ICBA Banker Defends Separation of Banking and Commerce
ICBA leadership banker Terry Jorde, providing a community banker's view, defended the long-standing U.S. policy of separating banking and commerce at an FDIC symposium entitled "The Future of Banking: The Structure and Role of Commercial Affiliations." Jorde, president and CEO of CountryBank USA in Cando, ND, and a member of the FDIC's Advisory Committee on Banking Policy, joined executives from Merrill Lynch and American Express (two companies that own Utah industrial loan companies) on a panel to discuss the impact of combining financial services firms and other commercial entities.
Jorde used the example of a world in which Wal-Mart is permitted to own a bank to illustrate the public policy reasons supporting the separation of banking and commerce-ensuring credit decisions are based on merit and creditworthiness, not competitive concerns; avoiding financial and economic monopolies, and preventing extension of the federal safety net and taxpayer liabilities. Would a Wal-Mart bank make a competing small business retailer a loan even if the retailer were credit worthy? Would Wal-Mart demand that its suppliers use the services of its affiliated bank? Would small businesses or consumers that don't fit the mold for a credit-scored loan be able to obtain financing? What if Enron or WorldCom had owned a large bank? Even if the bank were run safely and soundly, what would have happened to that bank upon news of its parent's spectacular demise?
On the issue of ILCs, Jorde noted that pending legislation would effectively nullify the conditions under which ILCs were granted an exemption from the Bank Holding Company Act. Interest on business checking legislation would give ILCs full commercial banking powers. The de novo interstate branching provision of the regulatory relief bill would allow large corporations to use the ILC charter to operate nationwide, by setting up branches in each of their locations, and not be subject to the same laws and regulations as owners of FDIC-insured banks.
ILCs say it is unfair to deny them expanded powers when they are only asking for parity with other banking institutions. "If parity is appropriate, then why not parity of holding company supervision and holding company activities restrictions?" Jorde asked. "If it is appropriate to restrict ownership of banks to financial companies and subject bank holding companies to certain rules and oversight, then it is appropriate to do so for an ILC that is the functional equivalent of a commercial bank."
Jorde said the issue is not whether the FDIC is capable of supervising and examining ILCs-it is. "The question is whether the FDIC, or the Federal Reserve, or any regulatory agency for that matter, has the ability to prevent a meltdown from occurring if the parent company implodes," she said.
"The separation of banking and commerce has served our nation and its economy very well," Jorde concluded. "Allowing commercial and bank affiliations would only serve to undermine our cultural heritage and the financial and economic diversity essential to our nation's well being."