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Banker Update: Industrial Loan Company Branching Threat

APRIL 4, 2003


Banker Update: Industrial Loan Company Branching Threat

The House Financial Services Committee next week will mark up a regulatory relief bill that could enable Wal-Mart and other commercial companies to establish banking operations and set up branches nationwide in each of their stores/locations.

At issue is a provision in H.R. 1375, the Financial Services Regulatory Relief Act of 2003, which would allow banks to expand into other states by branching de novo-that is, establishing a brand new branch, instead of expanding by acquiring existing banks or branches in another state.

How would Wal-Mart and friends accomplish this? By establishing or acquiring an industrial loan company (ILC)-a hybrid FDIC-insured banking charter available in a handful of states (also called an industrial bank)-and then using the new authority under the de novo branching provisions of the regulatory relief bill to branch nationwide. (See page 2 for more on ILCs/industrial banks and their ownership by commercial companies.)

The Federal Reserve has warned Congress about this. In testimony last week, Federal Reserve Gov. Mark Olson said, "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 owner of these institutions are subject to the same type of consolidated supervision and activities restrictions as the 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. … [P]ermitting 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."

A little history on branching authority: The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 expanded interstate banking and branching powers, but allowed each state to determine whether to allow out-of-state banks to branch into the state on a de novo basis. States were also permitted to require that an out-of-state bank could branch into the state only by acquiring a bank that had been in existence for a period of time, typically three to five years. This type of state provision prohibits de novo branching and presumably enhances the franchise value of the existing acquired bank. Presently, 17 states allow de novo interstate branching and 34 do not. Most states that allow it do so on a reciprocal basis.

The regulatory relief bill would remove authority from the states to determine whether to allow de novo interstate branching, and grant all banks de novo interstate branching authority. ICBA has opposed this provision in past regulatory relief bills, as it undermines the careful compromises regarding state authority that were crafted in the Riegle-Neal legislation. Historically, in establishing bank structure laws, Congress has generally chosen to establish a basic framework of rules, while allowing states to adopt additional rules and higher standards, particularly with regard to bank competition and operation. States should be free to continue to make decisions regarding de novo interstate branching because they know best what the banking structure in their state should be.

This is even more critical in light of the threat posed by the ILC charter.

Please contact your representative, especially if he/she serves on the Financial Services Committee, to express your concerns about the de novo interstate branching provisions of the regulatory relief bill. In particular, emphasize that this provision should not be permitted to allow commercial companies or retailers like Wal-Mart to establish nationwide banking operations through an ILC or industrial bank charter. The U.S. Capitol switchboard number is 202-225-3121. Ask for your representative by name.