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Is a Wal-Mart Bank Such a Bad Idea

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					                                           Morgan Clemons
                               Financial Holding Companies
                                     Lybecker, Spring 2010




Is a Wal-Mart Bank Such a Bad Idea?




                                 Morgan Clemons
                     Financial Holding Companies
                                        Lybecker
                                      Spring 2010




                 1
                                                                                                 Morgan Clemons
                                                                                     Financial Holding Companies
                                                                                           Lybecker, Spring 2010

    I.       INTRODUCTION

         In 2005 Wal-Mart filed an application to own an industrial loan company. 1 There was

much controversy surrounding Wal-Mart‟s assumed desire to enter the banking industry. Wal-

Mart‟s request to enter the financial industry was a “narrow charter that would allow it to process

the store‟s electronic checks and credit and debit transactions.”2                    Author Zachariah Lloyd

explains that the concern “was not that Wal-Mart would charter an ILC in order to more cost-

efficiently process credit transactions, but rather that it likely would have expanded its business

model” 3 to include full-service banking.4 This concern was rampant among banking industry

insiders, legislators, and regulators, even though Wal-Mart representatives had continuously

declared that the company did not intend to open branches or commit itself to full-service

banking endeavors.5         Wal-Mart‟s application was particularly troublesome and unfounded

because of the size of the company. For example, because such a large company had never

operated an ILC, the fear was that “the losses that the FDIC would be responsible for if the Wal-


1
  See Industrial Loan Corporations: Recent Asset Growth and Commercial Interest Highlight Differences in
Regulatory Authority, Before the Subcomm. on Fin. Inst. and Consumer Credit, H. Comm. on Fin. Serv., 109th
Cong. 1 (2005) (statement of Richard J. Hillman, Managing Director Financial Markets and Community Investment,
on behalf of the U.S. Government Accountability Office).
2
  Kevin K. Nolan, Wal-Mart’s Industrial Loan Company: The Risk to Community Banks, 10 N.C. BANKING INST.
187, 187 (2006).
3
  Zachariah J. Lloyd, Waging War with Wal-Mart: A Cry for Change Threatens the Future of Industrial Loan
Corporations, 14 FORDHAM J. CORP. & FIN. L. 211, 225-26 (2008).
4
  Nolan, supra note 2, at 190 (“Full service banking would include taking deposits and making consumer and
business loans.”).
5
  See Remarks by Jane J. Thompson, Vice President, Wal-Mart Financial Services, Forrester Research Finance
Forum (May 22, 2006), available at WalmartWatch.com (“There will be no branches and no lending […] we do not
plan to branch.”); see also Jane J. Thompson, Senior Vice President of Wal-Mart stores, Inc. response to Barney
Frank, House of Representatives, May 25, 2006. But see Arthur E. Wilmarth, Jr., Regulating Wal-Mart: Is Bigger
Better in Banking?, 39 CONN. L. REV. 1539, 1548 (2007) (“it seems highly unlikely that Wal-Mart Bank would be
content to pursue the very limited business plan set forth in its application over the longer term, because that plan
would not generate significant profits. […] the anticipated annual revenues from Wal-Mart Bank‟s proposed
business plan would be only $10 million during its third year of operation. Given Wal-Mart‟s well-known focus on
the bottom line, it seems improbable that Wal-Mart would choose to incur the very substantial costs it has already
spent in prosecuting its application for Wal-Mart Bank if the Bank never intended to expand its operations beyond
the narrow limits set forth in the application.”).


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                                                                                                   Morgan Clemons
                                                                                       Financial Holding Companies
                                                                                             Lybecker, Spring 2010
Mart ILC experienced financial problems could be significant.”6 Likely in response to Wal-

Mart‟s ILC application, the FDIC issued two separate moratoriums on the approval and

acceptance of ILC applications7—one lasting six months,8 and another extending the six month

period to an additional year.9            Additional responses to the Wal-Mart banking controversy

included the passage of the Industrial Bank Holding Company Act of 2007 by the House of

Representatives.10 However, the bill was never passed by the Senate and enacted into law. In

addition, as focus turned to the financial crisis and economic turmoil in America, and after Wal-

Mart withdrew its charter application,11 the idea of the Wal-Mart bank faded away. However,

the issue of an ILC for a large commercial parent is still unresolved.


    II.      INDUSTRIAL LOAN COMPANY (ILC) BACKGROUND

          12 U.S.C. §1841(c) defines a bank and excludes from that definition industrial loan

companies.12 It has been argued that a Wal-Mart ILC will “erod[e] the separation between

banking and commerce.”13               The fear from the Wal-Mart ILC stems from the idea that

“commercial firms are not permitted to own banks [but rather] […] industrial loan companies,

which are institutions that closely resemble banks.”14 Edward Yingling explains that:


6
  Nolan, supra note 2, at 205 (2006).
7
  See Moratorium on Certain Industrial Loan Company Applications and Notices, 71 Fed. Reg. 43482 (Aug. 1,
2006).The purpose of the moratorium was to “further evaluate (i) industry developments, (ii) the various issues,
facts, and arguments raised with respect to the ILC industry, (iii) whether there are emerging safety and soundness
issues or policy issues involving ILCs or other risks to the insurance fund, and (iv) whether statutory, regulatory, or
policy changes should be made in the FDIC‟s oversight of ILCs in order to protect the deposit insurance fund or
important Congressional objectives.”
8
  See Press Release, FDIC, FDIC Places Six-Month Moratorium on Industrial Loan Company Applications and
Notices, (July 28, 2006).
9
  See Press Release, FDIC, FDIC Extends Moratorium on ILC Applications by Commercial Companies for One
Year (Jan. 31, 2007).
10
   Industrial Bank Holding Company Act of 2007, H.R. 698, 110th Cong. (2007).
11
   See Parija B. Kavilanz, Wal-Mart Withdraws Industrial Banking Push, CNNMONEY.COM, Mar. 16, 2007.
12
   12 U.S.C.S. § 1841 (LexisNexis 2009)
13
   H. Comm. on Fin. Serv, Retailers Purchasing Industrial Loan Companies (May 2, 2007), available at
http://financialservices.house.gov/RetailersInBanking.html.
14
   Id.

