WASHINGTON — The long, tortured history of dividing banking and commerce may finally be coming to a close.
That at least is the hope of several observers watching as the House Financial Services Committee votes on a regulatory reform bill that would ban new commercial owners of banks and subject existing industrial loan companies to holding company restrictions.
Experts said the legislation, which was expected to be approved today, may settle a debate that stretches back more than 50 years on how far nonbanks can reach into the banking system.
"The issue has been around long enough that it is now time to have an answer. The House bill provides an appropriate answer," said Douglas Kantor, a partner at Steptoe & Johnson who has represented clients opposed to commercially owned ILCs.
At the core of the debate is the long-standing requirement that bank holding companies not engage in commercial activities. But the tussle over the scope of that restriction goes back at least to the original Bank Holding Company Act of 1956. At the time, Congress allowed parent companies with only one bank to avoid becoming bank holding companies, meaning retailers and other commercial giants could still avoid the restriction. In 1970, the loophole was tightened, with single-bank companies also needing to divest nonfinancial activities. Still, commercial firms could operate limited charters such as ILCs and credit card institutions, because those institutions were not technically banks. In 1999, Congress closed the loophole allowing commercial firms to own unitary thrift charters, but ILCs and limited credit card banks remain an option.
The issue came to a head two years ago when an ILC application by Wal-Mart Stores Inc. spurred opponents to demand legislation further tightening the loophole to keep the retailer out. Even though Wal-Mart withdrew over the controversy, the legislation failed.
A bill from House Financial Services Committee Chairman Barney Frank, which primarily addresses systemic risk, also includes provisions banning the creation of new ILCs. Many see it as the best way to finally put the issue to rest.
"The old adage of 'Never say never' is probably a good one to apply here," said Donald Ogilvie, the independent chairman of the Deloitte Center for Banking Solutions. "But it does look like this is a pretty definitive way to close the debate off."
Under the bill, commercial firms could no longer apply to own depository institutions, while nonfinancial companies that already own a bank could keep it. All current ILCs owners would face tougher oversight, and limits on the actions by their banking subsidiaries. They would have to establish special intermediate holding companies that would separate the bank from the parent's commercial enterprise and answer to Federal Reserve Board regulation.
"If the bill passed … I don't think we will be talking about ILCs" again, said Douglas Landy, a partner at Allen & Overy.
But the issue is still not clear-cut. The regulatory reform package proposed by Senate Banking Committee Chairman Chris Dodd leaves the debate unresolved by establishing a three-year moratorium for new bids by commercial parents and requiring a study to gauge if more action is needed.
Some ILC supporters also say the Frank version goes too far.
"It would be nice to get a final answer" in the debate, but "the House approach would be: 'We're going to separate banking and commerce forever, we're going to kill every bank that is not totally in accord with the separation of banking and commerce and we're going to kill every bank that has a parent that isn't regulated by the Federal Reserve,' " said George Sutton, a partner at Jones Waldo in Utah, the center of the nation's ILC industry.
Frank's panel attempted to soften the impact through amendments that would remove some of the restrictions on grandfathered institutions and allow the processing of pending ILC applications — including those of Ford Motor Co., Caterpillar Inc. and Deere & Co.
"Most of these banks have proven to be safe, sound and well managed, and meeting the credit needs of customers," said John Douglas, a partner at Davis Polk & Wardwell.