The Wal-Mart Decision

In this issue, I decided that instead of entertaining you with a discussion of something controversial, I’d put forth some of my thoughts on the current applications by Wal-Mart for an industrial loan corporation (ILC) bank charter, which carries with it the necessity for FDIC insurance.

ILCs are the exception to the pervasive decree in the United States that requires banking and other nonfinancial businesses be operated independently of each other. This is purely a U.S. doctrine not adhered to by any other major developed country.

In the United States, the doctrine is enforced through the use of a mechanism in the Bank Holding Company Act, which requires all corporate holders of banks to be regulated by the Federal Reserve System. ILC owners are exempt from this requirement through a specific exception promulgated through congressional action. This may be thought of by some as a loophole, but in fact, it is a well-crafted exception!

Many bankers today believe major retailers should not be allowed to operate under ILC bank charters because they fear such competition would be unfair to financial institutions that have no similar tie-ins to large-scale retail empires. In other words, they want the exception to the rule requiring the separation of banking and commerce to be eliminated. However, the FDIC has already granted insurance to an ILC by Wal-Mart’s major competitor, Target, and others.

So what should be done? The opposition to Wal-Mart’s applicationu00e2u20ac”community bankers, the Fed, etc., have focused on the FDIC’s regulatory powers. Also in the Congress, bipartisan opposition to FDIC-insured ILCs is being led by Congressman Barney Frank (D-MA) and Congressman Jim Leach (R-IA). They agree the loophole must be closed so that underregulated ILCs will not endanger the U.S. banking system. (“Underregulated” here refers to the fact that the FDIC does not have a legislative mandate to regulate owners of ILC banks. It has, in fact, dealt with all kinds of bank owners successfully for many years.)

Some time ago, I attended a Fed conference on this subject. When my time to speak arrived, I suggested that if the Fed was so worried about the FDIC’s lack of power to control ILC bank owners, this concern could easily be remedied by supporting a bill to make sure the FDIC expressly has such powers.

As the agency responsible for the overall safety and soundness of the financial system, the Fed should enthusiastically support additional powers for the FDIC.

Yet, for some reason, the Fed has not adopted that view. In fact, the Fed took the opposite approach, going so far as to help convince the General Accounting Office that the FDIC’s deficiency in powers over ILC owners jeopardized the safety and soundness of the entire banking system.

After a six-month self-imposed delay, the FDIC, with a new, well-informed chairman, will reach a decision on the sticky situation of Wal-Mart, as well as other commercial enterprises that will look to follow the same path. Personally, I hope the agency will stick with the opinion of one former chairman and end up with an FDIC-insured Wal-Mart ILC bank as well as new powers over other corporate owners of ILCs.

If the Congress supports this view, it will be good for the consumer, the free enterprise system, bank safety and soundness, community banks, and the U.S. economy. In times like these, what more could you want?