The San Fernando Valley Business Journal
December 5, 2005
Having Wal-Mart Run a Bank Would be Damaging to U.S.
By Congressman Brad Sherman
Lost amid the furor over our readiness for natural disasters, the political posturing over Supreme Court nominations, and the continuing bloodshed in Iraq, is an obscure "Financial Page" item that nonetheless could have profound consequences for our nation in years to come and should not be overlooked. Wal-Mart, the world's largest corporation, is attempting to charter a bank.
Wal-Mart has filed an application in the State of Utah for a particular type of bank, called an industrial loan corporation (ILC). ILCs are special purpose charters available in only five states (California, Nevada, Utah, Colorado, and Minnesota) that operate under a loophole in the law. This loophole allows ILCs---unlike other banks---to be owned by commercial firms, such as Wal-Mart, and it also enables the ILC owners---unlike other bank holding companies---to escape umbrella regulation by the Federal Reserve.
This loophole creates significant risks to the banking system, causes competitive imbalances in the banking world, threatens small businesses, including community banks, and violates long-standing principles of U.S. banking law.
Wal-Mart, which is the world's largest retailer, has tried repeatedly to enter the banking business. It has been properly blocked in the past by federal and state law, and regulatory actions. We cannot let the outcome be different this time.
By sheer strength of its size (4,300 stores world wide; $250 billion in annual revenue; 100 million customers per week), Wal-Mart has the economic power to drive out competitors and locally-owned small businesses. In communities with a Wal-Mart presence, it is hard to find community-based retailers.
Our nation would suffer if community banks met the same fate. America is well-served by a diversified financial services industry that gains strength in fair and healthy competition. Community banks are at the core of such a system, and community banks bring value to the communities they serve well beyond their assets. Community bankers live in their communities, they provide funding and loans to support local businesses and economic development, and they have a vested interest in the economic well being of their communities. In other words, they are stakeholders in their communities.
Clearly, Wal-Mart is not in the same category. In one well-documented case in Oklahoma, Wal-Mart opened a store that quickly became the "new downtown" when half the community's small companies were driven out of business. Twelve years later, Wal-Mart closed the store, abandoning the town, and leaving its residents without ready access to basic products necessary to maintain a household.
Community bankers do not leave town when the going gets tough.
Destabilizing communities is not the only reason to be concerned about a "Bank of Wal-Mart". It also would violate the long-standing doctrine that Congress wisely reaffirmed in the Gramm-Leach-Bliley Act of 1999, of maintaining the separation of banking and commerce. Out nation's long tradition of keeping banking and commerce separate is based on solid grounds. First, it guards against the excessive concentration of economic power that would be created by the merger of corporate and financial conglomerates. Second, it insures the impartial allocation of credit, thus protecting our economy from conflicts of interest that might arise under the common ownership of a bank and commercial firm. And, third, it safeguards against the improper extension of the federal safety net, which could put taxpayer dollars at risk if a financial firm is weakened by a troubled corporate affiliate, or by ill-fated loans to the corporate affiliate's suppliers, customers or officers.
In contrast, Japan allows the combination of banking and commerce, where it takes the form of a large conglomerate called a keiretsu. Firms within these conglomerates are in a relationship where it is the obligation of member firms to provide mutual support and do as much business as they can with one another. Therefore, a bank within the keiretsu is under an obligation to make loans to the other members of the keiretsu, based upon that relationship only. This contributed to the Japanese financial crisis, in which banks had billions of dollars on non-performing loans from their "member" companies.
As my Republican colleague Jim Leach, former Chairman of the then House Banking Committee, and the co-author of the Gramm-Leach-Bliley Act, stated in Roll Call on March 10, 1997, "While most Americans are not even aware of the commerce and banking issue, I believe that if they focused on it, the vast majority would be disinclined to support the kind of concentration of economic power contemplated. It is one thing to have a competitive consolidation in financial services activities; quite another to have a Keiretsu-like conglomeration of private sector economic power in America---the joint ownership, say, of a money-center bank with an auto company, defense contractor and department store chain."
The long-term potential repercussions to the U.S. financial system and economy over a commercial conglomerate like a Wal-Mart or a Microsoft Corp., or the next Enron entering the banking business are real---and not inconsequential, once fully considered. This nation would be wise to avoid excessive financial concentration. And, that means keeping Wal-Mart and other commercial giants out of the banking business.