Fed resists retailers' ownership of banks

WASHINGTON — The Federal Reserve's top attorney told a Senate panel Thursday that Congress should prohibit commercial and retail firms from owning banks going forward because of competitiveness and safety issues for the U.S. banking system.

More than 50 companies own industrial loan companies, or ILCs, state-chartered banks that can be owned by a nonfinancial company. Such firms have existed for years, but the Fed and others have said the recent growth of these companies poses risks because they are not supervised like other banks.

ILCs do have federal deposit insurance, and Home Depot is among the companies trying to acquire such charters.

Such a structure "fosters an unfair and unlevel competitive and regulatory playing field," Fed General Counsel Scott Alvarez told the Senate Banking Committee, in the text of remarks prepared for delivery at Thursday's hearing.

"The question of whether to allow firms engaged in commercial activities to own or acquire an insured ILC is one that has potentially far-reaching implications for the structure and soundness of the American economy and financial system," Alvarez said.

Supporters of the ILC charter have argued that they offer customers more options, and point out that the charter has existed safely since the early 1900s.

An ILC is virtually like any other bank, as it can accept deposits, make loans and issue credit cards. It is mainly the parent-company structure of ILCs that is both unique and controversial.

The applications of Home Depot and several other companies have been frozen as part of a moratorium at the Federal Deposit Insurance Corp. (FDIC) that dates back to the summer of 2006. The FDIC said it didn't want to permit any more retail firms to own these bank charters until it had time to study the risks posed by such ownership.

"Legislative action that clarifies the role and supervision of ILCs would be strongly welcomed and carefully implemented by the FDIC," FDIC Chief Operating Officer John Bovenzi said at the hearing.

The House of Representatives voted earlier this year to ban commercial and retail firms from owning ILCs, though House Financial Services Committee Chairman Barney Frank, D-Mass., has said a possible exemption could be carved out for automotive firms.

An attempt by Wal-Mart to acquire an ILC several years ago launched a tremendous controversy, as company critics allied with community banks to try to stop the deal.

Wal-Mart eventually withdrew its application, but Home Depot did not, keeping pressure on the FDIC and Congress to address the matter. Meanwhile, some of Wall Street's biggest firms own ILCs, drawing them into the controversy.

The FDIC's moratorium freezing applications from commercial firms is set to expire at the end of January.