ICBA - Education - More on Banking and Commerce - ILC Issues

More on Banking and Commerce - ILC Issues

JULY 18, 2003


Banker Update: More on Banking and Commerce-ILC Issues

The hard call was whether to lead this story with the very strong differences of opinion that emerged Wednesday during an excellent FDIC conference on banking on commerce, or the Hill discussions of the issue during Chairman Greenspan's monetary policy testimony before, first, the House Financial Services Committee and then the Senate Banking Committee. Tough call.

FDIC Chairman Powell and his staff organized a good show. There are differences of opinion on banking and commerce-in plain speak, whether Wal-Mart or other commercial companies should be permitted to buy an industrial loan company (ILC).

Coming out of the FDIC conference there was a better understanding that potential sup and reg shortfalls over ILCs lie in the supervision of the parent, rather than in the sup and reg of the ILC itself. Merrill Lynch, Sears, Morgan Stanley, GMAC and some ten commercial firms, among others, are presently proud and lesser-regulated parents of the hybrid ILCs. There is also better understanding that under current law, the comprehensive oversight of a bank holding company or financial services holding company that owns an ILC, such as Citigroup, is more comprehensive than that of a non-bank holding company that owns an ILC, such as Sears and Merrill Lynch (and prospectively, Wal-Mart).

And this leads to the fundamental conflict between FDIC Chairman Powell, who says there is no safety and soundness problem, and Fed Chairman Greenspan, who indicates there is a potential safety and soundness problem. Chairman Powell gave the last word to former FDIC chairman Bill Seidman, who urged that the FDIC be accorded additional powers-similar to what the Fed has-to supervise the ILC parent. How much do you want to bet that the ILC lobby would fight any such legislation? They flourish under the current lighter regulatory hand.

Greenspan's Response to Chairmen Shelby and Leach. The conference proceeded against the backdrop of the semi-annual congressional hearings where Chairman Greenspan discusses monetary policy. Specific questions were asked about the legislation aimed at increasing ILC powers, which Chairman Greenspan opposes. In his testimony, Greenspan stated that we are still adjusting to the major changes wrought by Gramm-Leach-Bliley (GLB) in 1999 (which opened the door to the common ownership of the largest banks, investment banks and securities firms, as epitomized by Citigroup).

Greenspan further noted that "we have opened up our financial system very aggressively and we need time to begin to evaluate how significant those changes are in the world economy and our own, and what type of regulatory structure is required." He added that GLB "indicated that commerce and banking was still to be separated." He concluded that the pro-ILC language on the table gets into this "very much broader question which is the issue of banking and commerce."

Reps. Gillmor (R-OH) and Frank (D-MA) of the House Financial Services Committee are trying to construct an amendment to the reg relief bill to limit ILC de novo interstate branching, so that a large commercial company like Wal-Mart can't use an ILC charter to establish nationwide banking operations. The ICBA welcomes this effort while having some concerns with the specific language of the amendment. We are continuing to work with these legislators and their staffs.