Washington — The Treasury Department's blueprint for revamping financial regulation would allow commercial firms of all stripes to own and operate banks.
Where to draw the line between banking and commerce is a perennial debate, and the Bush administration's proposal released Monday would go further than advocates have dared. The blueprint recommends removing any limits on banking charter ownership by retailers and other nonfinancial firms, but it would subject them to tight oversight, including Federal Reserve Board supervision.
A depository institution "should be able to affiliate with a broad range of firms, including other federally chartered financial firms and commercial firms," according to the proposal, tucked in the section of the Treasury's report devoted to longer-term reforms. "The history of commercial firms affiliating with insured depository institutions has not supported the view of greater risks present in such structures."
The Independent Community Bankers of America has led the fight against mixing banking and commerce in general and repeated attempts by Wal-Mart Stores Inc. to own an industrial loan company in particular. The trade group's president and chief executive, Camden R. Fine, blasted the Bush administration's idea.
"The federal regulatory agencies did such a great job of examining Citigroup and Bear Stearns that now the Treasury Department recommends that Wal-Mart and other commercial firms be allowed to own FDIC-insured banks," Mr. Fine said in an interview. "If the taxpayers enjoyed their dollars being put at risk in the Bear Stearns bailout, they will love having their tax dollars at risk with the largest commercial firms in the world."
But others saw the recommendation as acknowledging realities in the modern financial system—that separating bank and nonbank activities is a challenge, and that regulation should respond accordingly, not close the door.
"The issues surrounding banking and commerce are really political, and if you look outside of the political sphere … and look at the financial markets and the banking industry today, it's clear that separating banking and commerce is an antiquated and outdated notion," said former Utah Banking Commissioner George Sutton, who as an attorney at Jones Waldo Holbrook & McDonough PC in Salt Lake City has represented companies trying to enter the banking business through industrial loan charters.
The administration's plan would allow commercial firms to own what the blueprint calls "federally insured depository institutions," or FIDIs, which would be a consolidated federal charter for banks, thrifts, and credit unions. Commercial firms owning one of these institutions would be subject to Fed oversight, as well as supervision by a new agency, the Prudential Financial Regulatory Agency.
According to the blueprint, affiliations between banks and their nonbank parents "should have regulations imposed at the individual bank level and regulations imposed at the holding company level."
Leonard Bernstein, a partner at Reed Smith LLP in Philadelphia, said the Treasury's "view is—provided they have a streamlined supervisor—they seem to think it really doesn't matter who owns" the depository institution.
Veterans of banking policy fights do not expect the Treasury plan to be adopted either wholesale or quickly.
"This is a long-term project, and short-term, there are just way too many other things that people are going to worry about," said John Douglas, a former Federal Deposit Insurance Corp. general counsel and now a partner at Paul, Hastings, Janofsky & Walker LLP.
The recommendation could undercut the already challenged prospects of congressional action to bar commercial firms from owning ILCs.
The House passed a bill in May prohibiting charters from going to principally commercial firms, and a one-vote majority on the Senate Banking Committee supports a more restrictive bill. Yet it faces an uphill challenge in the Senate, where Republicans have united against it.
The ILC debate flared in 2005 with Wal-Mart's application for a Utah charter that the retailer said it would use to process electronic store payments.
Community bankers said the retailer was trying to get its foot in the door so that one day it could offer broader banking products and services—a claim Wal-Mart has vigorously denied.
Home Depot Inc. followed up with an application to buy a Utah ILC to offer home improvement loans, and the FDIC imposed a moratorium on approving ILC requests.
That moratorium expired Jan. 31. Both bids were subsequently withdrawn.
Source: American Banker
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