ILC’s—A REVIEW OF CHARTER,

OWNERSHIP, AND SUPERVISION ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 12, 2006

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ILC’s—A REVIEW OF CHARTER, OWNERSHIP, AND SUPERVISION ISSUES

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ILC’s—A REVIEW OF CHARTER,

OWNERSHIP, AND SUPERVISION ISSUES

HEARING

BEFORE THE

SUBCOMMITTEE ON 

FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

OF THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

SECOND SESSION

JULY 12, 2006

Printed for the use of the Committee on Financial Services

Serial No. 109–106

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(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

MICHAEL G. OXLEY, Ohio, Chairman

JAMES A. LEACH, Iowa 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

SPENCER BACHUS, Alabama 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

ROBERT W. NEY, Ohio 

SUE W. KELLY, New York, Vice Chair 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

MARK R. KENNEDY, Minnesota 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

KATHERINE HARRIS, Florida 

RICK RENZI, Arizona 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

MICHAEL G. FITZPATRICK, Pennsylvania 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

CAMPBELL, JOHN, California 

BARNEY FRANK, Massachusetts 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

CAROLYN B. MALONEY, New York 

LUIS V. GUTIERREZ, Illinois 

NYDIA M. VELA ́ ZQUEZ, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

BARBARA LEE, California 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

WM. LACY CLAY, Missouri 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

JIM MATHESON, Utah 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

ARTUR DAVIS, Alabama 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

DEBBIE WASSERMAN SCHULTZ, Florida 

GWEN MOORE, Wisconsin, 

BERNARD SANDERS, Vermont

Robert U. Foster, III, Staff Director 

(III)

SUBCOMMITTEE ON FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

SPENCER BACHUS, Alabama, Chairman

WALTER B. JONES, JR., North Carolina, 

Vice Chairman 

RICHARD H. BAKER, Louisiana 

MICHAEL N. CASTLE, Delaware 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

SUE W. KELLY, New York 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

JIM RYUN, Kansas 

STEVEN C. LATOURETTE, Ohio 

JUDY BIGGERT, Illinois 

VITO FOSSELLA, New York 

GARY G. MILLER, California 

PATRICK J. TIBERI, Ohio 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

RICK RENZI, Arizona 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

PATRICK T. MCHENRY, North Carolina 

MICHAEL G. OXLEY, Ohio 

BERNARD SANDERS, Vermont 

CAROLYN B. MALONEY, New York 

MELVIN L. WATT, North Carolina 

GARY L. ACKERMAN, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

LUIS V. GUTIERREZ, Illinois 

DENNIS MOORE, Kansas 

PAUL E. KANJORSKI, Pennsylvania 

MAXINE WATERS, California 

DARLENE HOOLEY, Oregon 

JULIA CARSON, Indiana 

HAROLD E. FORD, JR., Tennessee 

RUBE ́ N HINOJOSA, Texas 

JOSEPH CROWLEY, New York 

STEVE ISRAEL, New York 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

AL GREEN, Texas 

GWEN MOORE, Wisconsin 

WM. LACY CLAY, Missouri 

JIM MATHESON, Utah 

BARNEY FRANK, Massachusetts 

(V)

C O N T E N T S 

Page 

Hearing held on: 

July 12, 2006 ..................................................................................................... 1

Appendix: 

July 12, 2006 ..................................................................................................... 69

WITNESSES 

WEDNESDAY, JULY 12, 2006

Alvarez, Scott G., General Counsel, Board of Governors, Federal Reserve 

System ................................................................................................................... 16

Douglas, John L., partner, Alston & Bird, LLP, on behalf of the American 

Financial Services Association (AFSA) ............................................................... 55

Hillman, Rick, Director, Financial Markets and Community Investment, 

United States Government Accountability Office .............................................. 22

Johnson, Arthur C., Chairman and CEO, United Bank of Michigan, on behalf 

of the American Bankers Association (ABA) ..................................................... 57

Jones, Douglas H., acting General Counsel, Federal Deposit Insurance Corporation ................................................................................................................. 18

Jorde, Terry, Chairman, President/CEO, CountryBank USA, Cando, ND, & 

Chairman, Independent Community Bankers of America (ICBA) ................... 53

Leary, G. Edward, Commissioner, Utah Department of Financial Institutions 20

Sutton, George, former Commissioner, Utah Department of Financial Institutions, on behalf of the Securities Industry Association (SIA) ........................... 51

White, Lawrence J., Professor of Economics, Stern School of Business, New 

York University .................................................................................................... 58

Wilson, Michael J., Director, Legislative and Political Action Department, 

United Food and Commercial Workers International Union ........................... 60

APPENDIX 

Prepared statements: 

Bachus, Hon. Spencer ...................................................................................... 70

Carson, Hon. Julia ............................................................................................ 74

Clay, Hon. Wm. Lacy ....................................................................................... 76

Gillmor, Hon. Paul E. ....................................................................................... 77

Matheson, Hon. Jim ......................................................................................... 78

Alvarez, Scott G. ............................................................................................... 80

Douglas, John L. ............................................................................................... 94

Hillman, Rick .................................................................................................... 106

Johnson, Arthur C. ........................................................................................... 138

Jones, Douglas H. ............................................................................................. 148

Jorde, Terry ....................................................................................................... 170

Leary, G. Edward ............................................................................................. 185

Sutton, George .................................................................................................. 197

White, Lawrence J. ........................................................................................... 211

Wilson, Michael J. ............................................................................................ 223

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Letter to Hon. Spencer Bachus from Office of Thrift Supervision ............... 229

Letter to Hon. Barney Frank and Hon. Paul Gillmor from American 

Bankers Association ...................................................................................... 231

Letter to Hon. Barney Frank and Hon. Paul Gillmor from America’s 

Community Bankers ..................................................................................... 233

Page

VI

Issue of Consumer Finance Law Quarterly Report ....................................... 234

Letter to Hon. James A. Leach from Board of Governors of the Federal 

Reserve System ............................................................................................. 240

Statement of the National Association of Realtors ........................................ 252

Letter to Hon. Edward R. Royce from the SEC ............................................. 263

Statement of Hon. Thomas J. Bliley, Jr., on behalf of the Sound Banking 

Coalition ......................................................................................................... 267

Statement of the NCRC ................................................................................... 274

Letter to Hon. Spencer Bachus from the Office of Thrift Supervision ......... 276

Letter to Hon. Martin J. Gruenberg from Hon. Barney Frank, Hon. 

