Proposal would let big retailers open their own banks


You can already buy groceries, school supplies and lawn mowers at mega-department stores - not to mention that puppy the kids have been begging for. Now Congress is considering allowing retail behemoths to handle your checking and savings accounts, too.

The change could create the First National Bank of Wal-Mart. How about Sears Bank & Trust? Or Volkswagen Commerce Bank?

Banks inside supermarkets and some department stores have become commonplace. But those are existing banks partnering with stores. A bill before Congress would make it possible for retailers and others to own their own bank with branches all over the country.

The proposed changes in federal banking laws would blur the lines between commercial enterprises and financial institutions by allowing companies to buy entities known as industrial loan companies (ILCs) and branch them out to other states.

ILCs are niche financial institutions that don't exist in some places, like Illinois, but are found in a handful of states such as California, Utah and Nevada. Current federal law doesn't allow ILCs to move beyond state lines, but the proposed law would lift restrictions on such moves and eliminate states' abilities to restrict out-of-state banks from setting up shop.

Any business could buy an ILC, but it is Wal-Mart - the world's largest company with $244 billion in sales -that many bankers name as their greatest fear. Wal-Mart is the Incredible Hulk of commerce, and small banks say it's a juggernaut that could level competitors.

More than bankers are worried about some of the changes Congress is considering. A bill that has passed the House and is now before a Senate committee would allow financial institutions to pay interest on business checking accounts, something they cannot currently do. Giving ILCs that power is a mistake, according to Federal Reserve Chairman Alan Greenspan.

The "amendment would alter the structure of banking in the United States," he warned in a letter to the chairman of the House Financial Services Committee. Doing so for ILCs would run counter to laws "prohibiting the mixing of banking and commerce," he said.

Federal Deposit Insurance Corp. Chairman Donald Powell does not agree that ILCs are a threat to other financial institutions. In a May speech to banking supervisors, he said, "While I understand the anxiety some people have on this issue, fear of competition should not be the compelling argument in formulating good public policy."

Because ILCs are creations of state governments, what they are allowed to do varies from state to state. In general, they were created with limited lending abilities to serve areas traditional banks had neglected. While they are not supervised by the Federal Reserve, there are 51 ILCs that carry FDIC insurance, giving them government backing for up to $100,000 per account and making them subject to FDIC examinations. They are also subject to regulation by their chartering state.

Many companies use them to provide financial services related to debit and credit card operations.

"A lot of things are being said about ILCs, but the record and the facts and the picture that we have speaks to their safety and soundness," said Rep. Jim Matheson , a Utah Democrat. His state has 24 ILCs insured by the FDIC, and he supports lifting restrictions on them.

More reach by ILCs would offer businesses - and ultimately consumers - more financial options, he said: "These institutions are regulated by the FDIC. There is a strong separation between the ILC and the parent company."

Kenneth Guenther, president and CEO of the Washington-based Independent Community Bankers of America, still sees problems. "It's a fundamental principle - banking and commerce ought to be kept separate," he said.

Banks owned by commercial enterprises would compete for customers with all banks in a market where they're located, but it's smaller, community-based institutions that could be the most vulnerable to the competition. A multibillion-dollar institution, such as Bank One or LaSalle Bank in the Midwest, offers a range of personal, commercial and investment banking services that an ILC would probably not try to match. But an ILC could be vying for many of the same customers that keep smaller banks in business.

Faye Pantazelos, president of New Century Bank in Chicago, says retail services and banking should be kept separate because finance is very different from selling clothes or groceries. Her bank, which has $160 million in assets, does the bulk of its business working with small and medium-size businesses.

"When you need a mortgage ... it's not just passion or impulse buying - it's not like you're buying a hat and you go into the store," she said. "You research it and ponder it. You want to talk to somebody who knows something."

Last year Wal-Mart made an offer to buy Franklin Bank of California, an ILC. Its efforts were stymied when California lawmakers prohibited nonfinancial institutions from buying ILCs. Owning an ILC in Southern California could have affected more than Wal-Mart customers in the Golden State. For example, Wal-Mart could have used the bank to handle debit transactions for all its stores, reducing the company's costs.

While Wal-Mart has some financial services already in place - payroll check cashing, money orders and transfers - it has no current plans to purchase an ILC, said spokesman Tom Williams.

About 20 percent of Wal-Mart's customers don't have a bank account, so there is a demand for those services, Williams said. In addition, about 800 of the 3,500 Wal-Marts and Sam's Club locations have bank branches in the stores. Those are banks that Wal-Mart has a contract with to come in and offer services. Sears owns a Utah ILC, but the retailer has not lobbied to expand the powers or reach of the institution, said spokesman Chris Brathwaite. "We're focused on a number of things, and this isn't one of them," he said.

The Chicago Tribune is a Tribune Publishing newspaper.

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