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                                                                                                 Morgan Clemons
                                                                                     Financial Holding Companies
                                                                                           Lybecker, Spring 2010
         The definition of „bank‟ in the Bank Holding Company Act included only entities
         that offered commercial loans and accepted demand deposits. A number of large
         retail commercial entities exploited this provision by acquiring financial
         institutions that made loans but did not offer demand deposits. These so-called
         non-bank banks allowed commercial entities to avoid supervision as bank holding
         companies while offering banking services on an interstate basis.15

         Later, the Competitive Equality Banking Act (CEBA), passed in 1987, “amended the

definition of „bank‟ to include any financial institution that is FDIC insured.” 16 This brought

ILCs within the definition of a bank. However, ILCs would not be considered banks so long as

they did not accept demand deposits, their assets did not exceed $100 million, and “control of the

ILC [had] not been acquired by any company after August 10, 1987.” 17 Therefore, while an

ILCs is subject to FDIC regulation if its funds are federally insured, those ILCs that are not

owned by financial firms are not subject to an additional federal regulator like the SEC, OTS, or

more notably, the regulator of Bank Holding Companies—the Federal Reserve.18 This lack of

additional supervision—so called “consolidated supervision” was a source of contention for

those opposed to a large Wal-Mart bank. Overall, not only would the FDIC be the only regulator

(besides the state where the ILC received its charter), but it was also argued that the FDIC‟s

supervision capabilities were insufficient because of a lack of examination and enforcement

power.19



15
   Testimony Before the S. Comm. on Banking, Hous. and Urban Affairs, 110th Cong. 3 (2007) (statement of
Edward Yingling on Behalf of the American Bankers Association).
16
   Id. at 5.
17
   See Industrial Loan Companies, Before the S. Comm. on Banking, Hous. and Urban Affairs, 110th Cong. 3 (2007)
(statement of John F. Bovenzi, Chief Operating Officer and Deputy to the Chairman, FDIC).
18
   See Mark Jickling & Edward V. Murphy, Congressional Research Service, Who Regulates Whom?: An Overview
of U.S. Financial Supervision, Dec. 14, 2009, at 11 (“There is a dual banking system, in which each depository
institution is subject to regulation by its chartering authority: state or federal. In addition, because virtually all
depository institutions are federally insured, they are subject to at least one federal primary regulator. […] The
primary federal regulator of national banks is their chartering authority, the Office of the Comptroller of the
Currency (OCC). The primary federal regulator of state-chartered banks that are members of the Federal Reserve
System is the Board of Governors of the Federal Reserve System. State-chartered banks that are not members of the
Federal Reserve System have the FDIC as their primary federal regulator.”).
19
   See generally, Hillman supra note 1.

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                                                                                             Morgan Clemons
                                                                                 Financial Holding Companies
                                                                                       Lybecker, Spring 2010
            Wal-Mart‟s ILC application shook the financial world and caused the FDIC to take pause

in order to permit Congress to consider the state of ILCs. Scott G. Alvarez stated in his Senate

testimony that “what was once an exception with limited and local reach [had then] become the

avenue through which large national and international financial and commercial firms have

acquired federally insured banks and gained access to the federal safety net.” 20 The GAO listed

the possible choices in response to the Wal-Mart ILC application as:

            Eliminating the current [Bank Holding Company] Act exception for ILCs and
            their holding companies from consolidated supervision, granting FDIC similar
            examination and enforcement authority as a consolidated supervisor, or leaving
            the oversight responsibility of small, less complex ILCs with the FDIC, and
            transferring oversight of large, more complex ILCs to a consolidated supervisor.21


     III.      WAL-MART SHOULD NOT BE PERMITTED TO OWN A BANK.


            There have been three main arguments posited by opponents of the Wal-Mart bank.

First, it has been argued that a Wal-Mart ILC would have a negative impact on the world of

financial services because of Wal-Mart‟s reputation as a retailer. However, Edward Leary notes

that Congress should not “change, much less outlaw a proven, successful regulatory structure

because some groups have concerns about a particular applicant.”22 Second, the opposition is

united against a Wal-Mart Bank because, as a commercial parent, the structure would only be

subject to state and FDIC regulation. Third, those challenging the Wal-Mart ILC believe that the

bank‟s relationship to the parent company will be detrimental.                   For example, the bank‟s

reputation and financial stability will be viewed by outsiders as closely related to its parent‟s



20
   Testimony Before the S. Banking, Hous., and Urban Affairs Comm., 110th Cong. 2007 3 (statement of Scott G.
Alvarez, General Counsel Board of Governors of the Federal Reserve System).
21
   Hillman, supra note 1, at 4.
22
   Testimony Before the S. Banking, Hous. and Urban Affairs Comm., 110th Cong. 3 (2007) (G. Edward Leary,
Commissioner of Financial Institutions, State of Utah).

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                                                                                   Financial Holding Companies
                                                                                         Lybecker, Spring 2010
reputation and financial stability, and the parent will deny credit to competitors while forcing its

bank to extend credit to it.


     A. WAL-MART HAS A BAD REPUTATION AS CRUSHING THE COMPETITORS.

        Lloyd accurately describes the outcry against Wal-Mart‟s ILC application as

“protectionist reaction to appease lobbyists and constituents without actually weighing the issues

and the impacts.”23 Unfortunately, Wal-Mart‟s “public relation‟s troubles are restricting its

ability to grow.”24 Commercially, in the world of retail, Wal-Mart has established itself as an

aggressive giant that is unmatched. Kevin Nolan explains that “Wal-Mart achieved its status as

this retail behemoth by unflinchingly sticking to its goal of providing its customers the lowest

prices possible, at least until local competition is diminished.”25 Despite Wal-Mart‟s infamy26 in

the commercial world as crushing competitors, there is no basis for the assumption that its

behavior will be identical in the financial world.27 The company currently dabbles in the

financial industry with “money centers.”28 There is no indication that the success of these

services at Wal-Mart locations is predicated on ruthless or cutthroat tactics. For example, Jane J.

Thompson remarked that the success of the financial services the store currently offers to its

customers has not been based on an aggressive advertising campaign to force other check

cashing businesses out of business.29 Second, in reality, there is no guarantee that because Wal-


23
   Lloyd, supra note 3, at 243.
24
   Eric Dash, Wal-Mart Abandons Bank Plans, N.Y. TIMES, Mar. 17, 2007.
25
   Nolan, supra note 2, at 194.
26
   See Wilmarth, supra note 5, at 1609 (“Wal-Mart‟s emphasis on employing nonunionized, part-time workers to
reduce its labor costs has produced negative publicity, political opposition and many lawsuits (including a
nationwide class action) alleging employment discrimination and unfair labor practices.”).
27
   But see Nolan, supra note 2, at 194-95 (“Wal-Mart has shown a pattern of entering local communities and using
competitive pricing and other techniques to reduce local competition[…] A Wal-Mart ILC could have a similar
negative effect on local community banks.”); Cf. also Dash, supra note 24 (“its opponents said that Wal-Mart could
not be trusted.”).
28
   See http://www.walmart.com/cp/Money-Services/632400
29
   See Thompson (research forum), supra note 5.