Paul E. Gillmor, and Members of Congress ................................................ 278

Letter to Hon. Martin J. Gruenberg from members of the Financial 

Services Committee ...................................................................................... 286

Responses to Questions Submitted from Hon. Paul E. Gillmor to Rick 

Hillman .......................................................................................................... 288

(1)

ILC’s—A REVIEW OF CHARTER, 

OWNERSHIP, AND SUPERVISION ISSUES 

Wednesday, July 12, 2006

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON FINANCIAL INSTITUTIONS

AND CONSUMER CREDIT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 10:00 a.m., in room 

2128, Rayburn House Office Building, Hon. Spencer Bachus [chairman of the subcommittee] presiding. 

Present: Representatives Bachus, Royce, Lucas, Kelly, Gillmor, 

Biggert, Miller of California, Hensarling, Garrett, Brown-Waite, 

Barrett, Pearce, Neugebauer, Price, McHenry, Sanders, Maloney, 

Sherman, Meeks, Moore of Kansas, Carson, Ford, Crowley, McCarthy, Baca, Green, Clay, Matheson, and Frank. 

Chairman BACHUS. Good morning. The Subcommittee on Financial Institutions and Consumer Credit will come to order. 

At today’s hearing, which was requested by Mr. Leach, we will 

examine the charter, ownership, and supervision aspects of Industrial Loan Corporations, more commonly known as ILC’s. The hearing is not about a particular piece of legislation, nor is it in response to legislation, nor will we be reviewing legislation in anticipation of a markup. It’s simply about ILC’s, their structure, and 

their regulation. Today, there are 61 ILC’s in 7 States, with $155 billion in assets, and $110 billion in deposits. Although the insured deposits of ILC’s 

has grown by over 500 percent since 1999, those deposits represent 

less than 3 percent of the FDIC’s total insured deposits. Utah is home to 33 ILC’s with approximately $120 billion in as- sets; Merrill Lynch Bank is the largest with $66 billion. California 

is next, with 15 ILC’s and $17 billion in assets. Most ILC’s are 

owned by financial service companies such as Citigroup, Morgan 

Stanley, and American Express. Others like GE Capital and GMAC 

Commercial are within the financial arm of a larger corporate organization. ILC’s owned by BMW and Volkswagen support the holding companies’ commercial business. Target Corporation, the retailer, has Target National Bank in Utah. 

ILC’s originated in the early 1900’s as small, State-chartered 

loan companies serving industrial workers who were unable to borrow from commercial banks. Since then, the ILC industry has experienced significant asset growth and has evolved from small, limited purpose institutions to a diverse industry that includes some 

of the Nation’s largest and most complex financial institutions. 

2

In 1982, Congress made ILC’s eligible for Federal Deposit Insurance Corporation insurance, becoming subject to FDIC supervision 

as well as State regulation. In general, ILC’s may engage in the 

same activities as FDIC-insured depository institutions. ILC’s offer 

a full range of loans, such as commercial, consumer and residential 

real estate, and small business loans. 

However, because of the restrictions in Federal and State laws, 

ILC’s do not accept demand deposits or checking accounts but do 

offer NOW accounts which give the depository institution the right 

to require at least 7 days notice prior to withdrawal. Like other depository institutions, ILC’s may export their home State’s interest 

rates to customers living elsewhere and must comply with the 

Bank Secrecy Act, Community Reinvestment Act, and various consumer protection laws. 

In short, ILC’s are subject to the same State banking supervision 

and FDIC oversight as State banks. Nonetheless, owners of ILC’s 

do not have to be bank holding companies subject to the Federal 

Reserve’s consolidated supervisory authority. 

Instead, the FDIC has employed what some call a bank-centric 

supervisory approach that primarily focuses on isolating the insured institution from potential risk posed by holding companies 

and affiliates rather than assessing these potential risks systematically across the consolidated holding company structure. 

In addition, the Securities and Exchange Commission oversees financial conglomerates known as Consolidated Supervised Entities, 

several of which own one or more large ILC’s, although their main 

business is in the global securities market. Moreover, in any instance where an ILC and a savings association are affiliated in a 

corporate structure, the holding company is a savings loan holding 

company subject to regulation by the OTS. In fact, I believe that 

70 percent of the assets of ILC’s are regulated by the OTS. 

Some argue that this regulatory structure for overseeing ILC’s 

may not provide adequate protection against the potential risks 

that holding companies and non-bank affiliates may pose to an 

ILC. 

Another area of concern about ILC’s is the extent to which they 

can mix banking and commerce through the holding company 

structure. A special exemption in current banking law permits any 

type of company, including a commercial firm, to acquire an ILC 

in a handful of States. For some, this is the crux of the issue. 

I’m sure the separation of banking and commerce will be discussed in today’s hearing. There is also likely to be a debate over 

the fairness of excluding some commercial firms from owning or 

controlling ILC’s after other very similar firms are already engaged 

in the ILC structure. 

In closing, I would like to again thank Mr. Leach, and to thank 

the Ranking Member, Mr. Frank, as well as Congressman Gillmor, 

Congressman Royce, and Congressman Matheson for all of their efforts, and for helping us with today’s hearing. They are strongly 

committed to reviewing these issues, and I look forward to working 

with them and members of this subcommittee as we examine ILC 

charters. 

The Chair now recognizes Mr. Frank, the Ranking Member of 

the Full Committee. 

3

Mr. FRANK. Thank you, Mr. Chairman. I know that our colleague 

from Ohio had some other obligations at a markup and I would be 

prepared to defer to him if he was under the gun to get out. 

Chairman BACHUS. Thank you. In fact, Mr. Frank had extended 

that offer, Mr. Gillmor, and I wanted him to be able to do so as 

opposed to me. 

Mr. GILLMOR. Thank you. 

Let me thank the ranking member for doing that. I have a markup on two of my bills in another committee so I appreciate that. 

And I want to thank you, Chairman Bachus, for calling this important hearing today and for your interest in taking steps to address 

this important policy area. 

We could not be having this oversight hearing at a more critical 

time. Currently, the FDIC has 14 pending ILC applications for deposit insurance, including applications from some of the largest 

commercial companies in America. In the past year or so, such diverse commercial firms as Cargill, Daimler-Chrysler, Wal-Mart, 

and Home Depot have come to the conclusion that they should own 

and operate a bank. The problem is that they want different and 

more lenient rules than other companies that own banks. 

