Since Congress passed the Bank Holding Company, or BHC, Act in 1956, the separation of banking and commerce has been a cornerstone of U.S. financial regulation. Separating banks and commercial firms has played a key role in maintaining the stability of the U.S. financial system and protecting the economy against catastrophic
Rather than abandoning the separation of banking and commerce, as was recently suggested in a BankThink article ("
With narrowly limited exceptions, the BHC Act prevents banks from acquiring control over commercial firms and prohibits commercial firms from acquiring control over banks. In adopting the BHC Act, Congress determined that large banking-and-commercial conglomerates would create toxic conflicts of interest, prevent banks from acting as prudent and objective lenders, dangerously concentrate economic power and political influence, and cause financial and economic crises to spread across the economy, requiring massive taxpayer-funded bailouts to avoid another Great Depression.
In 1987, Congress amended the BHC Act to prohibit commercial firms from acquiring FDIC-insured banks that did not make commercial loans ("nonbank banks"). The 1987 amendments included Sen. Jake Garn's special-interest exemption for industrial loan companies, or ILCs. However, Congress did not express any intention to allow wholesale acquisitions of ILCs by commercial firms.
The 1999 amendments to the BHC Act included a provision barring commercial firms from acquiring FDIC-insured savings associations, thereby ending Walmart's attempt to acquire a thrift. While the 1999 amendments allow banks to acquire controlling interests in commercial firms through "merchant banking" investments, those investments are limited to 10 years and are subject to special capital requirements and other significant restrictions.
In 2005, Walmart applied to acquire an FDIC-insured ILC. This provoked a firestorm of opposition, and Walmart withdrew its application following an FDIC moratorium on such acquisitions, which Congress extended in 2010. During a hearing on the Walmart application, Sen. Garn said that it was never his intention to allow large retail companies to acquire ILCs. The FDIC has not allowed a large commercial firm to acquire an ILC for more than two decades, and only a small group of ILCs are controlled by commercial firms today.
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U.S. ILCs have already demonstrated the unacceptable risks that would be imposed on our financial system and economy if we abandoned the policy of separating banking and commerce. For example, the federal government provided a $139 billion bailout to GE Capital, which also owned an ILC, because GE Capital's deep financial problems threatened the stability of its commercial parent company, General Electric.
Allowing Big Tech firms like Google, Meta, Apple and Amazon to acquire FDIC-insured banks through the ILC loophole would enable them to siphon large amounts of deposits from community banks, thereby threatening to cut off access for many local communities to much-needed small-business, agricultural and consumer loans. Moreover, Big Tech ownership of ILCs would create a new group of systemically important behemoths that the federal government would be compelled to bail out during future financial crises.
As Congress recognized in passing the BHC Act, allowing commercial firms to own banks creates destructive conflicts of interest between a captive bank's loan decisions and its parent company's desire for immediate profits. For example, when an automaker owns a captive ILC, it has strong incentives to sell more cars by causing its ILC to make risky loans to marginally creditworthy customers or to offer promotional interest rates that would not be profitable for independent banks. Thus, as the former General Motors Acceptance Corp. demonstrated, a captive bank is a riskier and less stable financial institution because it does not act as an objective and prudent lender. A captive bank also does not make loans to competitors of its parent company, or to customers of those competitors, regardless of how sound those loans might be.
If large commercial firms were allowed to own banks and gain access to the personal financial data of their customers, those firms could conduct advertising and lending campaigns designed to prey on the vulnerabilities of their customers. For example, a large Big Tech or retail firm that owned a bank could use its customers' personal financial data to identify customers with frequent overdrafts or high-interest debts and then target them with "special financing" offers that appeared affordable on the surface but were loaded with hidden fees, inflated interest rates or punitive repayment terms.
Ending the separation of banking and commerce would also create serious regulatory and supervisory problems, with commercial parent companies not being subject to consolidated supervision by the Federal Reserve. In addition, the FDIC could not successfully resolve a failed bank owned by a large commercial firm because the parent firm would be exempted from the FDIC's Orderly Liquidation Authority. The parent commercial firm would have to be placed in bankruptcy, making it virtually impossible for the FDIC to gain access to the commercial parent's assets to protect the Deposit Insurance Fund from losses caused by the subsidiary bank's failure.
In sum, ending the separation of banking and commerce would open the door to banking-and-commercial conglomerates with dangerous concentrations of power and influence, and those conglomerates would threaten financial and economic stability as well as credit access on fair terms for consumers and Main Street businesses. Maintaining the separation between banking and commerce is a crucial safeguard for our nation's financial system, economy and society. Congress should preserve and strengthen that safeguard by repealing the ILC loophole.