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                                                                                                    Morgan Clemons
                                                                                        Financial Holding Companies
                                                                                              Lybecker, Spring 2010
Mart enters a market that it will dominate it.30 There is a possibility that, as is the risk with any

new venture, Wal-Mart‟s foray into the financial services world may be hardly noticeable or fail

completely.31 The fear of cutthroat competition is premature when “Wal-Mart doesn‟t have the

check-cashers shaking in their boots—at least not yet. For one thing, the check cashers have

Wal-Mart outnumbered, with more than 11,000 outlets cashing $55 billion in checks annually.”32

         It has been assumed that if Wal-Mart‟s business model were applied to its ILC, that this

would prove negative for the finance industry.                   Yet, “the company‟s management is widely

acknowledged to be top notch.”33 In addition, if Wal-Mart engenders competition, friendly or

otherwise, the consequences would be short of dire.                        It has also been argued, regarding

competition, that the parent companies of ILCs “operate under a substantially different

framework than the owners of other insured banks” which gives such companies a competitive

advantage over banks subject to consolidated supervision.34 However, this would not be unique

to Wal-Mart but rather all commercial owners of ILCs benefit from this loophole. In addition,




30
   But see Pallavi Gogoi, Wal-Mart Plans Poor Man's 'Bank', BUSINESSWEEK.COM, June 22, 2007, available at
http://articles.moneycentral.msn.com/Banking/Advice/WalMartPlansPoorManBank.aspx (“Of course, as with any
new area that Wal-Mart decides to target, experts expect that many Main Street financial-services shops like check-
cashing outlets will fold as the services start rolling out. In the past decade, Wal-Mart has become the largest
supermarket, selling more grocery and food items than any other retailer. It's also the largest toy store, and it's on the
way to becoming the largest seller of electronics goods. Meanwhile, rivals have filed for bankruptcy, including
supermarkets Winn-Dixie Stores in Florida and Penn Traffic in Pennsylvania; toy stores FAO Schwarz and KB
Toys; and, earlier this month, electronics-goods chain Tweeter Home Entertainment.”); see Anita Hamilton, Wal-
Mart’s Unbanking Business, TIME.COM, June 21, 2007, available at
http://www.time.com/time/business/article/0,8599,1635620,00.html (“And as countless small retailers can tell you,
when Wal-Mart decides it cares about a business, it usually finds a way to dominate it.”).
31
   See e.g. Wendy Zellner, Wal-Mart: Your New Banker?, BUSINESSWEEK.COM, Feb. 7, 2005, available at
http://www.businessweek.com/magazine/content/05_06/b3919046_mz011.htm ( Zellner notes “Sears's ill-fated
effort in the 1980s to create a financial supermarket with its Allstate (ALL ) insurance, Dean Witter brokerage, and
Coldwell Banker Real Estate units. Sears lost focus on its core business and found that many customers didn't want
to buy mutual funds or insurance from the same place that sold them appliances.”).
32
   Liz Pulliam Weston, The Basics: National Bank of Wal-Mart?, MSNMONEY.COM, available at
http://moneycentral.msn.com/content/banking/betterbanking/p109171.asp.
33
   David Reilly, Wal-Mart Can Do Us Good Taking on Bank of America, BLOOMBERG.COM, Mar. 13, 2009,
available at http://www.bloomberg.com/apps/news?sid=a4a4KU6OGTco&pid=20601039.
34
   Alvarez, supra note 20, at 12.

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                                                                                  Financial Holding Companies
                                                                                        Lybecker, Spring 2010
so-called “competitive imbalances” are rampant throughout the market. 35 Of primary concern

regarding competition is the closing of small community banks once a Wal-Mart bank moves

into local areas. Kevin Nolan states that community banks “primarily fund consumer and

business loans made to members of the community”36 but that “Wal-Mart may not be as

dedicated to the improvement of the local community.”37 Related to the community bank

concern is the idea that Wal-Mart will “take deposits from local communities without having to

reinvest in these same communities.”38 However, “Wal-Mart is, in fact and in practice, clearly

committed to supporting community banking, not undermining it.”39 It is also important to

recognize the alternative to the argument that Wal-Mart‟s competition strategy is not good for

the financial sector. If Wal-Mart‟s method of cutting prices and forcing competitors to follow

suit were applied to its ILC, more people would have access to financial services at reasonable

rates.40 While it is the small community bank that is being posited as the victim of the Wal-Mart

giant, it is in fact the large financial service providers who are behind this argument and who

would benefit from Wal-Mart being denied access to the industry.

        It is clear that government regulators have targeted Wal-Mart because of its size,41 prior

commercial reputation, and threat to both commercial and financial competitors if permitted to

own an ILC. For example, “industry observers said they see very little downside to a Wal-Mart

industrial bank since some of its competitors, including archrival Target, already operate a


35
   Id. at 13.
36
   Nolan, supra note 2, at 195 (2006).
37
   Id.
38
   Id. at 196.
39
   Thompson (research forum), supra note 5.
40
   See David Leonhardt, Who’s Afraid of Banking at Wal-Mart?, N.Y. TIMES, Mar. 15, 2006 (“Now think about
what would happen if Wal-Mart applied its legendary price-cutting to banking. Because starting a new bank is quite
difficult, banks have been able to get away with things that other companies just can‟t. They refuse to give you
access to money for days after you cash a check, even though the money itself now moves within minutes. And they
have long ignored low-income families, because the banks can make enough money elsewhere.”).
41
   See Dash supra note 24 (Wal-Mart is “the world‟s largest retailer.”).

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                                                                                    Financial Holding Companies
                                                                                          Lybecker, Spring 2010
similar setup.”42 Why should Target be permitted to thrive and expand?43 In addition, there is

no indication that Target‟s foray into the ILC business led to customer savings. Whereas,

regardless of the negative implication of Wal-Mart‟s competitive nature, it cannot be stated that

Wal-Mart does not pass on savings to its customers with it price-cutting maneuvers. In addition,

the size of Wal-Mart, especially with regard to its ability to consume FDIC funds and control the

industry, has been a topic of much discussion. This is so, even though “federal law place[d] no

limit on how large an ILC may become.”44 However, in 2006, ILC deposits amounted to “less

than 3 percent of the total estimated insured deposits in the bank insurance fund for all banks.”45

Is this three percent of funds, even when one adds Wal-Mart to the mix of ILCs, really capable of

toppling the financial industry? The GAO noted that “all of the ILCs that failed since the late

1980s […] were relatively small in size compared with some of the large ILCs that currently

dominate the industry [and the] FDIC has no experience using its supervisory approach to

mitigate potential losses from troubled ILCs” as large as Wal-Mart.46                       Yet, Mark Gimein

recognizes the fallacy in this supposed fear of large commercial ILCs when he states that:

        An equal affront to memory is the Obama team‟s attack on the sheer bigness of
        banks. For the last two years, as the credit crisis engulfed the banking system,
        making banks bigger was actually part of the government‟s effort to fix the crisis.
        The directive from policymakers at the Treasury Department and the Federal
        Reserve was merge, merge, merge. JP Morgan Chase got Washington Mutual
        and Bear Stearns. Wells Fargo gobbled Wachovia. And Merrill Lynch went to
        Bank of America in a union the government pushed so hard that the



42
   Parija Bhatnager, Wal-mart’s Bank Fracas: Pros and Cons, CNNMONEY.COM, Aug 14, 2006.
43
   See Weston, supra note 32 (“other retailers, including Nordstrom and Target, have purchased banks without
creating nearly the fuss that Wal-Mart‟s involvement generates. But those chains don‟t have nearly the scope or the
economic muscle that Wal-Mart flexes.”).
44
   Alvarez, supra note 20, at 4.
45
   Hillman, supra note 1, at 7.
46
   See id. at 21; Cf The Right Policy for Industrial Loan Companies, Testimony Before the S. Banking, Hous., and
Urban Affairs Comm.110th Congr. 2 (2007) (statement by Peter J. Wallison on behalf of American Enterprise
Institute) (“no harm can result from combinations between banks and other financial organizations, no matter what
their size.”).