I think there are many important policy questions at work here 

but it’s my belief that Congress is at a crossroads in financial services regulation. Do we choose to eliminate the historic separation 

between banking and commerce which has allowed us to avoid the 

economic pitfalls of Germany and Japan, for example? And if Congress chooses to make that decision, should we make it openly and 

explicitly rather than simply allowing a loophole in bank law to 

continue? 

Logically, you can’t support the use of the ILC loophole without 

repealing the Bank Holding Company Act that applies to other 

banks. And hardly anyone would support that position due to the 

dangers it poses to our financial system. My friend and colleague, 

Barney Frank, and I have worked on this issue for several years. 

We know there’s no silver bullet or clean fix but we do believe 

there’s a sensible approach to begin to answer this question. 

Earlier this week, Congressman Frank and I introduced a comprehensive ILC reform bill. H.R. 5746 would allow the FDIC to act 

as a consolidated regulator of ILC parent companies, limit the business activities of certain commercially-owned ILC’s and, most importantly, establish a cutoff date for commercially-owned ILC’s so 

that Congress can evaluate whether or not to explicitly permit the 

world’s largest retailers to operate full-service national banks. 

It’s my hope that the future of this charter option will be closely 

examined by our colleagues on this committee, and I look forward 

to continuing to work with Chairman Oxley, Chairman Bachus, 

Ranking Member Frank, my colleague Mr. Leach, and others to 

make prudent decisions at this fork in the road, and I yield back 

and I appreciate you yielding. 

Chairman BACHUS. Mr. Frank? 

Mr. FRANK. Thank you, Mr. Chairman. 

The issue, we should be clear, is not, in my mind, and I think 

in the mind of my colleague who just spoke, whether or not we curtail the ILC model. It is with a limited class of the ILC’s—those 

that are primarily non-financial. The legislation and the approach 

4

that Mr. Gillmor and I have taken borrows from the GrammLeach-Bliley approach, the 85 percent, 15 percent metric that says 

if you’re 85 percent financial, you go ahead. 

What concerns me is the problem of those entities that are not 

at all banks owning a bank and the conflicts that are there. Now, 

it is true when we abolished Glass-Steagall and promoted or recognized, after the fact, the merger, in effect, of banking and securities, there were some concerns about leveraging and tying. 

What drove that was the increasing convergence, for a variety of 

reasons, of the various aspects of the financial services industry, 

and there were some concerns and some efforts were made to try 

and limit those problems. I don’t see any reason to take that as a 

precedent for, in effect, throwing open the ownership of banks to 

entities that are entirely non-financial. 

In fact, if we were to go ahead and say, okay, everybody into the 

pool, you would now have an open season, I guess, for manufacturers, retailers, anybody else, contractors, to own what was in effect 

a bank. And at that point I’m not sure what value would be served 

by other restrictions we have. 

The other day, I was watching a rerun of, ‘‘Are You Being 

Served’’, the British comedy about the department store. And Mrs. 

Slocombe had been dispossessed from her house so she was being 

given temporary quarters in the home furnishings department of 

the department store and she felt somewhat exposed to the elements. 

So they found a fake door and side panels and put it up in front 

of her bed so she felt like she was in her house. And then when 

people came to visit, she would make them come through the door, 

but the door extended only so far, and on both sides of the door 

there was wide open space. 

It seems to me we’re on the verge of doing that with ILC’s. I 

mean, we have all these restrictions that apply if you want to become a bank but it will be like the door to Mrs. Slocombe’s apartment because if you want to just own an ILC, you just ignore those 

and go in anyway. 

And here are the problems. This is not artificial. I spoke with the 

people at Home Depot, a very well-run company. Home Depot is in 

the district of one of our colleagues who speaks highly of it. I don’t 

doubt their integrity for a minute. Here are the inherent problems. 

Home Depot says they’re going to buy a bank, and I spoke with 

them. Now, they have a bank which would have an ongoing relationship with a contractor. If you’re a contractor and you have this 

ongoing relationship, you have a leg up in getting loans for the 

work you would be doing. People want to have that relationship. 

Home Depot says, however, even though the contractor would 

want to have that relationship with the bank which Home Depot 

owned, that there would be no pressure whatsoever on that contractor to buy from Home Depot, as opposed to somebody else. 

Well, I am sure there are trusting souls who will believe that, 

and it may even be true, but it is exactly the kind of conflict of interest that we set up walls to prevent. The notion that I’m a contractor and I have an interest in Home Depot continuing to give 

me this relationship but it’s not going to affect where I buy things 

is tenuous. 

5

You also have this: I’m a homeowner and I want to get a loan 

so I can do some substantial renovation or repair in my house. 

Now, I know that if I go to the Home Depot-affiliated contractor, 

I get a better chance of getting a loan. Not only that, but if I’m the 

bank, now owned by Home Depot, and someone comes to me for a 

loan, I have two ways in which I make a profit. One, on the repayment of the loan, but also I understand that if I lend to this individual, he or she may buy a large amount of things from my owner. 

And people have said, well, yes, but that’s the kind of tie-in that 

we can prevent. Yes, you can theoretically prevent some of these 

things but I do not think in practice we ought to create all these 

problems for the regulators to have to deal with. I think trying to 

police those relationships on an ongoing basis really would require 

a degree of intrusive regulation and excessive regulation that’s in 

no one’s interest. 

What we are talking about is protecting the integrity of the decisions made by banks. They should be made based on the profitability of the loan, and solely on that. When you have a wholly unrelated entity owning the bank, and when that entity can make a 

profit because the loan is made, because the making of the loan 

will not only help the bank but will significantly help the owner of 

the bank, I think the integrity or the purity of that decision is 

somewhat impugned. 

And that’s why I believe that in the future we should go with an 

85–15 percent test. I would say in closing that if we don’t do that, 

it seems to me what we will then have is the notion that there is 

something where we have some kind of special status for banks 

where they are insulated from the other pressures in terms of the 

loans they make that will simply disappear because if ILC’s charters are freely granted, no matter who the owner is, retailer, contractor, manufacturer, racetrack owner, whatever, then I think we 

have a serious set of regulatory problems that we should not create. 

Chairman BACHUS. Thank you. At this time, I’ll recognize the 

senior member of the Financial Services Committee, Mr. Leach, for 

his opening statement. 

Mr. LEACH. Thank you very much, Mr. Chairman. 

I want to express my personal admiration for all you’ve been 

doing in this Congress on banking issues. I’m deeply impressed and 

I appreciate your inviting me to come today to your subcommittee. 

