Industrial bank bill moves closer to passage

Legislation is moving forward in the Senate that would allow financial services companies to keep their industrial banks.

On Feb. 13, the Senate Banking Committee voted 11 to 10 to approve a bill that would prevent retailers and many other commercial companies from also owning industrial banks.

The banking committee will have to vote again on the bill because a quorum wasn’t present when members’ proxy ballots were cast. But the bill appears headed for approval.

Industrial banks, also known as industrial loan companies, are financial institutions that may be owned by non-financial companies. Industrial banks are chartered by individual states, but must have federal deposit insurance.

The debate over whether commercial firms should be allowed to own industrial banks has intensified on Capitol Hill over the past several years.

Critics contend that allowing commercial firms to own banks could undermine the security of the federal-deposit insurance system. Proponents, meanwhile, argue that industrial banks offer consumers the benefit of more choices.

EXEMPTION ON THE TABLE

Under the proposed Industrial Bank Holding Company Act, commercial companies would be prohibited from owning industrial banks. But the bill would explicitly allow financial services companies and automakers to continue to own industrial banks.

The securities industry is “willing to say it’s OK to go forward because basically [the industry has] been exempted,” said George Sutton, a shareholder with Salt Lake City law firm Callister Nebeker & McCullough.

Calls to the New York and Washington-based Securities Industry and Financial Markets Association, were referred to Mr. Sutton, who has testified before Congress on SIFMA’s behalf on this issue.

The House approved similar legislation last year by a 371-14 vote. Passage of the bill will be more difficult in the Senate, where one senator can block legislation.

Most industrial banks are based in Utah, where the industry has developed. About 80% of the banks’ $225 billion in total assets come from brokerage firms, according to Mr. Sutton.

Merrill Lynch Bank USA is the industry leader with $77.6 billion in assets.

Under the proposed legislation, regulation of industrial banks by the Washington-based Federal Deposit Insurance Corp. would be strengthened. The Securities and Exchange Commission, meanwhile, would be responsible for regulating the financial services companies that own the banks.

If passed, the legislation would prohibit securities firms and automakers from selling their banks to non-financial companies.

In addition to using the banks to sweep money into money market accounts, brokerage firms use them to provide loans for their securities underwriting clients, Mr. Sutton said. “They gain a much better understanding of their business,” by engaging in those transactions, he said.

RETAILERS THWARTED

“A lot of investment funds are beginning to look at this,” Mr. Sutton said.

“The business plans are very diverse,” he said. “This is really a market-driven thing taking place.”

In recent years Wal-Mart Stores Inc. of Bentonville, Ark., and Home Depot Inc. of Atlanta have tried, unsuccessfully, to open industrial banks.

Keeping commercial companies out of banking is not an issue of competition, said Floyd Stoner, executive vice president for congressional relations and public policy for the American Bankers Association in Washington.

“We have a carefully constructed structure for financial firms that has served us pretty well,” he said. “If you leave this door open to any commercial firm, we just could not regulate it.”

Opponents of the industrial banks draw a link to the subprime mortgage market problems as an example of what can happen if banks are allowed to operate without government oversight. “Most of those involved in making subprime loans were not regulated by banking regulators,” Mr. Stoner said.

But industrial bank officials say that the banks are very safe.

“They are the safest and soundest financial institutions in the country,” said Frank Pignanelli, executive director of the Utah Association of Financial Services, a Salt Lake City trade group that primarily represents industrial banks.

Fears of problems associated with industrial banks are “based upon these hypotheticals of what could happen but has never happened,” he said.

In addition to some FDIC oversight, the banks are regulated by state banking regulators.

“We view this more as a function of politics than a function of policy,” Mr. Pignanelli said.

“Some banking organizations view [industrial banks] as competition because we are succeeding at filling a niche in the marketplace,” he said. “Passing legislation is easier than competing, apparently.”

Sara Hansard can be reached at [email protected].

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