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                                                                                        Financial Holding Companies
                                                                                              Lybecker, Spring 2010
         recriminations are still flying over whether the deal was Bank of America‟s or the
         government‟s.47

         Wal-Mart‟s size could be beneficial because it has the necessary capital and has

established the stability that is crucial to operating a financial entity.48 Utah, for example

considers, with regard to approving ILC applications, whether the “organizers have the resources

(sources of capital) to support an [industrial bank].”49 In fact, for a commercial firm like Wal-

Mart, to enter the banking business could be good for more than just customers.                                      The

competition, and resulting possible reduction in the price of financial services offered, should not

be viewed negatively simply because Wal-Mart is a dominant force.50 Rather, Peter Wallison

explained that removing barriers to competition, based on size and reputation in the case of Wal-

Mart, could, in fact, be good for the economy:

         Allowing nonfinancial companies to enter into competition with banks will bring
         more competition, more capital, more innovation and lower costs to the banking
         industry. This has happened in virtually every case where Congress has
         deregulated an industry. The influx of new competitors and new capital has been
         one of the reasons we have such a dynamic economy.51

Finally, one view is that diversity within a holding company structure that involves commercial

and financial activities rather than a company restricted to financial services is actually less

risky.52 Besides the diversity, permitting Wal-Mart and other commercial firm‟s access to the



47
   See Mark Gimein, What Makes Banks Fail, THEBIGMONEY.COM, Jan. 24, 2010, available at
http://www.thebigmoney.com/articles/money-trail/2010/01/24/what-makes-banks-fail.
48
   See Hillman, supra note 1, at 26 (“Because banks incur large fixed costs when setting up branches, computer
networks, and raising capital, these institutions may benefit from the selected economies of scale and scope that
could result from affiliations with commercial entities.”).
49
   Utah Department of Financial Institutions, What is an Industrial Bank?, available at
http://www.dfi.utah.gov/whatisIB.htm.
50
   See e.g. Leary supra note 22, at 14 (“Utah struggles to understand why Congress would want to keep out well-
capitalized innovative entrants to the market?”).
51
   Wallison, supra note 46, at 8.
52
   See ILCs: A Review of Charter, Ownership, and Supervision Issues, Before the H. Comm. on Fin. Serv., 109th
Cong. 9 (2006) (testimony of John L. Douglas, on Behalf of the American Financial Services Association) (“having
strong owners of depository institutions with diversified sources of income may be more beneficial to our system
than artificially limiting ownership to those that are engaged solely in activities so closely related to the business of

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                                                                                                Morgan Clemons
                                                                                    Financial Holding Companies
                                                                                          Lybecker, Spring 2010
financial world can be less risky because “Wal-Mart‟s reams of transaction data might also help

it make safer loans [because] „[i]f you serve primarily shoppers in the store, then you know

something about their spending patterns and behavior.‟ ”53

    The argument against competition is an argument within financial circles from banks that

will have to battle against a Wal-Mart bank in the future54 and the other losers in the scenario—

“the third party processors that currently handle Wal-Mart‟s transactions that will lose a large

client.”55 In the New York Times article, “Who‟s Afraid of Banking at Wal-Mart?,” author

David Leonhardt states that a Wal-Mart bank “would mainly hurt mammoth corporations and

Wall Street”56 and would “make life difficult for the Citigroups of the world and bring down

A.T.M. fees.”57


    B. ILCs OWNED BY COMMERCIAL PARENTS LIKE THE PROPOSED WAL-
       MART BANK WILL LACK SUPERVISION AND REGULATION.

        If Wal-Mart and other commercial entities were to own subsidiary ILCs, they would not

be subject to consolidated federal regulation. The FDIC explains that “federal oversight of the

relationship between an insured bank and its affiliates may occur in two ways: bank supervision

and holding company supervision. […] The ILC is subject to oversight by federal and state

bank regulators; however, the controlling company in many cases is not.” 58 Other ILCs that are

owned by parent companies that are financial in nature are subject to duplicative regulation by

both the FDIC and an additional federal regulator, depending on the nature of the parent

banking as to be a proper incident thereto or solely in financial activities as deemed permissible by the Federal
Reserve.”).
53
   Reilly, supra note 33.
54
   Wallison, supra note 46, at 1; see Wilmarth, supra note 5, at 1592 (“commercial firms will have a significant
funding advantage- and therefore an important competitive edge over competitors that do not own ILCs.”).
55
   Igor Fasman, Developments in Banking and Financial Law: 2006-2007: Wal-Mart Banking Bid, 26 ANN. REV.
BANKING & FIN. L. 116, 124 (2007).
56
   Leonhardt, supra note 40.
57
   Id.
58
   H. Comm. on Fin. Serv., Retailers Purchasing Industrial Loan Companies, May 2, 2007.

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                                                                                    Financial Holding Companies
                                                                                          Lybecker, Spring 2010
company. Instead, the FDIC and the state where the ILC is chartered regulate the ILC. The

GAO explains that parent companies that are financial in nature and their banking subsidiaries

and affiliates “are subject to a consolidated—or top down—supervisory approach”59 while the

FDIC‟s regulation of ILCs and their affiliates is “bank-centric or bottom-up.”60 Overall, the

Federal Reserve Board, the consolidated supervisor of bank holding company structures, has

“general authority to examine holding companies and their nonbank subsidiaries.” 61 However,

the FDIC is restricted to “examin[ing] some, but not all affiliates in a holding company

structure.”62 In addition, the Federal Reserve may impose capital requirements and require that

the holding company act as a “source of strength” to the banking entity; the FDIC does not have

these powers in its regulation of an ILC with a non-financial parent.63

         To require that industrial banks necessarily have such consolidated supervision

undermines the dual banking structure.64              The suggestion that only Federal Reserve Board

supervision will suffice does more than just imply that state and FDIC regulation is not good

enough. However, the dual banking system serves its purpose and helps to drive competition.65

For example, one of the reasons that Utah is favored by ILCs is because of the state‟s “desirable

usury law,”66 and because “Utah businessmen and legislators have collaborated to be on the

forefront of deregulation of the financial industry.”67 However, it is not clear that additional


59
   Hillman, supra note 1, at 10.
60
   Id. at 11.
61
   Id. at 12.
62
   Id. at 13.
63
   Alvarez, supra note 20, at 10.
64
   See Leary, supra note 22, at 2 (“It is therefore vital that there is more than one approach to the regulation and
supervision of financial institutions.”); see also Rose Marie Kushmeider, The U.S. Federal Financial Regulatory
System: Restructuring Federal Bank Regulation, FDIC BANKING REVIEW, 2005 at 9 (what Kushmeider describes as
“the right of states to charter and supervise banks.”).
65
   See Kushmeider, supra note 64, at 20 (“state regulators […] compete with their federal counterparts in the
regulation and supervision of financial services firms.”).
66
   Lloyd, supra note 3, at 218.
67
   Id.

