In the face of a wave of opposition against the prospect of a Wal-Mart-backed
bank, Utah's industrial bank leaders, legislators and financial regulators gathered
Monday to hash over industry issues and circle the wagons.
The Utah Industrial Bank Symposium, held at the Governor's Mansion, featured
the entire Utah federal congressional delegation, Gov. Jon M. Huntsman Jr.,
state lawmakers and regulators from the Utah Department of Financial Institutions
and the Federal Deposit Insurance Corp.
"I do believe that Utah, thanks to (Financial Institutions Commissioner)
Ed Leary, has done more than any other state in really carving out this niche
as a center of excellence," Huntsman said. "Nationally, Utah has become
or is rapidly becoming the face of (industrial loan corporations). All you have
to do is look at the trend line, to look at where the last few years have taken
us in terms of growth."
Industrial loan corporations, or industrial banks, function much like commercial
banks in that they can offer commercial and consumer loans, issue credit cards
and offer financing for auto purchases. Most industrial loan banks are owned
by financial services companies or other corporations.
In 1992, there were 17 industrial banks chartered in the state, with total
assets of about $1 billion, Huntsman said. As of Dec. 31, 2004, there were 29
chartered institutions with $120 billion in total assets. Those institutions
include American Express Centurion Bank, Merrill Lynch Bank (the largest, at
$66 billion in total assets) and Target Bank.
Despite that growth, the issue likely would have remained under the radar
were it not for a single retailer, Leary said.
"The discussion about the merging of banking and commerce likely would
have remained an esoteric discussion, in my opinion, had it not been for Wal-Mart,"
Leary said. Inquiries about banking possibilities from the behemoth retailer
have elevated the volume and intensity of public debate, which appears to be
nearing Utah's borders.
Critics are concerned that Wal-Mart's interest in establishing an industrial
bank may open a Pandora's box (a bank branch in every store), which could devastate
community banks, credit unions and others.
Rep. Jim Matheson, D-Utah, advocated expanding Utah's industrial bank charter
"in any way we can." But, he said, the Wal-Mart issue has become part
of the government's deliberation.
"Quite candidly, we might as well acknowledge that the issue that's out
there is that there's a certain entity, called Wal-Mart, that's interested,
that's looking at this industry," Matheson said. "When Wal-Mart wants
to get involved in something, that tends to draw some attention from folks who
aren't too engaged in the financial service industry. If Wal-Mart wants it,
they're going to be against it. So that's created a lot more attention in this
industry and created some issues in Congress in terms of allowing the expansion
of the charter."
Leary did not speculate on what would happen if Wal-Mart applied for a banking
charter in Utah, except to say that the retailer has yet to submit an application
to the department. If it did, Leary said, concerns likely would have to be dealt
with at the state level, and there is concern that the "Wal-Mart issue"
could lead to legislation that would restrict all industrial banks to spite
Matheson trumpeted the industry's contribution to the state — 14,000
jobs, taxes paid and community involvement mandated by the Community Reinvestment
Act. Industrial banks make up $115 billion of the $121.6 billion in total assets
at state-chartered banks.
Wal-Mart aside, there are other worries when it comes to industrial banks.
Some worry that industrial banks are not under the regulatory authority of the
Federal Reserve (as are bank holding companies). Industrial banks are regulated
by state authorities and insured by the FDIC.
Others worry about the "three horribles": that an industrial bank
might lend preferentially to its affiliate or parent company, or not lend to
a competitor of an affiliate or parent company, or that an industrial bank may
be used to bail out a parent or affiliate company in financial trouble. That
hasn't happened yet, Leary said.
Matheson, Leary and Michael Zamorski, director of the FDIC's division of supervision
and consumer protection, all maintained that Utah's industrial banks are well-capitalized
and closely watched to ensure both safety and soundness and sufficient distance
from their parent companies. All argued that the industry is good for the country
and good for Utah.
"Fifty-two percent of our GDP (gross domestic product) is based on the
activity of small- and medium-sized enterprises," Zamorski said. "The
largest organizations have access to the capital markets directly. But it's
this type of industry that really intermediates credit for the vast majority
of small businesses that contribute greatly to the overall level of economic
activity and stability."
"So it's very important, and it's why we stress supervision: a sound
industry is critical to maintaining the overall stability of the economy. If
people can't get credit on reasonable terms and on a reasonable basis, it inhibits
them and exacerbates difficulties. The ILC industry is a sound industry, with
good corporate governance, which contributes a lot to economic activity, not
only in Utah, but other states as well."