It’s self-evident that Congress must act to revamp the regulatory 

oversight of ILC’s. The simplest and most comprehensive approach 

is to require that an ILC become a financial holding company obligated to comply with all of the conditions, requirements, restrictions, and limitations that apply to a financial holding company 

under the Bank Holding Company Act. 

This approach, which I have introduced in this Congress as H.R. 

3882, is the exact bill I have introduced to numerous prior Congresses dating back to the 1990’s. It was initially objected to because ILC’s were considered small irrelevant footnotes in American 

finance. But as Chairman Bachus has just noted, the ILC industry 

has experienced significant growth over the past several decades. 

6

Now, more behemoth commercial companies are pressing the 

commerce banking envelope and this trend is likely to escalate and 

include greater numbers of foreign actors. 

As this Congress well understands, Congress has explicitly forbidden banks from engaging in commercial endeavors. Implicitly, it 

is irrational to think that a commercial company, by buying or establishing a banking-like institution such as an industrial loan 

company, should be able to do what Congress prohibited in reverse. 

What was prohibited in one direction should not be sanctioned in 

another. 

There are four broad attempts of financial modernization legislation known as Gramm-Leach-Bliley: one, to enhance three-way 

competition between the banking, securities, and insurance industries; two, to create functional regulation by category of activity; 

three, to establish a principal umbrella regulator to ensure that 

regulatory cracks are filled; and four, to curtail regulatory arbitrage at the Federal level. 

This fourth point is seminal to the discussion at hand. In developing compromises to make Gramm-Leach-Bliley possible, I fully 

understood that private sector industries had rival interests and 

that maximization of profit was a respectable motivation in a free 

market economy. But I was continually surprised at the intensity 

of bureaucratic rivalries and had minimal respect for the maximization of power motivation of public sector institutions. 

It is in this context that I’m concerned that regulatory power rivalry may resurface in the ILC issue. As a primary Federal regulator of ILC’s, the FDIC has the potential to empower commercial 

companies and, in so doing, aggrandize its own regulatory jurisdiction. But Congress’s goal in GLB was to protect the public interest 

by establishing cooperative rather than confrontational relationships between regulators. 

Although the FDIC is critically important in the Federal regulatory regime, it is not intended to be an exclusive authority. The 

Congress concluded in GLB that consensus institutional decisionmaking was vastly preferable to regulatory arbitrage. 

In an extensive review I requested last year, the General Accounting Office pointed out that when the Federal Reserve is deprived of a regulatory role, significant gaps in oversight can occur. 

The FDIC, after all, has limited experience in holding company 

oversight and, vastly more importantly, lacks the legal right to review the financial well-being of holding companies. 

Under a Bank Holding Company Act framework, from which 

ILC’s are currently shielded, the Federal Reserve is empowered to 

establish consolidated capital requirements to ensure that holding 

companies are a source of financial strength for a subsidiary bank. 

Under the Bank Holding Company Act, commerce and banking 

cannot be merged. Where financial companies have holding companies, the Federal Reserve has broad enforcement authority. It can 

issue cease and desist orders, impose civil penalties, and order a 

holding company to vest non-bank subsidiaries if it determines that 

ownership of the subsidiary presents a risk to the financial safety, 

soundness, or stability of an affiliated bank and is inconsistent 

with sound banking principles. 

7

Corporate parents of ILC’s are not subject to these requirements. 

In our marked economy, seldom is short-term viability a guarantor 

of long-term financial strength. Without the safeguard controls that 

exist under the Bank Holding Company Act, it’s problematic for the 

government to prevent deficiencies and damage to the Federal safety net. 

More profoundly, it’s problematic to envision the consolidation of 

ownership and other changes in the nature of our economy which 

will occur if banking and commerce are integrated. There is, after 

all, a catch-22 dilemma in allowing commercial companies to own 

federally-insured financial institutions such as ILC’s. Commercial 

companies which are weak or become weak could easily develop 

conflicts that jeopardize the viability of a federally-insured institution. On the other hand, those which are strong could too easily 

precipitate chain reaction consolidations of ownership or tilt the 

competitive marketplace in anticompetitive ways. 

Finally, a note about the bizarre circumstance that ILC’s are limited by law to only a handful of States. The effect of this legal situation is that the specially empowered States have a vested interest 

in approving ILC charters which may be foreign as well as domestic— 

Chairman BACHUS. Mr. Leach, you could— 

Mr. LEACH. I have just about 1 more minute if that’s all right 

with the Chair. 

Chairman BACHUS. You can stay on. 

Mr. LEACH.—despite the fact that certain charters might fly in 

the face of Federal precedent and good government practices. The 

concentration of ILC’s in a few States has the effect of taking jobs 

from the majority of States as well as the prospect of changing the 

nature of the American economy. 

In conclusion, let me stress that due to aspects of current economic circumstance and the obligations of Congress with regard to 

financial industry supervision, the United States today confronts 

unprecedented challenges. The twin fiscal and trade deficits are 

compounded by war on several fronts. It has eroded support for 

America and the world and by an escalation in petroleum prices 

which constrains the disposal income of the American family and 

thus GDP in general. 

This is why a straightforward, comprehensive approach of requiring an ILC to become a financial holding company with all of the 

obligations implicit in the Bank Holding Company Act is so preferable to the compromise approaches on the table. 

Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Leach. Mr. Sanders? 

Mr. SANDERS. Thank you, Mr. Chairman. 

Let me concur with Mr. Leach, and praise him for the work that 

he has done on this issue. Also, Mr. Chairman, I would like to ask 

unanimous consent that the statements of the National Community 

Reinvestment Coalition and the Sound Banking Coalition be included in the record of this hearing. 

Chairman BACHUS. Without objection. 

Mr. SANDERS. Thank you. 

Mr. Chairman, this is an important hearing. Thank you very 

much for holding it. What we are examining today is an enorVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00015 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
8

mously important issue and that is whether we continue our country’s strong tradition of separating banking from commerce or do 

we allow a loophole in current law to expand that could permit retailing giants like Wal-Mart and others to own banks all across 

America. 

Mr. Chairman, let me be clear that I am strongly opposed to allowing Wal-Mart and other non-banking conglomerates to receive 

industrial loan charters. In that regard, I have co-signed a letter 

authored by Mr. Gillmor and Ranking Member Frank urging the 

FDIC to impose a moratorium on approving any ILC applications 

owned by commercial firms. I am glad that Douglas Jones from the 

FDIC is here today and I hope that he will be receptive to imposing 

this moratorium. 

