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Let me address two fundamental questions
before the FDIC. One is whether the current regulatory treatment
of industrial loan banks (ILB) is good policy or whether it is
a bad loophole in what is otherwise good, prudential regulation.
The other is whether extending an ILB charter to Wal-Mart amounts
to a significant expansion of that policy.
If we get past the awkward
name--industrial loan company--and focus on the role these institutions
play in our economy, then we see that they are in all but name
a bank. (In my report submitted to the agency I suggest we refer
to them as industrial loan banks--they have nearly all authorities
granted to banks and Utah state law allows them to use the name
'bank' in their business title.) These banks are currently the
only way that a commercial or industrial corporation can own
and operate a bank. It is thus the only ongoing exception or
loophole to an important pillar of prudential banking regulation
in the United States--the separation of ownership and control
of banking from commercial and industrial enterprises. Congress
reaffirmed that separation in the Financial Modernization Act
of 1999.
The separation of ownership
has been a pillar of financial stability in this country and
a disaster when the principal was violated during the 1920s and
early 1930s. In contrast to the United States, Japan still has
not learned that lesson and its economy lost a decade of growth
and suffered subpar rates of investment
The rationale for the separation
of banking and commerce is based on solid economic reasoning,
and it has produced a safe, sound and efficient financial system
in the United States since the Glass-Steagall Act of 1933.
There are several economic
dangers from mixing ownership and control. One is for the bank
to become too exposed through loans to its parent holding company,
affiliates, management as well as its clients, vendors and customers.
Although federal banking laws set limits on such loans and financial
transactions, the lack of consolidated holding company supervision
raises fears of ineffective enforcement. Through this linkage,
trouble in the commercial business would harm the bank and hamper
the ability of the bank to lend. We have already seen troubled
firms failing to adequately maintain their pension funds. Similarly
troubled firms might short change their banking subsidiaries.
While Wal-Mart appears bulletproof today, much like GM appeared
bulletproof not so many years ago, the future is uncertain and
the best protection against that uncertainty is consistent application
of prudential regulatory standards.
Taken on a macroeconomic level,
this linkage would mean that an economic recession would harm
banks' ability to lend, thereby hampering their ability to finance
any expansion in activity that would be required to spur the
economy into recovery and prosperity.
Another danger is that the
parent company or its affiliates could drain the bank of its
capital or steer the bank towards reckless lending in the promotion
of the parent's own interests. The second largest failure of
an industrial loan bank--the Pacific Thrift and Loan--was caused
by just such mismanagement by the parent company. These conflicts
of interest should always be avoided, but they pose the greatest
danger when they arise at banks and other financial institutions
that serve as the core of our economy's payments and clearing
system--and an industrial loan bank charter provides direct access
to the Fedwire, the Fed's payments systems and the automated
clearing house.
What is more, the safety and
soundness problems posed by cross-ownership and control of banking
and commercial firms are all the greater in this case because
the Competitive Equality in Banking Act of 1987 exempts industrial
loan banks from consolidated supervision and regulation under
the Banking Holding Company Act. Cross-ownership would not only
expose our economy to various economic dangers, it would do so
without the prudential regulatory framework that applies to other
banks--namely consolidated supervision and regulation of the
whole enterprise. In today's world of large and complex corporations,
the only hope of prudential regulation is with consolidated regulation
and supervision. Disregarding this wisdom is a reckless policy
at a time when the nation's need to attract ever increasing amounts
of foreign capital depends crucially on the perceived safety
and soundness of our financial system.
The loophole in prudential
bank supervision and regulation created by industrial loan banks
is a bad policy for the U.S. economy. It threatens the safety
and soundness of our financial system and further undermines
its economic efficiency by creating an uneven playing field of
competition.
Expanding the scale of this
policy by allowing the creation of a Wal-Mart bank with government
insured deposits is a giant step in the wrong direction. Just
because policy mistakes have been previously made in granting
such charters and deposit insurance to GM and Toyota, it does
not justify making an even bigger policy mistake by expanding
the scale of the loophole--a regulatory loophole the size of
a Wal-Mart.
In conclusion, let me state
first what it is not
* It is not about lowering
the cost of banking services. Wal-Mart does not even claim to
be trying to lower ATM fees and the price of other consumer banking
services. They say they want to raise funds cheaply and have
direct access to the nation's Fed wire and automated clearing
house. Besides, the US banking sector already includes nearly
9,000 banks and another 9,000 credit unions--why should one more
bank change the competitiveness of the market.
* If lowering consumer costs
were the goal, Wal-Mart could contract with existing financial
institution to provide these services to its customers at lower
costs--after all Wal-Mart is famous for driving down the prices
paid to its suppliers and vendors.
* It is not about fairness
to Wal-Mart. It is about unfairness to competing financial institutions
that are--and should be--subject to holding company oversight.
* The issue is not about Wal-Mart
per se. Their controversial public image just brings
these issues to the fore. The agency's decision need not be
viewed as arbitrarily or capriciously reflecting any such prejudice.
What it does mean, and what
it is about, is whether the safety, soundness and efficiency
of the U.S. financial system is best preserved by granting deposit
insurance for a bank chartered by a commercial or industrial
holding company that would lack the normal prudential oversight
of consolidated regulation.
Industrial loan banks are an
unproductive and unnecessary loophole in the country's regulatory
framework of financial institutions. As such, there is no economic
rationale for expanding the loophole, and a larger expansion
would be a worse policy than a smaller expansion. A firm the
size of Wal-Mart would certainly amount to a large expansion.
And this is all the more important given Congressional consideration
of new laws that would expand the authority of industrial loan
banks to offer additional types of checking accounts and to expand
interstate by opening new or "de novo" branches--effectively
expanding the scope of the loophole. Extending another charter,
especially to such a major commercial behemoth as Wal-Mart, would
expand the scale of the loophole and amount to a taking major
step in the wrong direction.
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