern about the financial industry," wrote Mr. Salinger, a vice president for government relations at Advanta Corp., a credit card company that owns the $1.7 billion-asset Utah ILC.

Community bank advocates disagree.

Karen Thomas, the director of government relations for the Independent Community Bankers of America, said in an interview Wednesday that community banks worry that allowing commercial companies like Wal-Mart to own banks will result in their gaining a stranglehold on the industry.

The American Bankers Association and America's Community Bankers also submitted letters supporting ILC restrictions.

"Community banks welcome competition," Ms. Thomas said. "They compete with thousands of other community banks, large regional and nationwide banks, tax-subsidized credit unions and farm credit associations, securities firms, mortgage brokers, finance companies, payday lenders, Western Union, and so on.

"What we're concerned about is the dangers of mixing banking and commerce to drive out not only community banks but also small businesses, and the impact that will have on capital development in local communities."

Among other things, the FDIC asked whether ILCs owned by commercial firms pose any greater risk to the Deposit Insurance Fund and if more potential conflicts of interest exist between an ILC and its parent than other institutions.

ILCs and their representatives argued they do not pose added risks.

In a joint letter dated Oct. 10, officials with two ILC trade groups, the Utah Association of Financial Services and the California Association of Industrial Banks, wrote that ILCs' "risk profiles" are "generally the same as traditional banks. In reality, the controversy over industrial banks is political in nature and has nothing to do with problems in the industry or potential flaws in the bank-centric regulatory system. …