If Wal-Mart, Home Depot, and other large corporations are allowed to become ILC’s, they will be granted similar privileges as 

regular banks without the same regulatory oversight. This is wrong 

and could have very serious ramifications to our economy, particularly in rural areas. 

According to a study by Iowa State University, up to 47 percent 

of local retailers in some small towns are forced out of business 

within a decade after Wal-Mart opens up a store in their area—

up to 47 percent. But that figure could skyrocket even higher if 

Wal-Mart is allowed to own banks in thousands of their stores all 

across this country. 

First, Wal-Mart would drive many small community banks in 

rural areas out of business. Then Wal-Mart may refuse to lend to 

their local competitors, forcing them to close their doors. This could 

provide Wal-Mart with monopoly control over small towns throughout this country. And in that regard, Mr. Chairman, I would like 

to quote from the statement of the National Community Reinvestment Coalition. 

This is what they say, and I quote: ‘‘Mixing banking and commerce imperils safety and soundness because it eliminates a bank’s 

impartiality. A bank with a commercial affiliate will not base its 

lending decisions on sound underwriting criteria. Instead, it will 

favor its affiliate and cut off credit for its competitors. The bank 

will also be tempted to finance its affiliates’ speculative and risky 

ventures. With a bank the size of Wal-Mart or Home Depot, the 

end result is a significant reduction in credit for independent small 

businesses and an increase in financing for the bank’s affiliate regardless of the risk it produces’’. 

Mr. Chairman, small businesses and community banks are the 

backbone of our rural economy. In my opinion, we must not jeopardize the very survival of these businesses by expanding the ILC 

loophole. 

Mr. Chairman, on this issue I am in complete agreement with 

the Independent Community Bankers of America, the United Food 

and Commercial Workers, the National Grocers Association, the 

National Association of Convenience Stores and the National Community Reinvestment Coalition. We must end the ILC loophole 

once and for all. 

To that end, I want to commend Mr. Leach for his legislation 

that he has recently introduced to close the ILC loophole by requiring any company that owns or would like to own an ILC to sell off 

9

their non-financial activities. This legislation would also require 

ILC’s to undergo the same regulation and supervision by the Federal Reserve that applies to all other banks. I am convinced this 

is the correct approach to take. 

However, I also understand that Mr. Gillmor and Mr. Frank 

have introduced compromise legislation that would, among other 

things, prohibit commercial firms from acquiring industrial banks 

effective June 1, 2006. I applaud Mr. Gillmor and Mr. Frank for 

introducing this legislation and look forward to working with them 

as the chairman on this extremely important issue. 

The separation of banking and commerce has served our country 

well. We must keep the separation intact by passing either the 

Leach bill or the Gillmor-Frank bill. 

I thank the Chair and I look forward to hearing from our witness. 

Chairman BACHUS. Thank you, Mr. Sanders. We have nine other 

members who want to make opening statements and I’m going to 

suggest—we have two of those members who were among the members that actually made the written request for the hearing, and 

that’s Mr. Royce and Mr. Matheson. And I would not want to limit 

their time, but if we could have an agreement—I don’t know—Mr. 

Matheson, Mr. Royce, how long are your opening statements? How 

long are they? 

Mr. ROYCE. I’d say—would 4 minutes be fair? 

Chairman BACHUS. Four or five—if it’s—if the other members 

would consent to giving them their full 5 minutes, letting the other 

members have 2 or 3 minutes, try to limit theirs to— 

Mr. SHERMAN. Sounds good. 

Chairman BACHUS. And if you all will agree, I would like to recognize them next as the requesting members, and go to Mr. Royce, 

then to Mr. Matheson and then we’ll go back to the regular order. 

Mr. ROYCE. Thank you very much, Mr. Chairman. I appreciate 

that and I thank you again for holding this hearing to review the 

charter and ownership and supervision issues related to ILC’s. And 

I’d also like to thank our—I think we’re going to have a total of 

10 witnesses today—for their testimony this morning. 

While ILC’s have been in existence, I guess, for about 100 years, 

it is only recently that the charter has gained a great deal of attention and I believe a review of that charter is a healthy exercise for 

this committee. In fact, I’ve called for such hearings many times in 

the past. 

Industrial Loan Companies are regulated in a similar manner to 

all other federally-insured depository institutions. For example, 

they are subject to the same minimum capital and prompt corrective action provision as any other bank we’re familiar with in this 

committee. 

Some critics have expressed concern that an ILC might be used 

to subsidize a parent company’s cost of capital. However, the rules 

for dealing with affiliates first prescribed in Sections 23A and 23B 

of the Federal Reserve Act apply to all FDIC-insured and depository institutions. This means that an Industrial Loan Company’s 

relationship with any affiliates is subject to very strict rules. 

Under Section 23A, an ILC’s total covered transactions with any 

affiliate cannot exceed 10 percent of the bank’s capital. The ILC’s 

10

total covered transactions with all affiliates combined cannot exceed 20 percent of the bank’s capital. With few limited exceptions, 

covered transactions must be fully secured with qualifying capital 

and an ILC cannot purchase a low quality asset from an affiliate. 

Under Section 23B, an ILC must deal with an affiliate on market, in other words, at arms-length, in terms of arms-length terms. 

An ILC cannot, as a fiduciary, purchase securities or other assets 

from an affiliate unless otherwise permitted by statute or court 

order. The ILC cannot, as principal or fiduciary, purchase particular securities while an affiliate is a principal underwriter for 

those securities. And, lastly, neither the ILC nor its affiliate may 

publish any advertisement or make any agreement stating or suggesting that the ILC shall in any way be liable for the obligations 

of its affiliate. 

Other critics have suggested that the ILC regulatory structure is 

deficient because some ILC parents are not subject to supervision 

at the holding company level. In the past, the FDIC and the State 

banking regulators with oversight of ILC’s have suggested that 

they have sufficient powers to regulate the parent-ILC relationship. 

I’m interested to hear more about this concern from our witnesses 

this morning. 

Furthermore, I’d like to introduce into the record a letter from 

SEC Chairman Cox in which he outlines the Commission’s powers 

and authority under the Consolidated Supervised Entity regime. 

An overwhelming majority of total ILC assets are subject to the 

Consolidated Supervised Entity regime to supervision under this 

and from regulators such as the SEC and the OTS. 

