Fed Official Raises Concerns Over Wal-Mart Entry into Banking

July 14, 2006

A Federal Reserve official raised concerns this week about nonfinancial companies such as Wal-Mart and Home Depot establishing banks.

Legislation to block such arrangements has been moving forward in the House.

The two retailers are among 14 companies awaiting approval from the Federal Deposit Insurance Corp. to establish what is called an industrial loan corporation, or ILC.

The application of Wal-Mart Stores Inc., the world’s largest retailer, has rallied opposition from banks, unions, lawmakers, and consumer and community organizations fearful they would crush smaller local financial institutions.

The Fed believes that “the decisions on these important policies, which influence the structure and resiliency of our financial system and economy, should be made by Congress, acting in the public interest,” the Fed’s general counsel told a House Financial Services subcommittee.

The central bank is concerned because the owners of federally insured ILCs are able to avoid the regulatory requirements that apply to owners of other types of insured banks overseen by the Fed, Scott Alvarez said.

The Fed chairman, Ben Bernanke, has urged Congress to bring ILCs under Fed supervision.

Legislation to block commercial company’s from owning these banks has been proposed by Rep. Barney Frank, D-Mass., and Rep. Paul Gillmor, R-Ohio, and enjoys strong bipartisan support in the House. Prospects in the Senate are clouded.

In addition, nearly 100 lawmakers have asked the FDIC to halt any new approvals of the industrial banks to give Congress a chance to consider the legislation.

Some subcommittee members, particularly those from rural areas, said those banks unfairly can dominate small, local banks and other businesses.

“We must not jeopardize the very survival of these businesses,” said Rep. Bernard Sanders, an independent from Vermont. “We must end the ILC loophole once and for all.”

Opponents of the legislation insisted there was no evidence that ILCs pose any financial risk.

The FDIC has not taken a position on the bill.

A message left with Wal-Mart was not immediately returned Wednesday. The company has said it has no plans to compete with community banks and has pledged to the FDIC to stay out of branch banking and consumer lending.

Wal-Mart’s newly chartered bank, to be based in Utah, would be used to handle the 140 million credit, debit card and electronic check payments it processes each year, the company says.

There are now 61 ILCs with a total of about $141 billion in assets and $98 billion in deposits. Thirty-three are based in Utah, one of only seven states that grant charters for such banks.

The banks are allowed to issue credit cards, take deposits and make loans. What they cannot do is offer standard checking accounts if the bank’s assets exceed $100 million.

In addition to Wal-Mart and The Home Depot Inc., companies awaiting FDIC approval to establish ILCs also include Warren Buffett’s Berkshire Hathaway Inc., The Blue Cross and Blue Shield Association, automakers Ford Motor Co. and DaimlerChrysler AG, and information services provider Ceridian Corp.

The ILCs are federally insured, with deposits in individual accounts guaranteed up to $100,000 if any of them failed. The FDIC insurance fund, standing at some $49.2 billion currently, is financed by premiums paid by banks.

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