WASHINGTON -- Allowing Wal-Mart Stores Inc., the Home Depot Inc. and other retailers to own banks could threaten the soundness of the nation's banking system, the Federal Reserve's general counsel told a congressional panel yesterday.
Since the 1930s when many banks failed, Congress generally has prohibited commercial companies from owning banks.
But retailers' growing use of a banking loophole "undermines the supervisory framework that Congress has established" to regulate federally insured financial institutions, said Scott G. Alvarez, general counsel for the Federal Reserve board.
When Fed regulators have a "supervisory blind spot," they can't protect depositors and taxpayers from poorly run banks, he told a subcommittee of the House Financial Services Committee.
The panel's ranking Democrat, Rep. Barney Frank, of Massachusetts, and Republican Rep. Paul E. Gillmor, of Ohio, introduced a bill this week to prohibit the Federal Deposit Insurance Corp. (FDIC) from granting charters to companies that earn less than 85 percent of their income from financial activities. That, in effect, would prevent Wal-Mart and other commercial companies from getting into banking.
Congress originally exempted the banks from heavy federal regulation because they were supposed to help low-income industrial workers get small loans.
But starting in the early 1990s, dozens of large commercial companies began obtaining ILC charters to process credit-card purchases, commercial loans and other financial transactions.
Among the biggest consumer-oriented companies currently operating ILCs are General Motors Corp. and Target Corp.
These banks got little attention until last summer when Wal-Mart, the world's largest retailer, began seeking a charter for one to process its credit and debit card and electronic-check payments.
Its application was filed in Utah, where most ILCs are chartered. Neither Utah nor the FDIC officials have decided yet whether to approve Wal-Mart's application.
Wal-Mart critics fear the company's ILC would expand to become a full-service banking operation. The company denies that is its goal. Home Depot began seeking permission for an ILC in May.