Mr. Chairman, thank you again for holding this hearing and I 

look forward to hearing from our witnesses. 

I yield back. 

Chairman BACHUS. Thank you, Mr. Royce. And I indicated—I 

want to correct myself. I had indicated that Mr. Matheson and Mr. 

Royce actually requested this hearing. They did not request this 

hearing. What they requested was that, if this hearing was held, 

they be allowed to participate in the suggestions for witnesses and 

the structuring of the hearing. So I wanted to make that qualification. 

Mr. Matheson. 

Mr. MATHESON. Thank you, Mr. Chairman, for holding this hearing on the industrial bank charter and the framework in which industrial banks are regulated at the State and Federal level. It’s my 

hope that this hearing is going to be a constructive opportunity for 

the subcommittee to focus on factual information and legitimate 

policy issues regarding the regulation of ILC’s. 

And I hope members of the committee will set aside preconceived 

notions and take the time to listen and learn about the supervision 

of ILC’s rather than discussing issues outside the direct scope of 

this hearing, such as bills introduced by ILC opponents or applications for ILC charters not approved or even accepted by the State 

banking regulator. I think members will come to value the competition of benefits these institutions provide to millions of consumers 

and business around the country. 

I hope the members will learn in this hearing what ILC’s are and 

what they are not. While many critics and competitors of ILC’s 

11

argue that these institutions are not subject to comprehensive regulation, they are in fact subject to not only regulations and supervision by their respective State banking regulators but also by the 

FDIC and, in many cases, subject to consolidated holding company 

regulation by the Office of Thrift Supervision and the SEC. 

Industrial banks are subject to all the Federal banking laws that 

apply to other FDIC-insured State charter banks, including consumer protection requirements, restrictions on transactions with 

affiliates, depository reserve requirements, safety and soundness 

requirements, and Community Reinvestment Act requirements. 

Some ILC competitors have argued that these banks pose a 

threat to the safety and soundness of the national banking system. 

As a group, industrial banks are better capitalized and better rated 

than other banks. Former FDIC Chairman Powell asserted that 

ILC charters, ‘‘pose no greater safety and soundness risk than 

other charter types.’’ And in fact, the much-mentioned report 

issued by the Government Accountability Office last year said that, 

‘‘from an operations standpoint, ILC’s do not appear to have a 

greater risk of failure than other types of depository institutions.’’ 

Those who criticize ILC’s also argue that these banks allow for 

the inappropriate mixing of banking and commerce. ILC’s cannot 

engage in any activity not approved by their regulator, nor can 

they engage in any activity not permitted for other insured depository institutions. They’re subject to Sections 23A and 23B of the 

Federal Reserve Act which severely restricts transactions between 

a bank and its parent company. 

The fact is that it’s questionable if there is a bright line now between banking and commerce. Gramm-Leach-Bliley Act actually 

liberalized the ILC charter and authorized commercial banks to engage in a number of formerly prohibited non-banking commercial 

activities. 

Finally, there are those who claim that ILC’s exist only by virtue 

of a loophole. It is, in fact, the law that allowed the formation of 

ILC’s almost 100 years ago, and it is the law that has allowed the 

33 active industrial banks operating in Utah and holding over $120 

billion in assets to do well in a competitive market today. 

ILC opponents claim that a loophole exempts these banks from 

bank holding company regulation by the Federal Reserve. In fact, 

Congress expressly exempted the parent companies of industrial 

banks from the Bank Holding Company Act with the enactment of 

the Competitive Quality Banking Act in 1987. The exemption was 

debated before it was enacted, and Congress hasn’t modified the 

exemption since it became law almost 20 years ago. 

So in closing, Mr. Chairman, I do want to thank you for holding 

this hearing today. I hope that the facts speak for themselves and 

I hope that when the hearing is over, members will have a better 

appreciation for the facts surrounding industrial banks, including 

their strong record of effective regulation by State and Federal 

Governments, their history of industry success, and their role in 

providing greater competition and efficiency to our economy. 

I yield back my time. 

Chairman BACHUS. Thank you, Mr. Matheson. Mr. Pearce. 

Mr. PEARCE. Thank you, Mr. Chairman. 

12

Just briefly, being from a rural State—a vast rural State with 

lots of dirt between voters—my greatest concern is that consolidation tends to argue or work against the small rural States. Consolidation always—and funds should always seek the highest rates of 

return. The rates of return on loans and investments in New Mexico will never be what they are in Washington, D.C. The price of 

one of the houses along the Potomac could probably buy all of the 

homes in some of the counties in my district; that does not mean 

that we should not have access to capital and consolidation leads 

to a limitation and non-availability of capital in those area of low 

rates of return. 

As we look at the world and the Nation’s economy, we must be 

aware that our economy cannot thrive and survive with just 20 or 

30 large metropolitan areas. We do need to be aware of the areas 

where small rural banks will invest in their local economies but 

never get the rates of return that could be achieved in other areas. 

So I’m greatly concerned about that. 

On the other side of the fence, business, and Wal-Mart specifically, because they seem to be the focus of this discussion, deserve 

fairness. They deserve predictability and I arrive at the same conclusion that Mr. Gillmor did, that it’s time for a very thorough look 

at the entire way that we are granting charters, the way that we’re 

doing banking, the way that we’re doing the ILC’s in this country. 

It’s way overdue to look at the way that regulators are affecting the 

situation. 

So I appreciate you having this hearing. Thank you, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Pearce. Mr. Sherman, thank 

you; we appreciate your patience. 

Mr. SHERMAN. Thank you, Mr. Chairman. I want to join the gentlemen from Ohio, Massachusetts, Iowa, and Vermont, and associate myself with their statements. 

As so many have stated, we cannot and should not mix banking 

with commerce. Because I strongly believe in the importance of 

maintaining that separation, I have opposed the Wal-Mart ILC application. Quite a number of members of this committee signed a 

letter on December 15th to the FDIC asking for a moratorium on 

new approvals for new commercially-owned ILC’s until the FDIC 

board was fully constituted. 

Quite a number of us also joined in a June 8th letter to the FDIC 

asking for a moratorium on new approvals for new commerciallyowned ILC’s until Congress gets a chance to consider this matter. 

By consider this matter, I would think not only hold this particular 

subcommittee hearing, but actually consider the legislation put forward by Mr. Leach or the bill put forward by Mr. Frank and Mr. 

Gillmor. 

Without objection, I’d like to put those two letters into the record 

of this hearing. 