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                                                                                                    Morgan Clemons
                                                                                        Financial Holding Companies
                                                                                              Lybecker, Spring 2010
regulation is as beneficial as suggested or that it should apply to ILCs. For example, supervision

by a second federal regulator, under the idea of consolidated supervision, did not prevent the

financial crisis.68 American Enterprise Institute representative Peter Wallison testified that,

“securities firms, which can now control banks, are among the riskiest companies in our

economy.”69 This explains why perhaps such firms are and should be subject to more regulation

as compared to ILCs. In addition, even with consolidated supervision, regulatory arbitrage will

occur. In fact, more regulators equal more competition and infighting among regulators and

even less accountability.70 Making ILCs subject to the current system of regulation to which

bank holding companies are subject may simply lead to more “battles over turf.”71                                  With

competition among state and federal regulators already an issue, the added regulator may do

more harm than good,72 especially when no clear evidence has been presented that the current

method of regulating ILCs has not worked in the past.73 The current regulatory method for ILCs

and their affiliates may be preferable and a more sensible means to manage complicated financial

structures because the “regulation is [not] divided.”74 Besides financial conglomerates, other


68
   See Jickling & Murphy, supra note 18, at 1 (“even overlapping jurisdictions—where institutions were subject to
more than one regulator—could not ensure the soundness of regulated financial firms.”).
69
   Wallison, supra note 46, at 7.
70
   See “The Watchmen” audio recording, This American Life, (June 5, 2009), available at
http://www.thisamericanlife.org/radio-archives/episode/382/The-Watchmen; see also Kushmeider, supra note 64, at
8 (“In addition to blurring the lines of authority, the current federal financial regulatory system makes it hard for any
one agency to be held accountable for its actions or lack, thereof. Such an absence of regulatory accountability
enables regulators to pass the buck but, more importantly, it may leave holes in the regulatory structure—regulatory
gaps—that should not go unfilled. The complicated structure of regulation may lead to some problem or abuse not
being detected, because a particular agency believes the problem lies in some other agency‟s jurisdiction.”).
71
   Kushmeider, supra note 64, at 20.
72
   Id. (Kushmeider mentions “the dynamic tension created by the presence not only of state regulators but also of
multiple federal regulators has led many banking commentators to observe that nothing will change the regulatory
structure of the financial services industry unless the politics of the current system are taken into consideration.”)
73
   See e.g. Thompson (research forum), supra note 5 (“Both the FDIC and the OTS, and in this case, the Utah
Department of Financial Institutions, have admirable track records of regulating and supervising diversified
financial companies in their ownership of depository institutions.”).
74
   ILCs: A Review of Charter, Ownership, and Supervision Issues, Testimony Before the H. Fin. Serv. Comm. 109th
Cong. 7 (2006) (George Sutton on Behalf of the Securities Industry Association); see also Kushmeider, supra note
64, at 7 (“as the permissible activities of financial conglomerates have expanded, so has the potential for overlap and
duplication between bank and other financial services regulators.”).

                                                           13
                                                                                                     Morgan Clemons
                                                                                         Financial Holding Companies
                                                                                               Lybecker, Spring 2010
regulators that would perform as the consolidated regulator stand to benefit if commercial

parents of ILCs are regulated like bank holding companies.                          For example, Peter Wallison

explained that:

        The movement of state chartered banks to national charters has meant that the
        Fed‟s principal role as a regulator in the banking system is through its regulation
        of bank holding companies. It‟s reasonably clear that if the separation of banking
        and commerce were eliminated and commercial firms could acquire banks, the
        Fed would no longer be able to maintain its role as regulator of holding
        companies.75
Finally, while state regulation seems to be viewed as insufficient, Marc E. Lackritz, former CEO

of SIFMA stated that “no industrial bank in Utah has failed in the last 20 years, even in one

instance when an industrial bank‟s holding company went bankrupt.”76 This figure must be

acknowledged as a testament to the adequacy of state regulation.

         The reasoning provided for the overregulation of a Wal-Mart ILC is baseless because,

most importantly, for all the reasons stated, it has not been “indicated that any ILC failed because

of commercial affiliation”77; the evidence is absent from the equation. That ILCs are state-

chartered and not subject to consolidated federal regulation does not make an ILC any more

unsafe, especially in the wake of major failures with traditional banks within the financial

industry.78

         Overall Wilmarth places the shortcomings of the FDIC into three categories—that the

FDIC “has only limited power to examine the parent company or one of its nonbank

subsidiaries,”79 “the FDIC cannot impose capital requirements on the parent company of an ILC


75
   Wallison, supra note 46, at 11.
76
   Testimony Before the S. Comm. on Banking, Hous., and Urban Affairs, 110th Cong. 3 (Marc E. Lackritz,
President and CEO of SIFMA).
77
   Lloyd, supra note 3, at 236.
78
   Hillman, supra note 1, at 10 (“like other insured depository institutions, the risk of failure and loss to the Fund
from ILCs is not related to the type of charter the institution has. […] FDIC officials stated that their experience
does not indicate that the overall risk profile of ILCs is different from that of other types of insured depository
institutions, and ILCs do not engage in more complex transactions than other institutions.”).
79
   Wilmarth, supra note 5, at 1613.

                                                           14
                                                                                                 Morgan Clemons
                                                                                     Financial Holding Companies
                                                                                           Lybecker, Spring 2010
or on any of its nonbank subsidiaries,”80 and “the FDIC has only limited authority to bring

administrative enforcement proceedings.”81 It is important to note that the FDIC is not a weak

regulator as some imply with the push toward consolidated supervision. For example, the FDIC

can cancel deposit insurance.82 The FDIC‟s ability to deny insurance coverage to the ILC could

certainly have an affect on Wal-Mart‟s ability to be competitive against other institutions that are

insured. Therefore, while the termination of insurance protection may not, arguably, compare to

the enforcement and regulatory powers of the Federal Reserve for example, it does at least

impact the concern of Wal-Mart‟s ability to easily slay its competition.                          In addition, the

insufficiency of the FDIC as a sole regulator and the ability of a Wal-Mart bank depleting the

FDIC‟s funds because of its size and dominance are two ideas that are exaggerated. 83 Besides

Utah‟s demonstration of regulatory adequacy, the FDIC‟s supervision of ILCs can also compete

favorably with a comparison of the failures other regulators have experienced. Though it is

recognized that ILCs are certainly fewer in number than financial holding company or bank

holding company structures and have only recently emerged as an ideal option for commercial

and financial entities, John L. Douglas noted in his House Financial Services Committee

testimony that:

