Credit Unions on Sidelines as FDIC Proceeds with Wal-Mart Hearings

SALT LAKE CITY – The banking fracas over the application of Wal-Mart Stores to open an industrial loan corporation in Utah may be shifting next month to Washington and Kansas City, but credit unions – though on the sidelines – still remain interested observers. “That debate in Utah is completely unrelated to our application for an industrial loan corporation in California but you could say we do have idle curiosity” in the proceedings, said Darren Williams, president/CEO of Wescom CU in Pasadena, Calif. which two weeks ago filed formal application with the Federal Deposit Insurance Corp. and California regulators for an ILC. As part of a deal to purchase credit card portfolios, Wescom CU is purchasing La Jolla, Calif.-based Silvergate Capital Corp., parent of Silvergate Bank whose prime business is in commercial real estate lending. Williams said banking’s fierce challenge of the Wal-Mart application in Utah centers on the ongoing debate about breaching the wall separating banking and commerce, but Wescom’s plans for the Silvergate purchase have no tie-in though there has been confusion about it, said Williams. Citing the established history of ILCs in states like California and Utah, Williams said there never was a problem in Utah when Toyota and Target Stores were ILC applicants, but it was different when it came to Wal-Mart. As for its planned and unprecedented public hearings on the Wal-Mart application for deposit insurance, the FDIC said it will hold the hearings April 10-11 in Washington and a second set April 25-26 at a site “in metro Kansas City.” An FDIC spokesman said Kansas City was selected because most of the more than 2,000 comment letters “came from there” even though Wal-Mart’s FDIC application for deposit insurance was also filed with the Utah Department of Financial Institutions in Salt Lake City. The Wal-Mart application has been languishing here while Utah regulators insist on receiving more financial data from Wal-Mart before considering the controversial application, which has been vigorously attacked by the American Bankers Association and the Independent Community Bankers of America. Banker groups have complained the bid for a Utah bank by the nation’s largest retailer eventually opens the door to nationwide banking using the ILC vehicle. Commenting on the Wal-Mart application, the Salt Lake Tribune reported that “Congress is expected to hold hearings later this year to reconsider exemptions in federal banking laws – some describe them as loopholes – that allow such states as Utah, Colorado and California to charter industrial banks. The popularity of industrial banks, also known as industrial loan corporations or ILCs, can be traced to an exemption in federal banking laws enacted by Congress in 1987.” G. Edward Leary, the state’s commissioner of the Utah Department of Financial Institutions, which regulates banks and CUs, recalled that his state came under national scrutiny “when Wal-Mart tried unsuccessfully to buy an industrial bank in California in 2000.” “Since we’re one of only a few states that charter industrial banks, it wasn’t surprising the attention turned to us,” said Leary. Since last fall it has been apparent that small banks, particularly in the Midwest, most fear the entry of Wal-Mart into retail banking with the Independent Community Bankers of American warning that “there are real concerns about what could happen if economic power becomes too concentrated.” The Salt Lake Tribune also quoted U.S. Senate testimony from Federal Reserve Chairman Ben Bernanke expressing concern that commercial companies were using such industrial loan banks to slip past federal regulators’ ability to adequately regulate them. “We’ve been concerned about the ownership of ILCs by nonfinancial institutions and whether or not that poses risk to the safety net or creates an unlevel playing field with other kinds of financial institutions,” Bernanke said. He added that if they are to be the “functional equivalent” of banks, then they should face the same kind of supervision as banks. But Utah Sen. Bob Bennett, a Republican, told the Tribune that what’s good for Target should be good for Wal-Mart. “No one wanted to prevent Target from getting a [Utah] ILC charter, and I have a hard time understanding why it’s OK for one large retailer to have such a charter and not for its competitor to have such a charter,” Bennett said. -