January 26, 2006

Greenspan urges industrial bank exemption review

By Kristin Roberts

WASHINGTON (Reuters) - The U.S. Congress should review a
loophole in federal law that allows companies to buy industrial
banks in a handful of states but avoid a level of supervision
by bank regulators, Federal Reserve Chairman Alan Greenspan
wrote in a recent letter to a Republican lawmaker.

Greenspan, in the January 20 letter seen by Reuters, said
the special exemption under federal law for industrial banks,
or industrial loan companies, could undermine the policies
Congress has established to govern the U.S. banking system.

It may also create an uneven playing field for banks
supervised by federal regulators under national banking law.

His comments come as regulators review a controversial
application by Wal-Mart to open an industrial bank primarily to
handle electronic payment processing. That bid has drawn
concern from some in Congress, and from some financial
institutions, that the world's largest retailer could use its
bank as a base to offer a much wider array of services.

The Fed chief said the character, powers and ownership of
industrial banks have changed "materially" since Congress first
enacted the exemption from U.S. law that allows unregulated
companies to buy insured banks for limited purposes.

For example, while industrial banks were at first small,
locally owned institutions with limited powers, larger
corporations with global operations are now seeking to open
such banks. Assets and insured deposits at industrial banks
have ballooned as well, Greenspan noted.

"Importantly, these changes also threaten to remove
Congress' ability to determine the direction of our nation's
financial system with regard to the mixing of banking and
commerce and the appropriate framework for prudential
supervision," Greenspan wrote in a letter to Iowa Republican
Rep. Jim Leach.

"These are crucial decisions that should be made in the
public interest after full deliberation by the Congress; they
should not be made through the expansion and exploitation of a
loophole that is available to only one type of institution
chartered in a handful of states," Greenspan said.

Greenspan referenced Wal-Mart as among the companies that
have sought to open industrial banks. Others include General
Electric and General Motors, according to his letter.

Industrial banks are state-chartered and state-regulated,
and fall under the supervision of the Federal Deposit Insurance
Corp. Commercial companies may own them because federal laws
that bar non-financial companies from engaging in banking
activities do not classify them as banks.

But under federal statute, the corporate owners of
industrial banks are not subject to the "consolidated
supervision" framework that allows bank regulators to review
the activities of an entire company, including its nonbank

Regulators' ability to examine affiliates of industrial
banks, however, is more limited, Greenspan said.

Wal-Mart's application has generated significant interest.
A record 1,500 public comments were submitted on the
application and the FDIC's acting chairman recently told
lawmakers the regulatory agency would likely hold a public
hearing on the bid.

That would be the first formal public hearing by the FDIC
on a new bank application.