         There have only been two failures of FDIC-insured industrial loan banks owned
         by holding companies. These holding companies were not commercial (i.e., a
         nonfinancial) enterprises. These two failures cost the FDIC roughly $100 million.
         Both failed not as a result of any self-dealing, conflicts of interest or impropriety
         by their corporate owners; rather, they failed the „old fashioned way‟—poor risk
         diversification, imprudent lending and poor controls. These two failures stand in
         sharp contrast to the hundreds of bank failures that operated in holding company
80
   Id. at 1614.
81
   Id.
82
   See Hillman, supra note 1, at 20 (“the prospect of terminating insurance is usually sufficient to secure voluntary
corrective action by a holding company to preclude the occurrence of an unsafe or unsound practice or condition or
restore the institution to a safe and sound financial condition.”).
83
   It should be noted that the outcry over Wal-Mart engaging in full-service banking and accepting demand deposits
for the parent retailer to use at its will is somewhat misplaced because “Wal-Mart bank is not required to accept
deposits from the public in order to obtain deposit insurance from the FDIC.” See Wilmarth, supra note 5, at 1548.

                                                         15
                                                                                                   Morgan Clemons
                                                                                       Financial Holding Companies
                                                                                             Lybecker, Spring 2010
         structures, many of which cost the FDIC billions of dollars […] all of which were
         subject to the much-vaunted „consolidated supervision‟ by the Federal Reserve as
         the holding company regulator that is offered as a cure for something that hasn‟t
         proven to be a problem.84

         John Bovenzi, like others, again highlighted that “the causes and patterns displayed by

problem ILCs have been like those of other institutions.”85 Overall, these arguments against

Wal-Mart are based on the fact that “Wal-Mart is treated differently than the myriad of

commercial and retail firms that now engage in far broader banking activities than” what Wal-

mart intended.86 The disparity when it comes to Wal-Mart is recognizable and is described by

Lloyd as a “response to national hostility or animosity toward Wal-Mart.”87 This stems from the

fact that “Wal-Mart‟s credibility [is] again questioned.”88

     C. THE RELATIONSHIP BETWEEN THE BANK AND ITS COMMERCIAL
        PARENT WILL PROVE DETRIMENTAL TO THE BANK.

         One argument against permitting Wal-Mart to own an ILC is that the bank will be

consumed by the reputation and condition of its commercial parent. Wal-Mart is one of the most

profitable and stable companies in history.89 While the government has tried to hide the ball




84
   Douglas, supra note 52, at 7-8.
85
   See Bovenzi, supra note 17, at 6.
86
   Thompson (research forum), supra note 5.
87
   Lloyd, supra note 3, at 243.
88
   Dash, supra note 24.
89
   The worry about Wal-Mart‟s financial condition may be misplaced considering that “the bank‟s assets would be
concentrated in highly-rated investment grade securities and would have no credit risk from lending activities,
because the proposed bank would not engage in lending.” See Thompson (research forum), supra note 5; see also
John Berlau, Why Not a Wal-Mart Bank?, OPENMARKET.COM, Dec. 15, 2008, available at
http://www.openmarket.org/2008/12/15/why-not-a-wal-mart-bank/ (“It‟s now kind of hard to argue that a Wal-Mart
bank would add any significant systemic risk to the banking system, given the incredibly stupid risks that many of
the biggest established banks have taken. Wal-Mart, by contrast, looks like an especially prudent company. Not
only are consumers flocking there for bargains, but so are investors, as the company‟s stock price hasn‟t tumbled
nearly as much as other firms of its size.”). But cf Wilmarth, supra note 5, at 1609 (“it is not inconceivable that Wal-
Mart and Home Depot could someday find themselves in positions similar to GM and Ford. The growth rate for
Wal-Mart‟s domestic sales has declined sharply in recent years.”).

                                                          16
                                                                                                 Morgan Clemons
                                                                                     Financial Holding Companies
                                                                                           Lybecker, Spring 2010
from the public regarding the stability of some companies in order to prevent bank runs,90 the

GAO stated in 2006 that “no recent bank failures [] resulted from reputation risk.”91 Yet, the

fear is that “a parent company may encounter serious problems that cause the public to lose

confidence in the ILC itself.”92 For example, Arthur Willmarth notes that the proposed Wal-

Mart bank could end up like “General Motors Acceptance Corporation (GMAC), the finance

subsidiary of General Motors Corporation (GM), [which] saw its credit ratings fall to junk bond

levels because of the ratings agencies‟ concerns about GM‟s severe challenges.”93

         Another concern is that the Wal-Mart parent will make the ILC loan to its affiliates and

prohibit the ILC from making loans to Wal-Mart‟s competitors. In reality though, this is a

general risk with commercial companies and ILCs and not unique to the proposed Wal-Mart

ILC. Scott G. Alvarez, Federal Reserve general counsel stated that “history demonstrates that

financial trouble in one part of a business organization can spread, and spread rapidly, to other

parts of the organization [and that] large organizations increasingly operate and manage their

businesses on an integrated basis with little regard for the corporate boundaries.” 94 The fear with

regard to the parent company using the bank to its benefit is based on the notion that:

         Federal deposit insurance can also create incentives for commercial firms
         affiliated with insured banks to shift risk from commercial entities that are not
         covered by federal deposit insurance to their FDIC-insured banking affiliates.95

In addition, Wal-Mart could use the bank to loan to the company or its affiliates if the economic

trouble was on the horizon while another, outside bank, may have viewed the loan as too risky. 96


90
   See e.g. Wilmarth, supra note 5, at 1619 (internal quotations omitted) (“during the banking crisis of 1984-1992,
Bank of America and Citicorp, the two largest U.S. banks, each came perilously close to failure. However, federal
regulators did not take public enforcement action against either bank […] because they feared that public disclosure
of the bank‟s problems might trigger a generalized crisis of public confidence in the banking system.”).
91
   Hillman, supra note 1, at 19.
92
   Wilmarth, supra note 5, at 1606.
93
   Id. at 1608.
94
   Alvarez, supra note 20, at 9.
95
   Hillman, supra note 1, at 25.

