May 16, 2003
TO ALL MEMBERS OF THE HOUSE FINANCIAL SERVICES COMMITTEE
Dear Representative:
On behalf of the 1.4 million members of the United Food and Commercial Workers International Union (UFCW), I am writing to let you know of our strong opposition to a provision in H.R. 1375, the Financial Services Regulatory Relief Act of 2003. This provision would grant new authority to industrial banks (also known as industrial loan companies or ILCs) to create new interstate branches. This dramatic expansion of industrial banks across state lines would also drastically expand the industrial bank loophole, make ILCs even more appealing targets for commercial firms and potentially put our banking system at risk.
As you are well aware, federal law generally prohibits the mixing of banking and commerce. Congress strengthened this important prohibition as recently as 1999 when it passed the Gramm-Leach-Bliley Act. After 1999, industrial banks (chartered in only a handful of states) were left as the only banks that non-financial companies could own. Owners of industrial banks are not subject to regulations for safety and soundness by the Federal Reserve as are all other bank holding companies. Without effective safety and soundness regulation at the holding company level, we cannot know whether an owner of an industrial bank will be the next Enron, Worldcom, or Wal-Mart.
The Wal-Mart scenario is not theoretical. Wal-Mart has tried to enter the banking industry several times. While each of these efforts has been thwarted, none of this has stopped the world’s largest corporation from proceeding with their plan to enter banking. Just recently, in January 2003, in an interview with the Financial Times, the President and CEO of Wal-Mart Lee Scott, reaffirmed his desire to offer financial services, including bank accounts, to its millions of customers. Scott says, though, "I’d like to do it more along the Wal-Mart way than other people’s." Even banks would not be able to compete with the financial juggernaut of Wal-Mart which has more sales than the top three American financial corporations—Citigroup, American International Group, and Bank of America—combined. Is there any doubt that permitting interstate banking by ILCs makes them an even more tempting morsel for Wal-Mart?
Putting aside the challenges—legal and financial—of banks, thrifts, and other financial firms competing with Wal-Mart, the challenges to the banking industry and the U.S. economy are not to be minimized. Small banks and community banks will not be able to compete with a bank owned by a large commercial company. The result will be that many small communities, especially rural communities, will be entirely dependent on an out-of-state industrial bank for all of their financial and credit needs. In addition, retail businesses would be forced to seek credit from their largest competitor. What entrepreneur would want to share their business plan with a Wal-Mart bank in order to gain financing? Would suppliers enhance their relationship with Wal-Mart by moving their banking business? Additionally, the insolvency of a Wal-Mart-sized ILC would force the taxpayers to underwrite mammoth costs through FDIC insurance. Even Federal Reserve Governor Mark Olson has noted in testimony before this Subcommittee that, "Allowing a commercial firm to operate a nationwide bank outside the supervisory framework established by Congress for the owners of insured banks, raises significant safety and soundness concerns and creates an unlevel competitive playing field." The possible entry of the world’s largest retailer into banking makes clear some of the potential problems, and proves the wisdom of the clear division between banking and commerce.
The reasons against expanding this loophole, and allowing industrial banks to more freely branch across state lines are strong and compelling. We strongly urge your opposition to this provision, and hope that the Subcommittee will not let this provision go forward.
Thank you for your consideration of our views.
Sincerely,
Pat Scarcelli
International Vice President
Director, Legislative and Political Affairs Department
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