Greenspan Again Asks Congress to Close Banking Loophole
Friday, January 27, 2006
Outgoing Federal Reserve Board Chairman Alan Greenspan has repeated a long-standing plea to Congress to close a legal loophole that Wal-Mart Stores, Merrill Lynch, Morgan Stanley, General Electric and other companies hope to use to create a nationwide banking system that competes head-to-head with commercial banks but operates under looser federal rules.
Consumer groups, bankers, some members of Congress and Greenspan have criticized the effort for years, saying it would result in unfair competition and more risk for the federal agency that insures deposits, and possibly for taxpayers.
Greenspan repeated his plea in a letter Jan. 20 to Rep. Jim Leach (R-Iowa).
"These are crucial decisions that should be made in the public interest after full deliberation by the Congress," Greenspan said in the letter. "They should not be made through the expansion and exploitation of a loophole that is available to only one type of institution chartered by a handful of states."
The "institution" at issue is known as an industrial loan corporation. ILCs operate under charters issued by only a few states -- California, Nevada and, most notably, Utah.
An ILC charter appeals to Merrill Lynch and other financial services providers because it enables such companies to own and operate full-service banks without being supervised by the Federal Reserve, as federal law requires of most bank holding companies. For retail giants such as Wal-Mart, the charter is the only loophole left enabling a non-financial, commercial firm to own a bank.
Greenspan wrote the letter in response to Leach, who last fall introduced legislation closing the loophole. Leach sought explicit backing from Greenspan, whose opinion on financial matters carries great weight in Congress.
Greenspan's view has also been the official position of the seven-member Federal Reserve Board of Governors. In the past few years board members, including Fed chairman nominee Ben S. Bernanke, who is likely to succeed Greenspan next week, repeatedly has voted to endorse Greenspan's position.
Merrill Lynch, Wal-Mart and other companies have lobbied Congress to give ILCs the power to branch across state lines. Their efforts have been stymied by Leach, Sen. Paul S. Sarbanes (D-Md.) and others. But the issue could heat up again over Wal-Mart's recent application for federal deposit insurance, which it needs to operate an ILC in Utah.
Wal-Mart, the world's largest retailer, is a lightning rod because of other issues. Some members of Congress and union leaders have criticized Wal-Mart's labor practices and price-cutting policies, which they say have shipped U.S. jobs overseas.
The Fed argues that granting commercial retailers such as Wal-Mart federal deposit insurance gives them banking powers without adequate federal supervision. The General Accountability Office, the research arm of Congress, reached the same conclusion in a report last fall.
"We have already stated our willingness to participate should congressional hearings be held on ILCs," Wal-Mart spokesman Martin Heires said in a statement. The company looks forward to a "public hearing on our application to operate an industrial bank in Utah," he said.