                                                         17
                                                                                                   Morgan Clemons
                                                                                       Financial Holding Companies
                                                                                             Lybecker, Spring 2010
However, these arguments do little to distinguish a large ILC like the Wal-Mart bank from other

institutions. For example, when GMAC was in trouble, the FDIC quickly approved its request to

become a bank-holding company for the purpose of having access to the same deposit insurance

that a troubled ILC would have access to.97 The size of Wal-Mart and its relation to approval of

any ILC charter once again becomes an issue. Kevin Nolan describes a slippery slope problem:

         If one of Wal-Mart‟s subsidiaries or Wal-Mart itself made poor credit decisions
         and sustained large losses, it is possible that Wal-Mart could sell these loans to
         the Wal-Mart ILC knowing that the ILC is federally insured. The Wal-Mart ILC
         could become insolvent but the depositors of the ILC would be insured,
         permitting Wal-Mart to continue operations after shifting these losses to the
         government. The insolvency of a Wal-Mart ILC could mean significant losses
         and could have a significant negative impact on our national economy.98


However, the GAO notes that “past experience has shown that, regardless of whether regulatory

safeguards […] are set properly, even periodic examinations cannot ensure that regulatory

safeguards can be maintained in times of stress.”99 The Federal Reserve Act restricts such

lending activities among affiliates.100 The relevant parts of the Federal Reserve Act state that:

         a member bank and its subsidiaries may engage in [] transactions […] on terms
         and under circumstances, including credit standards, that are substantially the
         same, or at least as favorable to such bank or its subsidiary, as those prevailing at
         the time for comparable transactions with or involving other nonaffiliated
         companies, or in the absence of comparable transactions, on terms and under
         circumstances, including credit standards, that in good faith would be offered to,
         or would apply to, nonaffiliated companies.101




96
   See id.
97
   See e.g. Wilmarth, supra note 5, at 1620.
98
   Nolan, supra note 2, at 206.
99
   Hillman, supra note 1, at 22.
100
    See 12 U.S.C.S. §371(c) 1 (LexisNexis 2008). But see Wilmarth, supra note 5, at 1596 (“these firewalls have
often been disregarded under circumstances of financial stress when the financial viability of a controlling
shareholder or affiliate is threatened. […] a high percentage of thrift failures during the 1980s involved violations of
rules governing affiliate transactions and insider lending.”).
101
    12 U.S.C.S. § 371(c) (1)

                                                          18
                                                                                                     Morgan Clemons
                                                                                         Financial Holding Companies
                                                                                               Lybecker, Spring 2010
Lloyd also notes that being choosy about to whom to lend or engage in financial transactions

would not make economic sense for the bank or its commercial parent. 102 This would especially

make less sense for a company like Wal-Mart that has a reputation for being concerned with the

bottom line.

      IV.      THERE COULD BE BENEFITS TO WAL-MART’S OWNING AN ILC.

            Industry issues with Wal-Mart certainly affected the retailer‟s success in obtaining the

approval of an ILC charter in a timely manner. Regardless of individual opinions of the

company or incentives to restricting its access to providing financial services, a Wal-Mart ILC

can have positive implications. The positive aspects of a Wal-Mart have largely been ignored.

Though Wal-Mart is competitive and sees a high profit margin each year, the company

“contributed more than $200 million to support communities served by [its] stores, making it the

top cash contributor of any corporation in America.”103

            One benefit to a Wal-Mart ILC is that Wal-Mart can help the underserved. Financial

services offered by Wal-Mart can serve a specific population that is typically ignored by the

financial industry.        There is focus on Wal-Mart‟s negative reputation, but considering the

historical purpose of ILCs,104 Wal-Mart‟s reputation as a low-price leader that caters to lower

middle class patrons,105 is perfectly aligned with this historical purpose. The population that

Wal-Mart could serve want to keep banking “simple and not complicated.”106 A Wal-Mart bank


102
    Lloyd, supra note 3, at 239 (“refusing to lend to the competitors of its nonbank affiliates or granting credit to its
affiliates on favorable terms runs counter to market forces because it serves only to reduce bank income.”) (internal
quotations omitted).
103
    Thompson (research forum), supra note 5.
104
    See H. Comm. on Fin. Serv., Retailers Purchasing Industrial Loan Companies, May 2, 2007 (“These early
industrials operated more or less like finance companies, providing loans (at a high interest rate) to wage earners
who could not otherwise obtain credit.”); see also Hillman, supra note 1, at 1-2 (ILCs “primarily served the
borrowing needs of industrial workers unable to obtain noncollateralized loans from banks.”).
105
    See Weston, supra note 32 (Wal-Mart‟s customer‟s average incomes are below the national average […] Some
analysts estimate that more than one fifth of Wal-Mart‟s customers have no bank accounts.”).
106
    See Thompson (research forum), supra note 5.

                                                           19
                                                                                                    Morgan Clemons
                                                                                        Financial Holding Companies
                                                                                              Lybecker, Spring 2010
will “serve customers who have not traditionally been served by other types of financial

institutions.”107 Jane Thompson states that the particular Wal-Mart customer in mind needs their

money immediately available, while banks accepting Friday deposits may not have the money

accessible until “Monday or even maybe to Tuesday before that check clears.” 108 Other issues

that plague the underserved are the various “late fees, recurring fees, [and] end of the month

ATM fees that eat up the paycheck.”109 These are issues of banking behemoths and not a new

entrant into the world of financial services. MSN Money contributor Weston even mentions

“lenders who charge minorities hundreds of dollars more for loans than whites with similar credit

scores.”110

         Another benefit to the Wal-Mart ILC is that the ILC can pass savings onto customers. By

opening an ILC, Wal-mart has the potential to save “over three-quarters of a billion dollars a

year in fees” that it currently pays to third parties.111 Allowing Wal-Mart to expand its financial

services products will be beneficial to Wal-Mart‟s customers. Wal-Mart is continuously looking

for ways to cut prices and pass savings onto its customers.112 Liz Weston provides telling

figures: “a wire transfer to Mexico costs less than $10 compared to $14.99 at Western Union.

Money orders are less than 50 cents, compared to a buck or more at money banks.”113

Regardless of the supposed negative repercussions of Wal-mart‟s being permitted to own an ILC,




107
    See Bovenzi, supra note 17, at 2-3.
108
    See Thompson (research forum), supra note 5.
109
    See id.
110
    Weston, supra note 32.
111
    Bhatnager, supra note 42.
112
    See Thompson (research forum), supra note 5 (“a little growth, debit‟s going to grow, credit‟s going to grow,
electronic checks are going to grow, but it‟s still not going to ever be a lot of revenue for the company, but we did it
because we look for every nickel and every dime to save money for our customers.”); see also Peter J. Wallison, Is
Wal-Mart Leaving the Money Business? Don’t Bank On It, J. AM. ENTERPRISE INST., , Mar. 19, 2007, available at
http://www.american.com/archive/2007/march-0307/is-wal-mart-leaving-the-money-business-don2019t-bank-on-it
113
    Weston, supra note 32.

