The story was relegated to the business pages in most newspapers, and few citizens likely would have read past the headline even if it were on Page 1: The Federal Deposit Insurance Corporation -- the agency that insures bank deposits and regulates the industry -- ruled unanimously to extend a moratorium on any applications by nonfinancial companies to enter banking by creating or acquiring industrial loan companies.
Big deal, right? But while the FDIC rarely hears any public input on bank applications, it received thousands of letters last spring, leading to its first-ever public hearings on a bank application.
These ILCs exploit a loophole in laws that otherwise limit commerce and banking corporations to one realm or the other. Dozens of such ILCs already exist, so why would banks that purport to serve only companies' internal financial operations (primarily credit and debit card financing) generate such heated opposition?
One name: Wal-Mart.
Though Home Depot, Berkshire Hathaway and other companies have applications in process, the Bentonville behemoth's bid sparked both public interest and passage of legislation last year in five states, preventing corporations from engaging in both commerce and banking. Several more states have similar bills pending.
The theoretical limits on ILC activities failed to convince opponents. While Wal-Mart executives pledged not to engage in branch (consumer) banking, even the company's supporters clearly assume it's a lie when they argue that Wal-Mart could cut customers' banking costs. Critics also base their presumption on history, not just speculation; Wal-Mart previously has attempted to enter the branch banking business by purchasing banks in California and Oklahoma.
Beyond that evidence, we must consider the nature of publicly traded corporations, which are properly understood as perpetual growth machines. Just as Wal-Mart constantly expands into new spheres of retail and services, it necessarily will seek to expand its banking activities.
Of course, many banks are publicly held companies, but others don't carry such power and potential conflicts of interest.
A full-fledged Wal-Bank would inflict severe damage on America's independent businesses and many communities, leaving the economy of many smaller towns at the mercy of a single corporation. To paraphrase a North Dakota banker's testimony to the FDIC, will Wal-Bank lend you money to open or expand a competing hardware store, even if you've created a solid business plan? Would you open your business' books to your competitor to get a loan?
Even if you'd believe Wal-Mart's pledge to refrain from consumer banking, the ILC loophole would allow the company to conceal movement of funds between its stores and banking operations, potentially obscuring its financial health. We should have learned from the savings and loan debacle that transparency is essential in companies that are "too big to fail."
Further, the economic clout of giant conglomerates translates too easily into political favoritism that undermines both market competition and democracy. Wal-Mart, for example, has extracted taxpayer subsidies for hundreds of stores and 90 percent of its distribution centers, totaling more than $1 billion.
The dangers of combining commerce and banking in mega-corporations go well beyond a single company, however. Countless corporations have amassed fortunes due more to political power than business excellence.
I've spent nine years helping communities organize local businesses to compete successfully against chains, but real competition depends on preventing large corporations from rigging the rules in their favor.
This is one reason even free marketers like the current and past chairs of the Federal Reserve have called for Congress to reconsider the ILC loophole, and why heavily conservative states are passing laws to block new ILCs. Those who seek to solidify the separation of banking from other industries do so to preserve competition, not prevent it.
Now that the FDIC wisely has frozen such ILC applications, Congress should pass the bill introduced by Reps. Paul Gillmor, R-Ohio, and Barney Frank, D-Mass., to close the loophole permanently.
This, however, is merely a first step toward maintaining healthy business competition in America by establishing clear and impermeable limits on the size and scope of corporations.
The writer is a co-founder of the American Independent Business Alliance (AMIBA.net). AMIBA helps communities form local Independent Business Alliances to sustain strong local economies based on independent, locally-owned businesses.
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