It Ain’t Over ‘Til It’s Over

The FDIC board has delivered its decision on Wal-Martu00e2u20acu2122s application (as well as othersu00e2u20acu2122) for FDIC insurance on industrial loan banks (ILCs) it wishes to charter in Utah. ILCs are special-purpose banks that are restricted from providing checking accounts, among other limitations.

With Solomon-like wisdom, the FDIC has split the baby in half, allowing applications by u00e2u20acu0153financial compoundsu00e2u20ac to proceed but continuing its freeze on FDIC insurance for commercially owned ILCs for another year.

The board disposed of one issue by deciding that it has the power to supervise ILCs without further legislation. If there is doubt on this issue, board members suggested the FDIC be given additional power over ILC owners. Financial corporate owners were exempted from the freeze.

Since Wal-Martu00e2u20acu2122s competitor, Target, and many other commercial enterprises own ILCs, and since the law specifically allows commercial ownership, this decision might be viewed as a cop-out by the FDIC, impairing its well-earned reputation for independence.

Yet, if I had been chairman of the FDIC when this decision was voted, I probably would have decided that discretion was the better part of valor and voted the way the current chairman didu00e2u20ac”to defer to Congress, which, after all, has the power to change the FDICu00e2u20acu2122s independent status if it chooses to do so.

Since almost all community bankers have been violently opposed to Wal-Martu00e2u20acu2122s owning an ILC, there was the expected celebration of the victory over the much-feared Wal-Mart, which they definitely did not want as a competitor.

But as the saying goes, u00e2u20acu0153it ainu00e2u20acu2122t over u00e2u20acu2122til itu00e2u20acu2122s over,u00e2u20ac and this battle has really just begun.The basic question raised by the applications presumed a violation of a fundamental principal of U.S. bankingu00e2u20ac”that banks cannot be owned by commercial corporations. In fact, the entire U.S. bank holding company structure was designed around just that purpose: to keep commercial business separated from banking. (A disclosureu00e2u20ac”back in my CPA days, one of my clients, S&H Green Stamp Co., bought a bank, and this upset Sen.William Proxmire and others so much that the bank holding company system was bornu00e2u20ac”which, incidentally, prompted the involvement of the Federal Reserve System in regulation, since it was deemed regulator of the new bank holding company system. It is no wonder the Fed is such a strong backer of the separation of commerce and finance.)

Since my departure from the FDIC, I have done a great deal of consulting in Asia, including Japan, Thailand, the Philippines, and South Korea. In all these countries, I have seen frightening examples of how commercial companies can abuse the ownership of banksu00e2u20ac”if there is not effective regulation by competent, independent, and determined bank supervisors. So, the question of whether separation of banking and commerce is the preferred way to operate the financial system is not as clear to me as it once was.

I think we are headed for a great debate on the subject of the operation of finance and commerce, with an outcome that is not easily predictable.

And the players are arming themselves for the fight.The corporations owning ILCs and those who hope to become an owner have announced the formation of a lobbying organization, Americans for Banking Competition. (Mississippi Gov. and former Republican National Committee Chair Haley Barbouru00e2u20acu2122s firm, Policy Impact Communications, a formidable outfit, is the operator.) Its objective is to carry their message to Capitol Hill and u00e2u20acu0153educateu00e2u20ac consumers. For their part, the bankers have already been doing a pretty effective job lobbying against Wal-Martu00e2u20acu2122s application and its like for several years.

How will it come out? As long as Sen. Bob Bennett (R-UT) stays active, itu00e2u20acu2122s likely to be a compromise, one that will restrict ILCs (no branching, etc.), but will not draw a hard line that prevents retailers like Wal-Mart from owning a bank.

Is that the way Iu00e2u20acu2122d vote if I were in the Congress? Itu00e2u20acu2122s a tough call, but I believe I would support a compromise that favors the traditional position of the FDIC, which is that ILCs have added to competition and have not increased insurance costs, despite being owned by nonfinancial corporations. Just proves u00e2u20acu0153you can take the boy out of the FDIC, but you canu00e2u20acu2122t take the FDIC out of the boy.u00e2u20ac

(Authoru00e2u20acu2122s postscript: At press time,Wal-Mart had dropped its application, but the debate goes on.)