ILC Debate Continues Despite Absence of Wal-Mart bid

WASHINGTON - Even without the giant shadow of the application by Wal-Mart Stores for a bank charter, the effort by Congress to bar backdoor entry into banking by commercial entities moved ahead last month.

Members of the House Financial Services Committee, Democrat and Republican, alike, and federal banking regulators, including the Federal Reserve, agreed that the United States is not yet ready to mix commerce and banking, as is widely done in Europe. And the Financial Services Committee appeared poised to pass a bill that would require any owner of an industrial loan company charter, a so-called back-door bank, conduct the vast majority of its business in financial services.

Momentum on the bill continues to build even after Wal-Mart withdrew its application for an ILC charter six weeks ago, on the heels of a massive campaign launched by community banks and consumer groups. The momentum continues because other non-financial entities, including Home Depot and ChryslerDaimler have ILC applications pending that require approval by the FDIC.

Barney Frank, the Massachusetts Democrat who chairs the Financial Services Committee, said a bill he co-sponsored would continue to allow six states that charter ILCs to continue to do so as long as the companies conduct at least 85% of their business in financial services.

Commercial entities that have already obtained ILC charters are: Target Stores, CMS Energy, Pitney Bowes, General Motors, Ford, Toyota, BMW and Flying J, a provider of services for the trucking industry.

Among the concerns aired at the hearing were that commercially owned ILCs are not subject to the same rigorous consolidated regulatory review as financially owned ILCs, providing potential risk to the FDIC's federal insurance deposit fund. Some lawmakers suggested the less rigorous regulatory framework would give those commercially owned ILCs an advantage over other financial service providers. Other lawmakers wondered whether a commercially owned ILC could tie its business contracts to its financial service, requiring its commercial customers to do their banking with it.

Opposition to the bill was expressed by Democratic Congressman Jim Matheson, and by Edward Leary, Department of Financial Institutions Commissioner, both from Utah, where about two-thirds of the ILCs are chartered, and from Republican Ed Royce of California, which claims most of the other ILCs. "The bill put forward today," said Royce. "does nothing more than shield the financial interests of the banks."