FacebookTwitterGoogle+RedditEmail

How a Wal-Mart Bank Will Harm Consumers

Let me address two fundamental questions before the FDIC. One is whether the current regulatory treatment of industrial loan banks (ILB) is good policy or whether it is a bad loophole in what is otherwise good, prudential regulation. The other is whether extending an ILB charter to Wal-Mart amounts to a significant expansion of that policy.

If we get past the awkward name–industrial loan company–and focus on the role these institutions play in our economy, then we see that they are in all but name a bank. (In my report submitted to the agency I suggest we refer to them as industrial loan banks–they have nearly all authorities granted to banks and Utah state law allows them to use the name ‘bank’ in their business title.) These banks are currently the only way that a commercial or industrial corporation can own and operate a bank. It is thus the only ongoing exception or loophole to an important pillar of prudential banking regulation in the United States–the separation of ownership and control of banking from commercial and industrial enterprises. Congress reaffirmed that separation in the Financial Modernization Act of 1999.

The separation of ownership has been a pillar of financial stability in this country and a disaster when the principal was violated during the 1920s and early 1930s. In contrast to the United States, Japan still has not learned that lesson and its economy lost a decade of growth and suffered subpar rates of investment

The rationale for the separation of banking and commerce is based on solid economic reasoning, and it has produced a safe, sound and efficient financial system in the United States since the Glass-Steagall Act of 1933.

There are several economic dangers from mixing ownership and control. One is for the bank to become too exposed through loans to its parent holding company, affiliates, management as well as its clients, vendors and customers. Although federal banking laws set limits on such loans and financial transactions, the lack of consolidated holding company supervision raises fears of ineffective enforcement. Through this linkage, trouble in the commercial business would harm the bank and hamper the ability of the bank to lend. We have already seen troubled firms failing to adequately maintain their pension funds. Similarly troubled firms might short change their banking subsidiaries. While Wal-Mart appears bulletproof today, much like GM appeared bulletproof not so many years ago, the future is uncertain and the best protection against that uncertainty is consistent application of prudential regulatory standards.

Taken on a macroeconomic level, this linkage would mean that an economic recession would harm banks’ ability to lend, thereby hampering their ability to finance any expansion in activity that would be required to spur the economy into recovery and prosperity.

Another danger is that the parent company or its affiliates could drain the bank of its capital or steer the bank towards reckless lending in the promotion of the parent’s own interests. The second largest failure of an industrial loan bank–the Pacific Thrift and Loan–was caused by just such mismanagement by the parent company. These conflicts of interest should always be avoided, but they pose the greatest danger when they arise at banks and other financial institutions that serve as the core of our economy’s payments and clearing system–and an industrial loan bank charter provides direct access to the Fedwire, the Fed’s payments systems and the automated clearing house.

What is more, the safety and soundness problems posed by cross-ownership and control of banking and commercial firms are all the greater in this case because the Competitive Equality in Banking Act of 1987 exempts industrial loan banks from consolidated supervision and regulation under the Banking Holding Company Act. Cross-ownership would not only expose our economy to various economic dangers, it would do so without the prudential regulatory framework that applies to other banks–namely consolidated supervision and regulation of the whole enterprise. In today’s world of large and complex corporations, the only hope of prudential regulation is with consolidated regulation and supervision. Disregarding this wisdom is a reckless policy at a time when the nation’s need to attract ever increasing amounts of foreign capital depends crucially on the perceived safety and soundness of our financial system.

The loophole in prudential bank supervision and regulation created by industrial loan banks is a bad policy for the U.S. economy. It threatens the safety and soundness of our financial system and further undermines its economic efficiency by creating an uneven playing field of competition.

Expanding the scale of this policy by allowing the creation of a Wal-Mart bank with government insured deposits is a giant step in the wrong direction. Just because policy mistakes have been previously made in granting such charters and deposit insurance to GM and Toyota, it does not justify making an even bigger policy mistake by expanding the scale of the loophole–a regulatory loophole the size of a Wal-Mart.

In conclusion, let me state first what it is not

* It is not about lowering the cost of banking services. Wal-Mart does not even claim to be trying to lower ATM fees and the price of other consumer banking services. They say they want to raise funds cheaply and have direct access to the nation’s Fed wire and automated clearing house. Besides, the US banking sector already includes nearly 9,000 banks and another 9,000 credit unions–why should one more bank change the competitiveness of the market.

* If lowering consumer costs were the goal, Wal-Mart could contract with existing financial institution to provide these services to its customers at lower costs–after all Wal-Mart is famous for driving down the prices paid to its suppliers and vendors.

* It is not about fairness to Wal-Mart. It is about unfairness to competing financial institutions that are–and should be–subject to holding company oversight.

* The issue is not about Wal-Mart per se. Their controversial public image just brings these issues to the fore. The agency’s decision need not be viewed as arbitrarily or capriciously reflecting any such prejudice.

