How a Wal-Mart Bank Will Harm Consumers

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.

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