- The Washington Times - Wednesday, July 12, 2006


Allowing Wal-Mart Stores Inc., Home Depot Inc. and other retailers to own banks could threaten the soundness of the U.S. banking system, a Federal Reserve attorney told a congressional panel yesterday.

Since the 1930s when many banks failed, Congress generally has prohibited commercial companies from owning banks.

But now, retailers’ growing use of a banking loophole “undermines the supervisory framework that Congress has established” to regulate federally insured financial institutions, Federal Reserve general counsel Scott Alvarez told a House Financial Services subcommittee.

When Fed regulators have a “supervisory blind spot,” they can’t protect depositors and taxpayers from poorly run banks, he said.

Republicans and Democrats both expressed concerns about mixing commerce and banking. Rep. Ginny Brown-Waite, Florida Republican, said the thought of having commercial companies own lightly regulated banks is making her “nervous … almost terrified.”

Rep. Barney Frank of Massachusetts, the panel’s top-ranking Democrat, wants Congress to crack down, saying that if Home Depot has a banking operation as it plans, it could unfairly pressure customers who need loans for remodeling projects.

“I don’t doubt their integrity for a minute,” he said of Home Depot. But just by owning a lender, the Atlanta home improvement chain might push people to take out loans that don’t offer the best terms, he said.

Rep. Joseph Crowley, New York Democrat, disagreed, saying Congress shouldn’t be too quick to rein in new kinds of banks that “will provide greater competition.”

In an apparent reference to Wal-Mart, Mr. Crowley said lawmakers are overreacting because Wal-Mart has been criticized for its labor practices. The banking question “should be debated on its merit,” he said. But instead, it is being used by Wal-Mart opponents “as a stick to punish them.”

Mr. Frank, with Rep. Paul E. Gillmor, Ohio Republican, introduced a bill this week to prohibit the Federal Deposit Insurance Corp. (FDIC) from granting charters to companies that earn less than 85 percent of their income from financial activities. That, in effect, would prevent Wal-Mart and other commercial companies from entering the banking business.

In its assessment, the Government Accountability Office, Congress’ investigative arm, concluded that lawmakers should consider legislation to slow the growth of banks known as industrial loan companies (ILCs).

ILCs are state-chartered banks with access to federal deposit insurance. Congress originally exempted ILCs from heavy federal regulation because they were supposed to help low-income industrial workers obtain small loans.

But starting in the early 1990s, dozens of large commercial companies began obtaining ILC charters to process credit card, commercial loans and other financial transactions. Among the biggest consumer-oriented companies operating ILCs are General Motors and Target.

These ILCs got little attention until last summer when Wal-Mart, the retail giant based in Bentonville, Ark., began seeking a charter for one to process its stores’ credit and debit card and electronic-check payments.

Its application was filed in Utah, where most ILCs are chartered. Neither Utah nor the FDIC officials have decided whether to approve Wal-Mart’s plans.

Wal-Mart critics fear the company’s ILC would expand to become a full-service, nationwide banking operation capable of crushing competing banks in small towns by undercutting fees and interest rates. The company denies such intentions.

In May, Home Depot began seeking permission for an ILC.

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