What it does mean, and what it is about, is whether the safety, soundness and efficiency of the U.S. financial system is best preserved by granting deposit insurance for a bank chartered by a commercial or industrial holding company that would lack the normal prudential oversight of consolidated regulation.

Industrial loan banks are an unproductive and unnecessary loophole in the country’s regulatory framework of financial institutions. As such, there is no economic rationale for expanding the loophole, and a larger expansion would be a worse policy than a smaller expansion. A firm the size of Wal-Mart would certainly amount to a large expansion. And this is all the more important given Congressional consideration of new laws that would expand the authority of industrial loan banks to offer additional types of checking accounts and to expand interstate by opening new or “de novo” branches–effectively expanding the scope of the loophole. Extending another charter, especially to such a major commercial behemoth as Wal-Mart, would expand the scale of the loophole and amount to a taking major step in the wrong direction.

RANDALL DODD is the director of the Financial Policy Forum  in Washington, D.C.

[This article is adapted from testimony given to the Federal Deposit Insurance Corporation on April 11, 2006.]

 

 

More articles by:
August 16, 2018
Bruce E. Levine
“Don’t Be Stupid, Be a Smarty”: Why Anti-Authoritarian Doctors Are So Rare
W. T. Whitney
New Facebook Alliance Endangers Access to News about Latin America
Ramzy Baroud
Mission Accomplished: Why Solidarity Boats to Gaza Succeed Despite Failing to Break the Siege
Larry Atkins
Why Parkland Students, Not Trump, Deserve the Nobel Peace Prize
William Hartung
Donald Trump, Gunrunner for Hire
Yves Engler
Will Trudeau Stand Up to Mohammad bin Salman?
Barbara Nimri Aziz
Morality Tales in US Public Life?
Vijay Prashad
Samir Amin: Death of a Marxist
Binoy Kampmark
Boris Johnson and the Exploding Burka
Eric Toussaint
Nicaragua: The Evolution of the Government of President Daniel Ortega Since 2007 
Adolf Alzuphar
Days of Sagebrush, Nights of Jasmine in LA
Robert J. Burrowes
A Last Ditch Strategy to Fight for Human Survival
August 15, 2018
Jason Hirthler
Russiagate and the Men with Glass Eyes
Paul Street
Omarosa’s Book Tour vs. Forty More Murdered Yemeni Children
Charles Pierson
Is Bankruptcy in Your Future?
George Ochenski
The Absolute Futility of ‘Global Dominance’ in the 21st Century
Gary Olson
Are We Governed by Secondary Psychopaths
Fred Guerin
On News, Fake News and Donald Trump
Arshad Khan
A Rip Van Winkle President Sleeps as Proof of Man’s Hand in Climate Change Multiplies and Disasters Strike
P. Sainath
The Unsung Heroism of Hausabai
Georgina Downs
Landmark Glyphosate Cancer Ruling Sets a Precedent for All Those Affected by Crop Poisons
Rev. William Alberts
United We Kneel, Divided We Stand
Chris Gilbert
How to Reactivate Chavismo
Kim C. Domenico
A Coffeehouse Hallucination: The Anti-American Dream Dream
August 14, 2018
Daniel Falcone
On Taking on the Mobilized Capitalist Class in Elections: an Interview With Noam Chomsky
Karl Grossman
Turning Space Into a War Zone
Jonah Raskin
“Fuck Wine Grapes, Fuck Wines”: the Coming Napafication of the World
Manuel García, Jr.
Climate Change Bites Big Business
Alberto Zuppi - Cesar Chelala
Argentina at a Crossroads
Chris Wright
On “Bullshit Jobs”
Rosita A. Sweetman
Dear Jorge: On the Pope’s Visit to Ireland
Binoy Kampmark
Authoritarian Revocations: Australia, Terrorism and Citizenship
Sara Johnson
The Incredible Benefits of Sagebrush and Juniper in the West
Martin Billheimer
White & Red Aunts, Capital Gains and Anarchy
Walter Clemens
Enough Already! Donald J. Trump Resignation Speech
August 13, 2018
Michael Colby
Migrant Injustice: Ben & Jerry’s Farmworker Exploitation
John Davis
California: Waging War on Wildfire
Alex Strauss
Chasing Shadows: Socialism Won’t Go Away Because It is Capitalism’s Antithesis 
Kathy Kelly
U.S. is Complicit in Child Slaughter in Yemen
Fran Shor
The Distemper of White Spite
Chad Hanson
We Know How to Protect Homes From Wildfires. Logging Isn’t the Way to Do It
Faisal Khan
Nawaz Sharif: Has Pakistan’s Houdini Finally Met his End?
Binoy Kampmark
Trump Versus Journalism: the Travails of Fourth Estate
Wim Laven
Honestly Looking at Family Values
Fred Gardner
Exploiting Styron’s Ghost
FacebookTwitterGoogle+RedditEmail