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Thursday, January 26, 2006

Greenspan Opposes Wal-Mart's Banking Plans

There are limits to Greenspan's free-market tendencies after all:

Greenspan Opposes Bank Loophole, by Bernard Wysocki Jr., WSJ: Federal Reserve Chairman Alan Greenspan is opposing a regulatory loophole that allows corporations to own banks, [Icon]thrusting himself into the middle of an effort by Wal-Mart Stores Inc. to establish a bank. Mr. Greenspan's salvo, outlined in a 12-page letter to Congress ..., is the latest in a controversy over the separation of commerce and banking. ...

Wal-Mart officials say the Utah bank would be a back-office processing center, handling debit-card, credit-card and electronic check-transfer payments ... A third party currently processes the transactions ... and bringing the work in-house would save Wal-Mart money. Company officials repeatedly have said they don't plan to establish bank branches. Under current law, these state-chartered banks, many incorporated in Utah, may open branches in more than 20 states...

In his letter, sent Jan. 20 in response to questions from Rep. Jim Leach, ... Mr. Greenspan doesn't single out Wal-Mart's application for criticism but mentions it along with the names of other big companies that have established industrial-loan corporations -- or industrial banks, as these state-chartered financial institutions are sometimes called. ...

"The ILC exemption is now the primary means by which commercial firms may control an FDIC-insured bank engaged in broad lending and deposit-taking activities and thereby breach the general separation of banking and commerce," Mr. Greenspan's letter said. He warned that the growing use of the loophole is "undermining the prudential framework that Congress has carefully crafted and developed" to oversee financial institutions. ...

In uncharacteristically blunt language, Mr. Greenspan urged Congress to close the loophole, which he said "provides the corporate owners of exempt ILCs a significant competitive advantage over other types of banking institutions, and creates an unlevel competitive playing field among banking organizations."

In an interview, Mr. Leach, the former chairman of the House banking committee, said he considered Mr. Greenspan's letter significant. "It's ... a stark warning to the Congress" about the need to separate commerce and banking, Mr. Leach said. "This is not primarily a Wal-Mart issue. It is a 'nature of the American economy' issue."...

In coming out against the ILC loophole, and by implication against Wal-Mart's bid for a bank, Mr. Greenspan has parted company with some free-market advocates who believe that a Wal-Mart bank, if it did turn into a retail-banking powerhouse, would encourage competition in the financial-services field, and would ultimately lower costs to consumers....

A spokesman for the Fed said it couldn't comment on whether incoming Fed Chairman Ben Bernanke would endorse every word of Mr. Greenspan's comments. However, the spokesman said other Fed officials have made similar comments, as official Fed positions, during the time Mr. Bernanke was a Fed official...

[The Full Letter: Read Greenspan's letter to Congress.]

    Posted by on Thursday, January 26, 2006 at 12:36 AM in Economics, Financial System, Monetary Policy, Regulation | Permalink  TrackBack (0)  Comments (3)

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