House Passes Bill Blocking Giant Retailers’ Entry into Banking

May 22, 2007

The U.S. House of Representatives has overwhelmingly passed a measure closing a loophole and blocking giant retailers like Wal-Mart and The Home Dept from owning industrial loan corporations, or ILCs.

For ILCs already owned by commercial firms, the bill would restrict expanded business plans and branching across state lines.

The House passed H.R. 698, the Industrial Bank Holding Company Act of 2007, by a vote of 371 to 16. This legislation was co-sponsored by Congressmen Paul Gillmor,R, Ohio, the ranking member of the Financial Institutions Subcommittee, and House Financial Services Committee Chairman Barney Frank, D, Mass., along with Congressman Jim Marshall, D-Ga., who say it will restore the historic separation between banking and commerce, prevent branch banking by some commercially-owned ILCs, and bolster the supervisory authorities of the FDIC as a holding company regulator.

“This bill has been trumpeted by both Republicans and Democrats alike because we all recognize the need to maintain the historic separation between banking and commerce. As our legislation continues through the legislative process, I will continue to advocate for the strongest possible restrictions on the ILC charter going forward. I look forward to getting a bill to the President before the end of the FDIC-imposed moratorium,” said Gillmor.

“This bill will preserve the distinction between banking and commerce that is necessary to protect the integrity of our banking system,” said Rep. Barney Frank, Chairman of the House Committee on Financial Services. “I hope to work with the Senate to forge a compromise bill that the President can sign.”

The bill is an outgrowth of a Gillmor/Frank compromise measure which passed the House in both the 108th and 109th Congresses. This legislation was the subject of a hearing on April 25, 2007 and was passed by the Financial Services Committee on May 2, 2007.

“H.R. 698 is a good bill. Commercial businesses should not be in banking, just like banks should not be in commercial businesses. But I hope the bill will be fine-tuned in conference to protect reasonable investment decisions made recently by those who had no reason to expect their ILC application might be blocked,” said Rep. Jim Marshall.

Additionally, H.R. 698 contains provisions that generally provide the FDIC with the regulatory tools to effectively supervise industrial bank holding companies.

The measure would prohibit new commercially-owned ILCs effective January 29, 2007. This provision would prohibit Wal-Mart, Home Depot and several other commercial firms from chartering or acquiring an industrial bank.

It also seeks to address the concerns of the Government Accountability Office (GAO), which in September of 2005 advised Congress to consider bolstering the authorities of the FDIC at the consolidated holding company level.

The House vote met with praise from the American Banking Association, which opposes commercially-owned ILCs.

“We now urge the Senate to take action before the wall between banking and commerce is eroded any further,” said Edward L. Yingling, ABA president and CEO. “If the Congress doesn’t act quickly, several ILC applications pending before the FDIC could be approved when the moratorium expires in early 2008.”

In March, Wal-Mart Financial Services withdrew its controversial application seeking to start its own bank.

The retailer is one among 14 companies including The Home Depot with applications before the Federal Deposit Insurance Corp. to establish what are called industrial loan corporations, or ILCs. In January, the FDIC delayed a decision on the pending applications.

Various banks, unions and consumer organizations have opposed letting giant retailers into the loan business out of concern they would drive out local financial institutions.

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. They cannot 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 include Berkshire Hathaway Inc., The Blue Cross and Blue Shield Association, automakers Ford Motor Co. and DaimlerChrysler AG, and information services provider Ceridian Corp.

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