By any other name, Part 2
[Continued from yesterday’s Part 1.]
If an Industrial Loan Company is really a bank in disguise, what public-policy risks does that entail?
No risks here.
1. ILCs allow firms to skirt the separation of commerce and banking. The reason for the division is a fear that banks lend to their industrial affiliates at preferential rates, say, or discriminate against affiliates’ competitors.
Conflict of interest is not unique to bank versus non-bank, and can be handled in the same ways:
Anil Kashyap, an economist at the University of Chicago, thinks that proper regulation, which ensured all transactions between a bank and its affiliates were at “arm’s length”, would prevent such difficulties.
As to the other risk:
2. In times of financial distress, the non-bank owner could raid a bank’s deposits, causing a run on the bank—not to mention a claim on taxpayers’ money through the FDIC, which insures deposits.
That’s not a major risk:
Others think these fears overblown. In
If a bank’s ownership can be regulated against raiding deposits, so can the owners of a non-bank.
Peter Wallison, of the American Enterprise Institute, a conservative think-tank, believes that the separation of the “suppliers of credit”—ie, banks—from the “users of credit” is an increasingly arbitrary one. He points to bank deregulation in 1999, which allowed non-bank financial companies (insurance firms, brokers and the like)—big users of credit—to own banks for the first time since the Depression. Mr Wallison argues that letting an insurer own a bank is little different from letting a retailer do so: the same conflicts arise, which can be managed with proper regulation.
Yet when facing a contradiction that would ordinarily encourage liberalization, the Congress — or at least, some members of the House — has chosen the exact opposite course:
On July 10th a bill was introduced into the House of Representatives that would quash Wal-Mart’s aspirations by prohibiting non-banks from buying or forming industrial loan companies (ILCs). Several commercial firms run banking businesses through ILCs; several more, including Wal-Mart, hope to do so.
At a committee hearing on July 12th Scott Alvarez, general counsel of the Federal Reserve, gave warning that the proliferation of ILCs in recent years (see chart) was eroding
The bill seeks to strengthen the wall by preventing the Federal Deposit Insurance Corporation (FDIC), the bank regulator that oversees ILCs, from granting charters to companies that derive more than 15% of their profits from non-financial activities.
None of your ILC allowed in.
As we return to ‘what’s in a bank?’ we find ourselves realizing that the question isn’t whether ILCs are banks — of course they are, in all practical function — but rather, what other large financial institutions are de facto banks?
The second question raised by Wal-Mart’s application is whether ILCs are properly regulated now.
As state-chartered banks, they are overseen by the FDIC rather than the Federal Reserve, which watches financial companies that control banks. The problem with this, argue some (including the Fed), is that only the Fed has broad powers to examine a bank’s parent and its non-bank subsidiaries and act to stop problems elsewhere spreading to the insured bank. On this logic, ILCs belong in the Fed’s purview. Not surprisingly, the FDIC disagrees.
Critics of ILCs say that fundamental questions of bank regulation are at stake, which deserve a thorough airing in Congress: they should not be settled piecemeal, by single bills and licences.
Yes, that’s the real question, isn’t it? Who is a bank, and what burdens does being a bank entail?
Those who see no reason why non-banks should not own ILCs say bankers’ real fear is competition, especially from Wal-Mart and Home Depot. Although Wal-Mart insists it would use an ILC only to save money on processing its credit-card and debit-card transactions, bankers fear it will eventually enter branch banking.
Of course it would, given the slightest crack in the fortress.
Nothing to worry about here
Already, the retailer cashes cheques, sends money orders and so forth, often much more cheaply than competitors do.
“Now you’ve done it! Doing things more cheaply that we do!”
Here we uncover the banks’ real fear: if you boil away all the brick structures, and the need for massive safes, you see a bank as an interface between a retail customer and a financial network. Co-locating that inside a major retail outlet is logical, and efficient — not just for the provider, who adds another ’share of wallet’ capturing opportunity, but also for the customer, who’s there in the story anyway.
Retailers as banks are so logical that if enacted, they would be formidable competition through the dastardly, under-handed, nefarious strategy of charging less.
In
“Don’t fire until you see the whites of their checks!”
And the customers? Too bad.
So we end this post series with the right question rather than the wrong one. Given that ILCs are obviously banks:
Shouldn’t they be subject to the CRA as well?
