WASHINGTON — The battle over whether commercial firms, such as Walmart Stores, should be allowed to own a bank may be poised to start again soon after having been eclipsed in recent years by the financial crisis and its aftermath.
Congress delayed the issue in the Dodd-Frank Act by enacting a three-year ban that prevents purely commercial firms from owning industrial loan companies and other limited-purpose banking charters — a moratorium that is now due to expire in July.
Since the issue grabbed headlines before the crisis, the central question of whether commercial ownership of banks is a risk to the system has been turned on its head.
"Some of the biggest political targets in Washington now are in the banking industry. When this issue was in the news, the banking system looked strong and the argument was that mixing banking and commerce could put the industry at risk," said Douglas Kantor, a partner at Steptoe & Johnson. "Now the banking industry is viewed as having hurt the economy."
The Independent Community Bankers of America, which has led past fights against retailer-owned banks, says it plans to urge lawmakers to extend the freeze, while supporters of ILCs — also known as industrial banks — based in Utah say the existing institutions' success justifies keeping access open to others.
"The [ILC] industry is in lockdown right now until all of the banking issues coming out of the downturn get sorted out" but "the crisis proved that the industrial bank model is a sound business model," said George Sutton, a partner at Jones Waldo and a former Utah state banking commissioner.
The end of the moratorium could be anticlimactic. Walmart has repeated on numerous occasions that it is through trying to get a banking license. And if the issue heats up again, the crisis' aftermath will reframe the debate. Dodd-Frank implementation still dominates the discussion in Washington, while many nonbanks have shown a charter is not necessary for getting into the financial business.
Even outside the moratorium the demand for new bank charters of any kind has been nearly nonexistent.
"The expiration of the moratorium is going to cause about as much tension as the weather report, just because there's not much de novo activity generally," said V. Gerard Comizio, a partner at Paul Hastings.
Still, the moratorium's expiration may become a big issue further into the future.
Banks, which fought hard against Walmart's banking efforts, have seen their reputation plummet after the 2008 meltdown, while the retail giant has become a bigger player in providing financial options to lower-income customers. Meanwhile, numerous ILCs that helped fund investment banks no longer exist after their parents failed in the crisis.
"When you look at the parent companies that owned the majority of ILC assets, it's like murderers row," said Raj Date, founder of the advisory firm Fenway Summer LLC.
Comizio said if Congress fails to extend the freeze or prohibit the loopholes allowing commercial ownership of ILCs or other limited-purpose charters, the issue "could be more contentious when economic and regulatory conditions improve and companies start to look to get into banking again."
"It's caused controversy before and it certainly has the potential to cause controversy again," he said. "The ground is moving under our feet in financial services where a lot of nontraditional financial services companies are emerging. All parties concerned can hide their head in the sand in the short term … but the fact of the matter is not too far from now there is going to have to be a time and a place to address a lot of overlap between the retail and banking industries."
The issue over ILCs and other charters exempt from legal barriers to commercial firms owning banks has festered for more than a decade. Community bankers were vigorously opposed to Walmart receiving Federal Deposit Insurance Corp. backing, and helped to kill the retailer's ILC bids in 2002 and 2005. (The company's 1999 attempt to buy an Oklahoma thrift was thwarted by federal legislation prohibiting commercial firms from acquiring thrifts.)
The debate took a back seat to the crisis, and Walmart has steadily built a financial services menu without FDIC backing since withdrawing its last application in March 2007.
"The Walmart application was endlessly fascinating to people, especially in the media world. But right now, there is very little attention or energy focused on the issue," said Kantor, who represented a coalition of community bankers and labor unions opposed to ILC bids by commercial firms.
A spokeswoman for Walmart said in an email, "We have no plans to become a bank."
But Dodd-Frank left the parameters of ILC ownership unresolved. Despite legislative attempts to end the exemption, the moratorium and a mandated Government Accountability Office report on the topic were as far as the law went.
"I would bet dollars to donuts that when this moratorium expires, Walmart is going to show up within a very short period of time. Even in the midst of the crisis, Congress was unwilling to shut down" the loophole, said Arthur Wilmarth, a law professor at George Washington University.
Just the details of how the moratorium was structured legislatively reflect how the ILC issue has been affected by the broader banking environment. Dodd-Frank imposed the freeze on applicants with less than 15% of their assets tied to financial activities, meaning a company 84% engaged in commercial activities could still technically apply. Past proposals to end the exemption outlined a much stricter breakdown of assets. Still, the FDIC has received no ILC charter applications from anyone during moratorium.
"As a practical matter, given the financial activities particularly of retail companies, it is a non-moratorium moratorium," said Comizio. "You could drive a large truck through that definition in terms of the scope of companies that can still apply. It seems that as a practical matter no applicants have tried to drive through that and the FDIC had not been called upon to approve any applications. That's a reflection of the FDIC not really being interested in approving a lot of de novo charters while they're still putting banks into receivership and there are still a number of troubled banks out there."
A spokesman for the FDIC — while not pinpointing ILCs specifically — said the lack of interest in new banking charters has come from potential entrants in the market. But that will likely change, he added, as the recovery moves forward. Of the four pending de novo applications before the FDIC, three of them are for ILCs.
"Since the onset of the crisis, there has been considerably more interest from outside groups in buying existing community banks than in organizing new community bank charters," the spokesman said. "With the banking industry continuing its improvement, at some point in the future we expect to see a shift back to de novo applications."
Paul Merski, the ICBA's chief economist, said the association plans to engage members of Congress about the end of the moratorium, but said without legislative action, the post-crisis environment may still simply make charters unattractive to new applicants. Yet he noted that just one high-profile application could renew interest on Capitol Hill.
"We plan to pressure Congress to extend the moratorium. But the ILC charter is different now post financial meltdown," Merski said. "Congress and regulators are more sensitive to and aware of the dangers of loopholes.
"A key factor is if someone poked their head up. That would be like a call to action. … At that point we would want Congress to shut the loophole down."
The population of existing ILC charters has dwindled, going from 56 at the beginning of 2008 to 31 currently.
Many of the biggest-name financial companies had owned ILCs, which are exempt from bank holding company registration. But several Utah-based institutions were affected by the crisis just like their parents.
Morgan Stanley and Goldman Sachs converted their ILCs to commercial banks to obtain certain regulatory benefits in the crisis. Bank of America's acquisition of the collapsing Merrill Lynch included the investment bank's Utah-based ILC. Lehman Brothers' ILC was wound down as part of the parent's bankruptcy.
Sutton said the state's special-purpose banks proved they could be insulated from problems suffered by their parent firms.
"They did not contribute to the parent's problems and were not the source of any of the stress during that period," he said, adding that Lehman's unwinding in particular showed how ILCs were able to weather the crisis. "Its closure didn't cost the taxpayer anything. The outcome was exactly what one would hope for when a bank is unwound."
But Date, the former deputy director of the Consumer Financial Protection Bureau, said the fact that Wall Street firms had used ILCs to help fund operations done in by the crisis could draw further scrutiny to the charter.
"I just don't see why we would provide special treatment to a depository for a broker dealer that is highly leveraged," he said, adding that, on the other side of the coin, commercial companies like Walmart that sought access to the banking system before have since proven themselves more deserving of that access.
"Walmart has proven itself to be pretty good at understanding lower- and middle-income people in America and their needs," Date said. "In an environment where access to the financial system for middle- and lower-income customers is more scarce, … I feel that Walmart's relative success in this market should be reflected in the arguments around this issue."