CONGRESS Proposal would allow retailers to form banks

Letting Wal-Mart offer loans would kill many banks, some say.
CHICAGO TRIBUNE
You can already buy groceries, school supplies and lawn mowers at mega-department stores -- not to mention that puppy the kids have been begging for. Now Congress is considering allowing retail behemoths to handle your checking and savings accounts, too.
The change could create The First National Bank of Wal-Mart. How about Sears Bank & amp; Trust? Or Volkswagen Commerce Bank?
Banks inside supermarkets and some department stores have become commonplace. But those are existing banks partnering with stores. A bill before Congress would make it possible for retailers and others to own their own bank with branches all over the country.
The proposed changes in federal banking laws would blur the lines between commercial enterprises and financial institutions by allowing companies to buy entities known as industrial loan companies (ILCs) and branch them out to other states.
ILCs are niche financial institutions that don't exist in some places, but are found in a handful of states such as California, Utah and Nevada. Current federal law doesn't allow ILCs to move beyond state lines, but the proposed law would lift restrictions on such moves and eliminate states' abilities to restrict out-of-state banks from setting up shop.
Greatest fear
Any business could buy an ILC, but it is Wal-Mart -- the world's largest company with $244 billion in sales --that many bankers cite as their greatest fear. Wal-Mart is the Incredible Hulk of commerce, and small banks say it's a juggernaut that could level competitors.
"Wal-Mart would have the potential to bring, if not the Black Death, at least the plague to thousands of community banks," said Kenneth Guenther, president and CEO of the Washington, D.C.-based Independent Community Bankers of America.
More than bankers are worried about some of the changes Congress is considering. A bill that has passed the House and is now before a Senate committee would allow financial institutions to pay interest on business checking accounts, something they cannot currently do. Giving ILCs that power is a mistake, according to Federal Reserve Chairman Alan Greenspan.
The "amendment would alter the structure of banking in the United States," he warned in a letter to the chairman of the House Financial Services Committee. Doing so for ILCs would run counter to laws "prohibiting the mixing of banking and commerce," he said.
FDIC chief's stance
Federal Deposit Insurance Corp. Chairman Donald Powell does not agree that ILCs are a threat to other financial institutions. In a May speech to banking supervisors, he said, "While I understand the anxiety some people have on this issue, fear of competition should not be the compelling argument in formulating good public policy."
Because ILCs are creations of state governments, what they are allowed to do varies from state to state. In general, they were created with limited lending abilities to serve areas traditional banks had neglected. While they are not supervised by the Federal Reserve, there are 51 ILCs that carry FDIC insurance, giving them government backing for up to $100,000 per account and making them subject to FDIC examinations. They are also subject to regulation by their chartering state.