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NON BANKS - Developments for America's industrial loan companies shows desire for stronger control of the non banking sector.
(July 13th 2006, from The Economist)

WAL-MART has a way of upsetting people. So it was no surprise that the giant American retailer's plan to set up a bank, announced last year, met noisy opposition. Now debate may be turning to action. On July 10th a bill was introduced into the House of Representatives that would quash Wal-Mart's aspirations by prohibiting non-banks from buying or forming industrial loan companies (ILCs). Several commercial firms run banking businesses through ILCs; several more, including Wal-Mart, hope to do so.

At a committee hearing on July 12th Scott Alvarez, general counsel of the Federal Reserve, gave warning that the proliferation of ILCs in recent years (see chart) was eroding America's 50-year-old regulatory wall dividing banking and commerce. The bill seeks to strengthen the wall by preventing the Federal Deposit Insurance Corporation (FDIC), the bank regulator that oversees ILCs, from granting charters to companies that derive more than 15% of their profits from non-financial activities.

This would rule out a Wal-Bank. It would also thwart Home Depot, a large DIY chain that said in May it was buying EnerBank, an ILC that provides home-improvement loans, and some other companies with applications pending. Existing ILCs chartered after October 1st 2003 would be restricted too, for instance by a ban on opening branches across state lines. The bill also gives the FDIC broader regulatory powers, including the authority to scrutinise not just an ILC, but also its (commercial) owner and affiliates.

Even if the bill gets through the House, it faces a fight in the Senate. Still, Floyd Stoner of the American Banking Association, a trade group that is critical of ILCs, is optimistic: “Reform always takes time—but the debate in Congress is a sign that the process has started.” Some states have already headed in this direction. California and Colorado passed laws in 2003 barring non-banks from owning ILCs. Five states have passed rules that, in effect, bar non-bank ILCs from opening branches. Similar legislation is pending in six other states.

According to those against non-banks owning ILCs, mixing banking and commerce could distort lending. A non-bank owner could use its banking subsidiary's deposits (which, through the FDIC, are insured by the taxpayer) as a source of cheap finance. In particular, suppose that the parent company got into trouble. It might borrow from the ILC to shore itself up. Alternatively, the ILC's customers could take fright at the parent's difficulties and pull out their deposits in a hurry. What, ask the bill's supporters, would have happened had Enron owned a bank?

Others think these fears overblown. In America's competitive financial industry, a bank's ability to discriminate in its lending is limited. Moreover, federal rules that limit the amount banks can lend to their affiliates are already on the books.

Those who see no reason why non-banks should not own ILCs say bankers' real fear is competition, especially from Wal-Mart and Home Depot. Although Wal-Mart insists it would use an ILC only to save money on processing its credit-card and debit-card transactions, bankers fear it will eventually enter branch banking. Already, the retailer cashes cheques, sends money orders and so forth, often much more cheaply than competitors do. In Massachusetts bankers are fighting Wal-Mart's attempts to start cashing cheques in the state. And the customers? Too bad.

PS: the number of US ILC's has doubled over the last ten years (from 29 to 61), and their assets have multiplied 8 fold during the same period (from $20bn to nearly $160bn)

ID: 37892
Author(s): iff
Publication date: 17/07/06

Created: 18/07/06. Last changed: 18/07/06.
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