Piggy Banker?

A handful of states, including California and Nevada but most of all Utah, grant charters for ILCs. Sixty-one ILCs have been granted since 1984, nearly half of them after the 1999 financial deregulation bill passed, and six applications, including Wal-Mart's, are pending. The advantage of an ILC -- aside from the fact that commercial firms are prohibited from owning a traditional bank -- is that it allows its owner to bypass regulation by this country's main bank regulator, the Federal Reserve Board.

Instead, ILCs are supervised by their state regulator and, at the federal level, the FDIC, which in addition to insuring all banks has for decades regulated some state banks. The FDIC has said it has the capability to provide sufficient federal oversight of these state banks. Leach and others disagree, as did the Government Accountability Office, the research arm of Congress, in a report last fall.

The majority of ILCs are owned by financial companies such as securities firms Merrill Lynch & Co. and Goldman Sachs Group Inc. that under deregulation could own a traditional bank but don't want to because that would require they be regulated by the Fed as bank holding companies. The Fed requires holding companies to maintain certain amounts of cash against potential losses, and that's an expense these firms want to avoid. The dozen or so nonfinancial companies that own ILCs -- BMW of North America LLC, Volvo and the like -- do so to finance purchases of their cars and motorcycles.

Controversy has surrounded ILCs for several years, but the debate has been mostly among lawmakers and regulators. Not until Wal-Mart applied to the FDIC did the issue attract widespread public attention.

Partly it's Wal-Mart's sheer size. But it's also because of Wal-Mart's employment and pricing practices. For years, labor unions, employees in dozens of lawsuits across the country and even state legislators have criticized the company for low pay and health benefits. Critics also say the low prices the company uses to dominate industries -- while they may make consumers smile at the checkout -- have put many smaller companies out of business and shipped jobs to cheaper overseas labor markets.

The FDIC has received 1,500 comment letters on Wal-Mart's application, the most it's received on an issue. Many support Wal-Mart's bid to own a bank, but most are from banks and bank-lobbying groups across the country opposing it.

Three dozen members of Congress, evenly divided between Republicans and Democrats, have written the FDIC expressing concern about Wal-Mart's application: Twenty-five members of the House Financial Services Committee, including Leach, and three senators asked the FDIC to hold hearings before making a decision, which it has said it will do in the next few months.

Spencer Bachus (R-Ala.), chairman of the House financial institutions and consumer credit subcommittee, has announced plans to hold hearings on ILCs.

And no less than Alan Greenspan, while Federal Reserve Board chairman, at least twice told members of Congress that ILCs -- especially if given authority to open branches nationwide -- threatened to undermine sound banking oversight by creating a second, parallel system.

"These are crucial decisions that should be made in the public interest after full deliberation by the Congress," Greenspan said in a recent letter to Leach. "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."

By contrast, the FDIC, with little fanfare and no headlines, granted retail discounter Target Corp.'s application for insurance for a Utah-chartered ILC 18 months ago . Target is using it to offer a credit card to its small-business customers. Wal-Mart uses Target to press its case in its lobbying of Congress, saying it's unfair to let its rival own a bank when it doesn't.

Wal-Mart officials, in letters to Congress, in the company's FDIC application and in interviews, say it too would use the Utah bank for limited purposes, namely to accept large deposits brokered through third parties and, by removing the middleman, to lower costs of back-room operations by tens of millions of dollars a year in the processing of 2.5 billion credit and debit-card transactions.