Chairman BACHUS. Without objection. 

Mr. SHERMAN. We took a giant step when we passed GrammLeach-Bliley and said that the walls that separated banking from 

other financial activities would be swept aside. I think that it is 

best for us to see how our economy reacts to that dramatic change 

before we allow the ILC’s to go from a real small part of our econVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00020 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
13

omy to a new device to break down all the walls between banking 

and commerce. 

We ought to see how Gramm-Leach-Bliley works, how this massive expansion of the activities that can be linked with banking 

works before we go down the road of the Japanese model of linking 

banking and finance. It is important that capital be allocated fairly 

and efficiently, especially if that capital is created through Federal 

insurance. And as Mr. Frank pointed out, there is certainly the 

risk that an ILC will favor its parents, suppliers, customers, or potential customers and, in some cases, perhaps its parent entity 

itself. 

So I look forward to not only these hearings but hopefully a 

markup of legislation, and I would hope that the FDIC would take 

no action until Congress has a chance to consider such legislation. 

I yield back. 

Chairman BACHUS. Thank you. Mr. McHenry. 

Mr. MCHENRY. Thank you, Mr. Chairman. Thank you for holding 

this hearing. I appreciate the opportunity for us to discuss in this 

Congress the future of the Industrial Loan Corporations. 

This has been a growing interest in commercial enterprises entering the insured banking business and this has resulted in a significant increase in ILC assets over the last 20 years. The mounting concern that comes from this growth is certainly justified but 

while it supports the competitive spirit intrinsic in expansion, it’s 

imperative that we don’t allow a competitive advantage or disadvantage to take hold in the marketplace. 

And as public policymakers, it’s important that we achieve that 

balance so that there is competition within the marketplace, that 

there are no public policy advantages or disadvantages given to different sectors. And so I think it’s important that we have a very 

balanced approach when it comes to ILC’s. 

And as someone who has not made my mind up in regards to 

how we approach this or what the proper approach is, rather, I 

think it’s important that we, here in Congress, listen to what we 

can come up with from the two wonderful panels we have here 

today and through ongoing discussions about the best way to approach this to achieve a proper balance in the marketplace. 

So, Mr. Chairman, thank you so much for taking the time to 

have this hearing. I appreciate the panelists being here today as 

well as a small crowd. 

Mrs. KELLY. [presiding] Thank you, Mr. McHenry. 

Mr. Moore. 

Mr. Moore, you have no opening statement? 

Ms. Carson, do you have an opening statement? 

Ms. CARSON. I do not have an opening statement but I would like 

to request that my statement—go into the record for— 

Mrs. KELLY. Yes. So moved. Mr. Crowley? 

Mr. CROWLEY. I thank the gentlelady for yielding and I appreciate the committee holding this important hearing today on Industrial Loan Corporations. 

First, let me say that while I may disagree with the ranking 

member of the Full Committee on this particular issue, I believe 

he has not tried to demagogue this issue or some of the corporations at play, but has a true philosophical opposition to the expanVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00021 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
14

sion of ILC’s. I respect his opinion as much as I respect him, but 

on this issue we disagree. 

I support ILC’s because I do not believe they present any risk to 

the safety and soundness of our Nation’s banking system. They will 

provide greater competition in the marketplace for consumers and 

because I fear that an idea that should be debated in a rational 

way may be being argued by some opponents using a major American retailer as a sort of evil face of ILC’s. 

With respect to the safety and soundness issue, there’s been no 

evidence presented to me to date of an ineffectiveness or weak supervision by the FDIC or current ILC’s as some claim. Furthermore, current ILC’s operating have posted no risk, either individual 

or systematic, to the Nation’s banking system. 

Secondly, ILC’s will also provide greater competition in the Nation’s banking system which is, I believe, a positive. These ILC’s 

will provide greater competition to the banking industry which will 

also help consumers. In fact, some opponents of ILC’s happen to be 

the chieftains of capitalism arguing essentially that they oppose 

ILC’s for the fear of new competition they will bring. 

And finally, I fear that an idea that should be debated on its 

merits, whether we should expand ILC’s or not, and on which both 

sides have reasonable arguments, some people are using this issue 

as a red herring of sorts to beat up on a particular retailer or retailers, trying to obtain FDIC permission to create an ILC. 

Some argue that some of these retailers are bad on other issues 

and this should be used as a stick to punish them. But I think, 

while appreciating their arguments and not necessarily disagreeing 

with some of their arguments, that their overall argument is 

flawed, and that allowing an ILC to continue will provide new competition and help the very people these groups represent. 

But again, I am pleased that we’re having this hearing so that 

we may discuss the issues of ILC’s and Congress’s role and whether we should stop them or not. And before I yield back, I’ve been 

asked by Mr. Matheson if I would enter into the record a letter 

from the Office of Thrift Supervision, Department of the Treasury, 

into the record, Madam Chairwoman. 

Mrs. KELLY. So moved. 

Mr. CROWLEY. And with that, I yield back the balance of my 

time. 

Mrs. KELLY. Thank you. Actually, I’m next on the list so I’m 

going to make an opening statement. 

I want to echo my colleagues’ concerns about safety and soundness with regard to ILC’s. I’ve always been concerned that ILC’s 

represent a dangerous exception to our banking laws by placing a 

disproportionate share of our Nation’s financial assets into small 

State regulators with a financial interest in attracting business 

away from established regulatory centers like New York or Chicago. 

Wall Street firms are regulated by the SEC and the FDIC as well 

as State regulators and when you look at the number of people in—

the number of ILC’s in Utah, it’s a small State. The ILC’s are 

growing and I’m concerned that the Utah banking department 

doesn’t have the resources to accomplish its regulatory job. 

15

I’m very concerned that the entire list of the staff of the Utah 

financial institution department can fit on one page, in large type. 

I’m asking the committee to place that page in the record so the 

public can know how small the Utah ILC regulatory force is. In New York State, there’s 438 examiners for a level of $900 million assets for each examiner. In Utah, there are 36 examiners for 

a level of $3.1 billion in ILC assets alone per examiner, and that 

does not include all the small banks and credit unions in the State 

that also need regulation. I wonder if that’s going to be enough regulation and I’m very concerned about whether the regulation is 

enough to hold the safety and soundness issues that we are concerned with back from being a problem in the States that have the 

ILC’s. 

So I will, with unanimous consent, put this in the record and 

yield back the balance of my time, and turn now to Ms. McCarthy. 

