Retail Banking Loophole Remains Open

Fed urges Congress to close banking loophole [MarketWatch]

Congress should close a loophole that has allowed commercial firms and foreign banks to own specialized banks known as industrial loan companies, the Federal Reserve’s chief lawyer said Thursday.

In prepared testimony, Scott Alvarez told the Senate Banking Committee that such banks operate outside of the rules governing commercial banks and that that is a concern.

“Corporate owners of ILCs operate outside the prudential framework and statutory activity provisions that apply to all other corporate owners of full-service insured commercial banks,” Alvarez told senators.

Giant retailer Wal-Mart was seeking such a bank but dropped its bid after critics heavily opposed it.

A moratorium on new applications to the Federal Deposit Insurance Corp. expires in January.

An FDIC official told lawmakers that the types and number of ILC applications have evolved in recent years.

“These changes raise potential risks that deserve further study and important public policy issues that are most appropriately addressed by Congress,” said John Bovenzi, the regulator’s chief operating officer.

The banking industry also fought to keep Wal-Mart from entering the banking business, even though the retailer said it was seeking an ILC only to process credit-card and other payments.

On Thursday, the American Bankers Association urged senators to shut companies like Wal-Mart out of the industrial-bank space for good.

“Congress should act, as it has many times before, to ensure that the potential dangers associated with mixing banking and commerce don’t become a reality,” said Edward Yingling, the group’s president. “Banking is a critical component of our economy and is carefully regulated for safety, soundness and systemic risk,” he said.

Posted by Alex Goldschmidt on Friday, October 05, 2007

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