The Business Checking Bill and the Wal-Mart Menace
Legislation to lift the prohibition on the payment of interest on business checking, strongly supported by the NFIB, ACB and the administration, probably will be considered on the House floor next Wednesday, the day the House is also scheduled to vote on the deposit insurance reform bill. There is concern among some community bankers that the business checking legislation will increase bank funding costs. Small business relations are core to the profitability of thousands of community banks.
But it is another issue that is generating political controversy. The business checking bill has become the vehicle for language giving banking hybrids called industrial loan companies (ILCs) business checking powers.
Wal-Mart tried to buy an ILC in California last year, and Toyota is eyeing one in Nevada today. ILCs are also found in Utah, and this hybrid charter has already been attractive to Merrill Lynch, Morgan Stanley, American Express and other so-called "free riders" who have established substantial operations in Utah. Congressional representatives from Utah and California are on point in expanding ILC powers, to the potential detriment of all other states and existing commercial banks and thrifts.
The ICBA has been on point in keeping Wal-Mart and friends from buying, first, unitary thrifts, and now, ILCs. Chairman Greenspan has warned Chairman Oxley that the Fed opposes giving ILCs business checking powers and that the Matheson (D-UT)-Royce (R-CA) amendment, which the House Financial Services Committee added to the bill, "would alter the structure of banking in the United States and be contrary to two important national policies that congress reaffirmed recently in the Gramm-Leach-Bliley Act (GLB): one prohibiting the mixing of banking and commerce, and the other establishing a federal prudential framework to assure that companies that own banks operate in a safe and sound manner."
The committee's bipartisan leadership did not agree with the Fed, and last-minute efforts by Rep. Jim Leach (R-IA), supported by the ICBA, to amend the Matheson-Royce ILC empowerment language were overwhelmingly rejected.
We have asked Chairman Oxley to revisit this issue before the bill is brought to the House floor. Other powerful interests and their supports on the committee are advising to the contrary. The ABA also has expressed concern about ILCs-other national banking associations have been absent or quietly supportive.
Lobbying the Senate Banking Committee-the next stop for any business checking bill that passes the House-is already under way. Senator Robert Bennett (R-UT), the second-ranking Republican on the committee, strongly supports enhanced ILC powers.
Below are excerpts from letters and testimony of those involved in the ILC powers issue.
From Federal Reserve Chairman Alan Greenspan's March 11, 2003, letter to Chairman Mike Oxley:
"Currently, federal law prohibits commercial firms from owning and operating insured banks and establishes a prudential framework of supervision that protects the safety and soundness of banks controlled by corporate owners and thereby protects the taxpayer. When Congress closed the nonbank bank loophole in 1987, it granted corporate owners of ILCs chartered in a limited number of states an exception from the rules that apply to all other corporate owners of banks. The exception was subject to the condition that the ILC either refrain from offering demand deposits withdrawable by check or remain below $100 million in assets. At that time, ILCs were for the most part small local institutions that did not offer checking accounts and consequently were distinguishable from full service insured banks. In recent years, the insured deposits in a number of ILCs have grown into the multiple billions of dollars and ILCs have been acquired by a number of large corporations.
"The ILC amendment would effectively remove this condition of the 1987 law. It would allow ILCs that currently cannot offer demand deposits to offer there functional equivalent: business checking accounts. As result, ILCs would become the functional equivalent of full service insured commercial banks."
From Federal Reserve Board Governor Mark Olson's testimony on March 27, 2003, before the Subcommittee on Financial Institutions of the House Financial Services Committee on a different bill than the business checking bill:
"While we support the [regulatory relief] bill's provisions expanding the de novo branching authority of banks, we continue to believe that Congress should not grant this new branching authority to industrial loan companies (ILCs) unless the owners of these institutions are subject to the same type of consolidated supervision and activities restrictions as the owners of other insured banks. "ILCs are FDIC-insured banks that operate under a special exemption from the Bank Holding Company Act (BHC Act). This exemption allows a commercial company to own an ILC without being subject to the supervisory requirements and activities limitations generally applicable to the corporate owners of other insured banks. The bill as currently drafted would allow large retail companies to establish an ILC and then open a branch of the bank in each of the company's retail stores nationwide. Allowing a commercial firm to operate a nationwide bank outside the supervisory framework established by Congress for the owners of insured banks raises significant safety and soundness concerns and creates an unlevel competitive playing field. In addition, permitting commercial firms to control a nationwide bank would undermine this nation's policy of maintaining the separation of banking and commerce-a policy recently reaffirmed by the Congress in the Gramm-Leach-Bliley Act (GLB Act)."
From the ICBA's March 26, 2003, letter to Chairman Oxley:
"The regulatory and supervisory problems of some of the largest financial firms in the United States and the world, as authorized by GLBA, and the potential conflicts of interest they present, still command public and media attention. Clearly, their size and complexity-which, as a Federal Reserve Board governor has pointed out increases systemic risk-can pose significant regulatory challenges. While this is still being worked through, including the relationship between the largest commercial banks and ENRON, we question whether an inadequately understood ILC amendment to a business checking bill should be the mechanism for fundamentally changing the economic and financial structure of the United States by opening the door for the largest commercial firms to acquire a full service bank.
"In light of such major, high profile public policy issues, and the political dynamics that are developing, we respectfully request that you re-visit the ILC issue as you consider the manager's amendment you may offer to the bill."