                                                           20
                                                                                                      Morgan Clemons
                                                                                          Financial Holding Companies
                                                                                                Lybecker, Spring 2010
the “expansion of Money Centers is a more effective way to add shoppers than price cuts.”114 In

this way, Wal-Mart‟s commercial consumers, current users of Wal-Mart‟s limited money

centers, and future users of its expanded financial services offerings can benefit.115 One thing

that is clear is that Wal-Mart, with all of its negative press, is not shrouded in a cloud of secrecy

like the stability of some financial service providers. Instead, Wal-Mart‟s tactics are well-

known. When a commercial firm suffers, it is usually to the benefit of its competitors.116 When

a bank fails, given the interconnectedness of the financial industry and reliance on other banks

for liquidity, the entire industry can be toppled. 117 Whether such systemic risk could play a role

in the relationship between the commercial and financial model that could result from ILC

ownership is a more difficult issue. Where bank regulation and market discipline failed is

because of a lack of transparency, not because of a lack of extra regulators. On the contrary,

according to Bloomberg.com contributor David Reilly, Wal-Mart could “be the kind of private

initiative that helps ease the smothering influence of government in the industry.”118 Arguably,

imposing counter-cyclical restrictions on Wal-Mart is a misplaced solution when the commercial

world, and specifically Wal-mart does not have the same issues of secrecy that are prevalent in




114
    Lauren Coleman-Lochner, Wal-mart Will Open 1,000 Financial Centers by 2009, BLOOMBERG.COM, June 20,
2007.
115
    See Weston, supra note 32 (“Wal-Mart's relentless push for ever-lower prices has revolutionized retailing and is
sometimes even credited for helping to keep U.S. inflation low. It's not hard to make the leap into imagining the
retailer bringing similar price discipline to an industry grown fat on escalating rates and fees. (Fee income now
comprises half of banks' total income.”).
116
    See Ronald J. Mann, A Requiem for Sam’s Bank, 83 CHI.-KENT L. REV. 953, 965 (2008) (“When a large
corporate enterprise fails, the resulting financial distress is borne primarily (though not entirely) by that institution‟s
shareholders and its contract partners (creditors, suppliers, employees, and the like). In the case of a depository
institution, however, there is a greater risk that the failure of the institution will have ripple effects extending
throughout the economy to the creditors of creditors. This is particularly true when the bank that fails holds large
deposits from other banks.”).
117
    Id.
118
    Reilly, supra note 33.

                                                            21
                                                                                               Morgan Clemons
                                                                                   Financial Holding Companies
                                                                                         Lybecker, Spring 2010
the financial industry. Rather, Wal-mart has attempted to be helpful in the ILC application

process.119

           Additionally, as has already been stated, a Wal-Mart ILC could be beneficial because

competition could reduce financial services costs to consumers,120 and the commercial giant has

sufficient capital to suggest stability.121 More specifically, David Reilly explains that:

           The economy is in an awful jam. Consumers and businesses need access to credit.
           Many banks, starved of capital, aren‟t up to the task. Nor is the shadow banking
           system, which offered an alternative source of credit from money-market, bond
           and hedge funds, but has now dried up. One suggested out: Create new banks that
           wouldn‟t be saddled with the soured loans and toxic assets constraining other
           lenders. That‟s easier said than done. Even with government funds, most start-
           ups couldn‟t muster the technology, infrastructure and management expertise to
           form the kind of big, national bank that could quickly have an impact. Most, that
           is, except for Wal-Mart Stores Inc. The retailing giant could probably get a big
           bank up and running pretty easily. If, that is, its opponents put the economy‟s
           needs ahead of their own interests.122

Overall, Peter Wallison explains that “the withdrawal of [the Wal-Mart] application means

America‟s working families, who are Wal-Mart‟s principal customers, will have to pay more for

what they buy at Wal-Mart, and should thank their representatives in Congress for this

privilege.”123

      V.      CONCLUSION

           The FDIC prohibited Wal-Mart from moving forward with its ILC application. Because

of its size and reputation, legislators, big bank representatives, and financial services insiders

rallied against the commercial giant‟s entry into the banking business. Wal-Mart‟s general

opponents argue against the retailer‟s competitive tactics, and the Wal-Mart ILC opponents are
119
     Thompson (research forum), supra note 5 (“During the application process, we have listened to others and made
a number of significant changes to the bank application in response to comments and concerns.”).
120
     See Ronald Ence and Howard L. Davidowitz, Wal-Mart: Stay Out of Banking, Period, BUSINESSWEEK.COM,
available at http://www.businessweek.com/debateroom/archives/2007/07/wal-mart_stay_o.html; see also
Leonhardt, supra note 40.
121
     See Hillman, supra note 1, at 26.
122
    See Reilly, supra note 33.
123
     See Wallison, supra note 112.

                                                        22
                                                                                                 Morgan Clemons
                                                                                     Financial Holding Companies
                                                                                           Lybecker, Spring 2010
no different. They also believe that the retailer‟s expansion of services will do more harm than

good by forcing out local competition.124 However, Wal-Mart‟s size could be helpful because it

has the necessary capital and experience to venture easily into banking and alleviate credit issues

during trying economic times.125 Second, Wal-Mart‟s business model is not as abhorrent as the

ILC‟s critics assume because the lowering of the cost of financial services will benefit the

public.126

         Another issue of concern to opponents of a Wal-Mart ILC is that the structure would not

be subject to consolidated supervision.127 However, this supposed flaw of ILCs with commercial

parents is based on the assumption that FDIC and state supervision are inadequate. Instead, the

consolidated regulation that was proposed would disturb a proven model and reduce regulatory

efficiency and accountability.128

         Finally, the last argument against the Wal-Mart ILC is that the retailer will use the ILC

subsidiary to benefit the commercial parent or thwart its commercial competitors.129                            This

argument is weak because the likelihood of Wal-Mart needing financial help is low,130 and bad

lending decisions are bad for business.131

         There are, in fact, benefits to a Wal-Mart ILC. The ILC could provide financial services

to the “underserved”132 and reduce the cost of banking for everyone.133 In addition, one thing

that is notable about Wal-Mart‟s infamous controversies is that they are well-known to the


124
     See Nolan, supra note 2, at 195.
125
     See Reilly, supra note 33; see also Hillman, supra note 1, at 26.
126
     See Ence & Davidowitz, supra note 120; see also Leonhardt, supra note 40.
127
     See Jickling & Murphy, supra note 18, at 11.
128
     See Kushmeider, supra note 64, at 7, 8, 20; see also Thompson, supra note 5; see also Douglas, supra note 52, at
7-8.
129
     See Alvarez, supra note 20, at 9.
130
     See Reilly, supra note 33.
131
     See Lloyd, supra note 3, at 239.
132
    See Bovenzi, supra note 17, at 2-3.
133
     See Thompson, supra note 5; see also Weston, supra note 32.

                                                         23
                                                                                   Morgan Clemons
                                                                       Financial Holding Companies
                                                                             Lybecker, Spring 2010
public; Wal-Mart as a commercial entity could not hide behind the same shroud that financial

service providers rely on in times of crisis. Finally, while Wal-Mart has since withdrawn its

application, the issue is still relevant because a Wal-Mart ILC could be the type of bank that the

economy currently needs—a bank that serves “main street” and a bank with a parent that makes

sound business decisions. Wal-Mart has an undeniable record of success, and a foray into the

business world would likely fare similarly if the retailer were given the opportunity.134 Any

qualms about the extent of that possible success can be addressed through antitrust laws enforced

after ILC application approval rather than through ad hoc banking “rules” created to reduce

competition and discriminate against a particular applicant.




134
      See Gogoi, supra note 30.

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