Fed Chair Opposes Bank of Wal-Mart

U.S. Federal Reserve Chair Ben Bernanke testified yesterday before the House Financial Services Committee, where he endorsed legislation that would block Wal-Mart’s banking application.

REP. JAMES LEACH (R-IA): Mr. Chairman, as you know, there’s an odd financial entity on the financial landscape called industrial loan companies which have powers of banks in many different ways because they allow the merging of commerce and banking. A number of well-known companies have established ILCs or are seeking to establish them. And then because of their regulator arbitrage advantages, a number of financial companies have also established ILCs.

In his last communication to the Congress, the former chairman of the Fed, Mr. Greenspan, endorsed a bill called H.R.3832 that would subject industrial loan companies to the same laws and principles that apply to financial holding companies.

In this hearing as your first appearance before the Congress, I’m wondering if you would care to present your views on the industrial loan company issue?

MR. BERNANKE: Yes, Congressman. If I understand your bill correctly—and you should correct me if I’m mistaken—the bill would require any firm acquiring an industrial loan company to take financial holding company status, which in turn would restrict—create restriction on its activities, require consolidated supervision and, indeed, would also require that the firm hold its subsidiaries to a somewhat higher standard than might otherwise be the case. That’s my understanding --

REP. LEACH: That’s correct. It simply puts ILCs under the Bank Holding Company Act, which has that effect.

MR. BERNANKE: Congressman, as you know, the Federal Reserve’s had concerns about industrial loan companies and the level playing field and the separation of banking and commerce. In my view, the bill that you’re describing would solve the problem and would relieve our anxieties considerably about this particular type of organization.

REP. LEACH: Thank you, sir.

Click here to read more from Reuters.

Click here to read more from the Wall Street Journal.

Posted by Nu Wexler on Thursday, February 16, 2006

COMMENTS

WalMart watch has confused me with the above topic, maybe someone can clear things up for me. After reading the proposed legislation and also the application filed by WalMart I do not understand what would stop WalMart from obtaining an ILC. The proposed legislation simply restricts the power of an ILC. It is also stated that Greenspan endorsed legislation, correct me if I am wrong but I do not think there is any current bills addressing the current ILC issues. I have read proposals for legislation but I do not know of anything formal being drafted. I must also add that I agree with the proposal.

strident in MO
Friday, February 17 at 12:40 AM

I didn’t know what an ILC was until I heard Bernanke speak and looked into it.

Here is some info. The separation of commerce and
banking was done to keep another 1929 depression type
banking crisis to occur again. We are now going full
circle to allow it to happen again.

An ILC is an unusual state-chartered financial
institution--eligible for federal deposit insurance,
but not defined as a bank for purposes of the Bank
Holding Company Act, the federal law that prohibits
affiliations between banks and enterprises that are
not engaged solely in financial activities. Wal-Mart,
as a retailer, would not be permitted to acquire a
bank under the act, but argues that there is no bar to
its acquiring an ILC.

Here are the reasons not to let this happen.

1. A bank with a commercial affiliate will lend
preferentially to its affiliate--either at a
concessional interest rate or on terms that would not
be offered at arms’ length--whether willingly or under
duress from its commercial parent.

2. A bank with a commercial affiliate will not lend
to competitors of its commercial affiliate, thus
distorting competition.

3. If a bank’s commercial affiliate encounters
financial difficulty, the bank’s resources will be
marshaled to bail it out, using insured deposits for
this purpose and jeopardizing the health of the
deposit insurance funds and its own safety and
soundness.

The number 3 reason is the plan for corporations to
place all business risk in the hands of the taxpayers.
Nifty idea! Isn’t it! It’s just another version of
the older Bush’s Savings & Loan bailout by taxpayers
in the late 1980’s.

learning more every day in Wa. in Seattle, Wa.
Friday, February 17 at 03:21 AM

Very interesting and informative post learning more. Thank you.

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