California lawmakers have revamped the state's industrial loan charter in hopes of competing with Utah to encourage this kind of banking.
Taking advantage of Utah's less-restrictive laws, the automaker BMW recently set up an industrial bank in Salt Lake City that offers a range of products - including vehicle financing - to car owners.
But California Gov. Gray Davis signed a bill last month giving the state's industrial loan companies, which are now called industrial banks, many of the same powers as commercial banks, including the right to do transactions with parent companies and affiliates.
"Under the former law, if a member of the board of directors of an industrial loan company owned an automobile dealership in the community, the bank could not finance loans or purchase contracts from that dealership," said Bernard B. Nebenzahl, an attorney who lobbied for the new law on behalf of the California Association of Industrial Bankers.
Industrial banks were formed in many western states at the turn of the last century to offer credit to factory workers; they have since evolved into specialized lenders with niches in areas such as commercial real estate or automobiles.
Unlike commercial banks, industrial banks may be owned by commercial companies, such as BMW and General Electric Co. Industrial banks cannot accept demand deposits, so they are exempt from the federal Bank Holding Company Act, but they can sell certificates of deposit and NOW accounts and therefore are regulated by the Federal Deposit Insurance Corp.
Historically the state's 23 industrial banks have been prohibited from doing business with customers of their parent companies. But under the new California law, these banks may lend to such customers - a change supporters say will make the charter far more attractive.
Despite the banking industry's general reservations about mixing banking and commerce, the California Bankers Association did not oppose the legislation. In fact, Greg Wilhelm, the association's director of government relations, said it welcomed the change.
"In some ways, the new law offers opportunities" for commercial and industrial banks to merge, he said. "Now that industrial banks are almost identical to commercial banks, there is a mutual advantage to buying one or combining in some fashion."
But Craig Hudson, executive director of the California Independent Bankers, said the law could set a dangerous precedent.
"Commerce and banking need to be kept separate - it's a very fundamental safeguard to keeping safety and soundness strong," he said. "This legislation opens the door to insidious conflicts of interest."
Kenneth Sayre-Peterson, senior counsel to the California Department of Financial Institutions, the regulatory agency that sponsored the legislation, said he does not have a problem with nonfinancial institutions' owning an industrial bank.
The Bank Holding Company Act exemption allowed the nonprofit Telacu Industries in East Los Angeles to found Community Commerce Bank in 1976, Mr. Sayre-Peterson said. "The nonprofit and the bank work well together, and in my opinion, it's a great relationship."
William Lasher, president and chief executive officer of Community Commerce, agreed that the bank, which now has $250 million of assets, works well with its nonprofit parent. "We were founded in 1976 to lend in areas historically underserved by banks, so over 50% of our loans go to low- and moderate-income families," Mr. Lasher said. "A lot of our profit is upstreamed to our nonprofit company, and if we had to be under the Bank Holding Company Act, we could no longer have that relationship."
Mr. Sayre-Peterson said state regulators encouraged enactment of the legislation in the hope that it would give lenders "more flexibility to increase their business, which gives people more options to obtain credit."
Commercial banks need not fear industrial banks because commercial banks still offer a wider range of services, he said.
"The industrial bank charter can be a very attractive charter - you're still in the financial institutions area without having the overhead of a commercial bank because you don't have checking accounts," Mr. Sayre-Peterson said. "But it's still not a full-service bank. So a large commercial customer wouldn't be able to have all of their banking services provided by one institution. That's the advantage of a commercial bank."
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