Federal Reserve Chairman Paul A. Volcker yesterday urged the House banking committee to pass legislation quickly to stop the spread of so-called nonbank banks. He also said some liberalization of current restrictions against interstate banking is justified.
Volcker emphasized that action to close the legal loophole that allows corporations as diverse as retailers and steel companies to own banks and permits banks to evade interstate banking prohibitions by setting up a nonbank bank is urgently needed.
Several hundred nonbank bank applications have received preliminary approval, but a recent court decision has put the whole issue is limbo. A nonbank bank is one that makes commercial loans or offers checking accounts but may not do both.
Once that issue is addressed, Congress should then turn its attention to other issues such as allowing banks to deal in additional assets, including municipal revenue bonds, and allowing interstate banking, Volcker said.
Volcker's testimony appeared to be a retreat from his previous policy of advocating nonbank bank legislation in conjunction with other banking issues. The U.S. League of Savings Institutions, which speaks for the thrift industry, also supported a separate nonbank bank loophole closing bill. But the Association of Bank Holding Companies, representing the big banks that have made the most nonbank bank applications, testified against the measure.
Given the Fed's influence, the switch could possibly lead to a breakthrough in the banking legislation stalemate. Rep. Fernand St Germain (D-R.I.), chairman of the banking committee, has insisted upon taking up nonbank banks separately, while his Senate counterpart, Sen. Jake Garn (R-Utah) has opted for a comprehensive approach.
Volcker, who has repeatedly stated that he does not want Sears, Roebuck & Co. in the banking business, derided the giant retailer's "misguided" efforts to establish a special category of institution called a "family bank." Recently, Sears officials have said they want to establish "family banks," which would deal only in consumer loans, small business loans, family farm loans and other similar transactions and offer certain consumer protections.
Despite what he called the "sugar coating" of consumer protections such as higher capitalization, lifeline banking requirements and prompt deposit availability, Volcker said no exception should be made for banks that essentially would be nonbank banks