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Just say no to mixing retailing and banking

By Patti Murphy

Should commercial firms, especially retailers, be allowed to get into banking and payments? Questions about nonbanks owning banks have confronted lawmakers, on and off, for more than three-quarters of a century, and consistently, the answer has come back a resounding no.

But banking and the industry's payments franchise have a great deal of allure, certainly for the uninitiated, and no lack of lawyers and corporate executives have been eager to blast holes in Congressional intent.

Wal-Mart Stores Inc. is leading the latest assault. Several other big brands have joined the fight too. They want to exploit a loophole in a federal banking law enacted nearly 20 years ago. That law, the Competitive Equality Banking Act of 1987 (CEBA), itself was an attempt to close a loophole in federal law, one that resulted in a rash of applications for "nonbank banks." These limited-purpose banks typically were chartered to issue credit cards.

Wal-Mart wants to own an industrial loan company (ILC) in Utah so it can handle credit and debit card processing in-house, or so the company has said.

ILCs, sometimes known as industrial banks, have existed for nearly a century; almost all are located in the Southwest and West, with the largest number in Utah. State governments and the Federal Deposit Insurance Corp. charter and regulate these institutions. But unlike other financial institutions under its jurisdiction, the federal government has no authority over ILC parent companies.

In an apparent bow to state law, Congress, in enacting CEBA, decided to single out ILCs in certain states, most notably Utah, as being exempt from the law's strictures on nonbank ownership of banking institutions.

Jake Garn, formerly a Republican Senator from Utah who championed the ILC loophole and was Chairman of the Senate Banking Committee in 1987, has insisted that the law provision permitting ILCs was not an invitation to retailers to get into banking.

Testifying at an FDIC hearing in April, Garn said, "It was never my intent, as author of this particular section, that any of these industrial banks be involved in retail operations." He even asked Wal-Mart to not apply for a charter from Utah; he feared it would result in a brouhaha and subject other Utah-based ILCs to unnecessary scrutiny.

Wal-Mart's application for an ILC has been pending for more than a year before the FDIC, which has received a record number of letters protesting the request. And at public hearings in April, agency officials got an earful from bankers and consumer groups opposed to the idea of Wal-Mart owning a bank.

Congress took up the nonbank-bank issue anew, following a report last year by its watchdog agency, the Government Accountability Office, which documented huge increases in ILC assets over the past 10 years. It urged broader federal regulatory authority over ILCs and their parent companies.

In June, 98 members of Congress wrote the FDIC requesting a moratorium on new ILC approvals. In early July, Reps. Paul E. Gillmor, R-Ohio, and Barney Frank, D-Mass., introduced legislation to eliminate the ILC loophole once and for all.

"The proliferation of new ILC applications is creating a situation where Congress must set appropriate policy to preserve the integrity of the banking system," Frank said.

There was no lack of support for this bipartisan measure at hearings earlier this month before the House Committee on Financial Services' Subcommittee on Financial Institutions and Consumer Credit.

"Imagine if Enron or WorldCom had owned an ILC," said Terry Jorde, President and Chief Executive Officer of CountryBank USA and Chairman of the Independent Community Bankers Association of America. "Their problems could have easily spilled over to their banks, draining the FDIC's resources and requiring all banks, including community banks, to cover the costs."

Jorde suggested the same fate would face a retailer battered by changes in economic conditions. She also raised specific questions about Wal-Mart's planned ILC, including the likelihood of the retailer competing head-to-head with banks for payment clearing and settlement services.

Here's what the Federal Reserve Board's General Counsel, Scott Alvarez, said to subcommittee members: "The question of whether to allow broader mixings of banking and commerce has broad-reaching implications for the structure and soundness of the American economy and financial system ... because, if permitted, any general mixing of banking and commerce is likely to be difficult to disentangle."

The legal issues against commercial enterprises owning banks have deep roots in American history. They were enacted in the wake of the Great Depression. And although much has changed in the ensuing years, two things have not: 1) financial institutions are crucial to the American economy, thereby requiring close government scrutiny; and 2) commercial enterprises, such as retailers, are accountable to individuals and groups that may not always have the best interests of the American economy in mind.

Maybe it's time for Congress to just say no to retailers owning banks.

Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. E-mail her at

Article published in issue number 060702

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