Magazine article American Banker

Viewpoint: Carveout Reveals ILC Bill's True Nature

Magazine article American Banker

Viewpoint: Carveout Reveals ILC Bill's True Nature

Article excerpt

The House of Representatives has passed HR 698, legislation that is intended to prevent companies that receive more than 15% of their revenue from "commercial activities" from owning a Utah industrial loan company. ILCs have many of the powers of banks, including the ability to take deposits backed by the Federal Deposit Insurance Corp.

This act demonstrates beyond any reasonable doubt the hollowness of congressional pretensions to be protectors of U.S. consumers in general, or of the "American family" in particular.

While claiming that the legislation is based on the principle of separating banking and commerce, the sponsors have made clear that they are protecting the banking industry against competition that might bring down financing costs for ordinary Americans. In the end, the legislation is not good either for working American families or the banking industry.

To push this bill through the House, the sponsors endlessly invoked the so-called principle that banking should be separated from commerce. This notion rests on the proposition that banks, as federally backed lenders, must be protected against exploitation by commercial firms in two different ways.

A commercial firm, it is argued, could abuse a bank it controls by forcing the bank to lend on favorable terms to the parent or by preventing it from lending to the parent's competitors.

In addition, a commercial firm might be able to exploit the bank's connection to the banking safety net by using the bank for a bailout if the parent gets into financial trouble.

Following out this idea, the bill's sponsors drafted legislation that would allow the FDIC to deny applications by any firm that was engaged to a substantial degree in commercial activities. Up to this point, there is a surface consistency to the legislation. If one really believed that affiliation with a commercial firm would indeed be a threat to the federal safety net - a very doubtful proposition, by the way, since it depends on several different violations of law - limiting connections between banks and commercial firms would make sense.

However, once the bill was passed, it became clear that it was nothing more than another weakly disguised effort to protect a favored industry.

Thus, the bill's principal sponsor - House Financial Services Committee chairman Barney Frank - let it be known that, if necessary to obtain Senate approval, automobile companies might be allowed to acquire ILCs. Huh? Aren't automobile companies commercial firms? And wouldn't their acquisition of ILCs violate the so-called separation of banking and commerce?

Surely, if you believe that commercial firms will misuse their banking subsidiaries, there's no reason to assume auto companies will be different. …

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