Since I arrived at the Independent Community Bankers of America in 2003, the conversation about the mixing of banking and commerce has heated up, come to a head, disappeared and then resurfaced. It is a persistent issue that keeps those in the banking and business community debating, repeatedly. First it was Walmart’s quest for banking powers through the industrial loan company charter. Now it’s fintech.
The issue is back in the forefront with Social Finance’s application for deposit insurance to charter SoFi Bank, as well as acting Comptroller of the Currency Keith Noreika’s suggestion that the government should re-examine the historic separation of banking and commerce in federal law and regulation.
Commentators who say we should do away with that historic separation should be aware that the community banking industry will once again fight tooth and nail against such a move. We fiercely and successfully opposed Walmart’s 2006 bid. More than a decade later, the core principle remains the same.
Allowing nonbank corporate conglomerates to own banks not only violates the U.S. policy of maintaining the separation of banking and commerce. It also jeopardizes the impartial allocation of credit, creates egregious conflicts of interest, and results in a dangerous concentration of commercial and economic power. It also extends the federal safety net to commercial interests, which is counter to the principles upon which the Federal Deposit Insurance Corp. was created.
The Independent Community Bankers of America’s main objection to the SoFi application for federal deposit insurance is that the ILC charter would allow the fintech company to avoid the legal prohibitions and restrictions under the Bank Holding Company Act (BHCA).
The BHCA contains a comprehensive framework for the supervision of bank holding companies and their nonbank subsidiaries. Regulation under the BHCA entails consolidated supervision of the holding company by the Federal Reserve and restricts the activities of the holding company and its affiliates to those that are closely related to banking, such as extending credit and servicing loans, or performing appraisals of real estate and personal property.
Because of a loophole in the law, companies that own ILCs are not subject to BHCA supervision. As a result, a company that owns an FDIC-insured ILC can engage in non-banking commercial activities and not be subject to consolidated supervision.
Over the years, both Federal Reserve and Treasury Department officials have expressed concerns about the lack of BHC consolidated supervision for ILCs and their parents. Under the previous administration, a 2012 Government Accountability Office report about institutions exempt from the BHCA, like ILCs, said Fed and Treasury officials “contend that the exemptions represent gaps in the current regulatory structure that pose risks to the financial system.” According to the report, those officials said “the lack of consolidated supervision of institutions that are federally insured” was “a supervisory ‘blind spot.’”
The report also cited comments from Fed officials that if Congress did not close the ILC loophole, “the number and size of ILCs could grow to much higher levels then they had reached prior to the financial crisis.”
“Furthermore, Federal Reserve officials noted that maintaining these exemptions resulted in differing regulatory oversight, raising questions about whether the exemptions provide an unfair competitive advantage,” the report said.
The dangers of mixing commerce and banking were also noted in the Obama Treasury’s 2009 report on regulatory reform proposals that preceded the extended debate over the Dodd-Frank Act.
The precedent supporting a wall between banking and commerce was also set by legislation, most recently by the ILC moratorium (which expired in 2013) that was imposed by Dodd-Frank. Let’s also not forget that in 1999 Congress debated the issue of mixing banking and commerce as it considered the Gramm-Leach-Bliley Act. Congress decided not to expand the safety net for commercial firms any further. Lawmakers heeded the lessons of the 1980s and the banking collapse of the early 1930s, recognizing that the system of deposit insurance was created for the protection of depositors of regulated banks and not for the protection of commercial firms.
As this hotly debated issue is revived once more as a result of industry innovation, the benefits of mixing banking and commerce continue to be a grand illusion.
Mixing banking and commerce wasn’t a good idea in 1929, 1999, 2006 and 2009, and it’s still not a good idea in 2017. Sometimes, the more things change, the more they stay the same.
This op-ed first ran in American Banker on August 17, 2017