To Close for Comfort

Article excerpt

Wal-Mart application shows need to close ILC loophole

The past is prologue. ICBA and community bankers are working diligently to ensure that Wal- Mart Stores Inc.'s fourth attempt to enter the banking business will meet with the same results as its first three-a failure.

Wal-Mart has applied to the state of Utah and the FDIC for a federally insured industrial loan company (ILC) or industrial bank charter- a hybrid banking charter available in only a handful of states that operates under an exemption from the Bank Holding Company Act. The ILC loophole not only breaches the separation of banking and commerce embodied in the Bank Holding Company Act, but ILC owners also escape consolidated holding company supervision and regulation by the Federal Reserve.

Wal-Mart says it plans to use the ILC charter for back office processing of credit and debit card transactions in Wal-Mart stores. But once it has a charter there is little to prevent the retail giant from amending its business plan and expanding into full-service banking.

ICBA has been leading the effort to oppose the application. More than 1,500 commenters have filed letters with the FDIC objecting to the application-a great many of whom are ICBA members.

A History Lesson

In 1999, as Congress considered the Gramm-Leach-Bliley Act, Wal- Mart applied to acquire an Oklahoma unitary thrift institution. Wal-Mart's move highlighted the unitary thrift holding company loophole-at the time, another vehicle allowing commercial companies to own a bank charter.

Faced with the prospect of Wal-Mart owning a thrift charter, Congress took the opportunity in Gramm- Leach-Bliley to close the unitary thrift loophole and bar nonfinancial companies from owning thrifts. The retail giant didn't give up. In 2002, it tried to purchase a California ILC. Again, facing the prospect of a Wal-Mart Bank, the California legislature closed the loophole, barring nonfinancial companies from owning ILCs.

ICBA played key roles in both of those fights to protect one of our core principles-the separation of banking and commerce- that guards against financial and economic concentration, conflicts of interest in the granting of credit and undue extension of the federal safety net.

Wal-Mart is but one of a recent string of commercial companies seeking to exploit the ILC loophole, including Toyota, BMW, Target and Volvo, among others. In addition, a number of non-bank financial companies, such as Merrill Lynch, Goldman Sachs and Morgan Stanley, own ILCs. The ILC charter is proliferating beyond anything intended in 1987 when the loophole was created. ILC assets have ballooned 3,500 percent between 1987 and 2004, from $3.8 billion to over $140 billion. The spread of the ILC charter is creating a parallel banking system, outside the Bank Holding Company Act and not subject to consolidated supervision and regulation by the Fed.

Policymakers Take Notice

As with the unit ary thrift loophole, Wal-Mart's ILC application has galvanized policymakers into action. Here are a few of the resulting actions:

* Pending regulatory relief legislation that passed the House Financial Services Committee would prevent Wal-Mart and other commercial companies from using the ILC charter to establish out-of-state bank branches (the so-called "Gillmor- Frank compromise" language, named for its chief proponents in the House, Reps. …