Mrs. MCCARTHY. Thank you. I don’t have an opening statement. 

I’m looking forward to hearing from the witnesses. 

Mrs. KELLY. Thank you, Ms. McCarthy. Mr. Baca. 

Mr. BACA. Thank you, Madam Chairwoman. I want to thank you 

for holding this important hearing. 

While this hearing is about the ILC’s in general, the impact of 

Wal-Mart pending the ILC’s application will be felt in our districts 

and our communities across the Nation. For this reason, the application was a subject of two FDIC hearings in April and is a source 

of considerable debate across the country today. 

Federal Reserve Chairman Ben Bernanke, and former Federal 

Reserve Chairman Alan Greenspan, had publicly opposed the ILC’s 

loopholes in underscoring the reasons for a full Congressional review of the issues surrounding the ILC’s. I am pleased that the 

FDIC postponed pending ILC’s application, giving us a chance to 

examine this issue further. 

Other commercial firms like Target, General Motors, and General Electric own ILC’s; however, there are many questions that 

are left unanswered about the impact of these companies entering 

into the banking business. 

Does the FDIC have enough supervision or authority over the 

ILC’s to uphold the safety and soundness of the banking system, 

is question number one. Will we begin to see communities’ banks 

closed in the same way that local businesses have been driven out 

by the Wal-Mart superstores? What will this mean for the underserved communities? Will low income consumers have access to 

capital and fair lending, which is very important for a lot of us as 

we look at our diversity and growth within our communities. And 

I know in the empire we probably don’t have the biggest wealth in 

that area but how it would impact us in that area. 

I look forward to hearing from some of the witnesses today, and 

hope that their input will help us better determine appropriate 

steps we should take in moving forward on this and other ILC applications. 

I thank you, and I yield back the balance of my time, Madam 

Chairwoman. 

Mrs. KELLY. Thank you, Mr. Baca. Ms. Brown-Waite. 

Ms. BROWN-WAITE. Thank you, Madam Chairwoman. I certainly 

appreciate the subcommittee holding this hearing. 

16

America has had a long history of keeping banking and commerce separate. This philosophy has actually protected our Nation 

from giant conglomerates controlling the financial markets, and enforcing the hands of the economy in their favor. This philosophy 

was strongest after the Great Depression, not that I was around for 

it, but I’m told that it was, when our government fought against 

major monopolies and won. Allowing a worldwide giant like WalMart to provide banking services to millions of employees and consumers would throw us right back into that fight. 

Florida is not home to any ILC’s. In their absence, community 

banks, farm credit organizations, and credit unions provide specialized services to their unique client base. In rural areas like my 

Congressional district, a farmer can get a loan for new tractor 

equipment, while a local restaurant can reinvest their profits to 

open up a new location, and a young family can begin a savings 

and investment plan to meet college needs. 

This diversity can only be met by local financial planners and advisers who know their clients. Therefore, saying that I’m troubled 

by Wal-Mart’s ILC application is an understatement. Nervous, nauseous, and almost terrified, is more like it. 

I certainly look forward to hearing what our witnesses have to 

say today on this issue and again, Madam Chairwoman, I appreciate having this hearing so that we can have a public record about 

this issue. 

Thank you, and I yield back. 

Mrs. KELLY. Thank you. Mr. Ford, do you have an opening statement? 

Mr. FORD. I do not. I would subscribe to the notion that since we 

have panelists we ought to listen to them, so I’m going to wait and 

let them talk. 

Mrs. KELLY. In that case, we will introduce the witnesses and 

let’s hear from them. 

We have first Mr. Scott G. Alvarez, General Counsel, Board of 

Governors of the Federal Reserve System. Next, Mr. Douglas H. 

Jones, Acting General Counsel, Federal Deposit Insurance Corporation. Next we have Mr. Edward Leary, Commissioner for the Utah 

Department of Financial Institutions and, finally, Mr. Rick 

Hillman, Director, Financial Markets and Community Investment, 

the United States Government Accountability Office. 

We welcome you, gentlemen, and look forward to your testimony. 

We will begin with you, Mr. Alvarez. 

STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, 

BOARD OF GOVERNORS, FEDERAL RESERVE SYSTEM 

Mr. ALVAREZ. Thank you, Madam Chairwoman, Representative 

Frank, and members of the subcommittee. I am pleased to testify 

on behalf of the Board regarding Industrial Loan Companies or 

ILC’s and I ask that my full statement be incorporated into the 

record. 

ILC’s are State-chartered banks that have access to the Federal 

safety net and virtually all the powers of insured commercial 

banks. Nevertheless, a special exception in the Federal Bank Holding Company Act allows any type of firm, including a commercial 

firm or a foreign bank, to acquire an Industrial Loan Company 

17

chartered in one of a handful of States without Federal supervision 

of the parent holding company and without any restriction on the 

scope of activities conducted by the bank’s affiliates. 

At the time the ILC exception was adopted in 1987, ILC’s were 

mostly small locally-owned institutions that had only limited deposit taking and lending powers under State law. Today, however, 

this exception has become the means through which large commercial, industrial, retail, and other firms may acquire an insured 

bank and gain access to the Federal safety net. 

Indeed, the changes that have occurred with ILC’s in recent 

years have been dramatic. For example, while the largest ILC in 

1987 had assets of less than $400 million, the largest ILC today 

has more than $60 billion in assets, and $54 billion in deposits, 

making it the twelfth largest insured bank in the United States in 

terms of deposits. 

The ILC exception is open-ended and subject to very few statutory restrictions. Only a limited number of States may charter exempt ILC’s. However, there is no limit on the number of ILC’s that 

these grandfathered States may charter going forward and Federal 

law allows new or existing ILC’s to offer a wide range of insured 

deposit, lending, payment-related, and other banking products and 

services. 

The Board is concerned that the recent and potential future 

growth of ILC’s threatens to undermine two important policies established by Congress; one, concerning the separation of banking 

and commerce, and the other concerning the proper supervisory 

framework for companies that own a federally-insured bank. 

For many years, Congress has sought to maintain the general 

separation of banking and commerce. Congress reaffirmed this policy several times, most recently in 1999 in the Gramm-Leach-Bliley 

Act when it closed the unitary thrift loophole which previously allowed commercial firms to acquire a federally insured savings association. 

In the GLB Act, Congress also created the concept of financial 

holding companies and allowed those companies to engage as a 

general matter only in financial activities and it allowed a financial 

holding company to affiliate with a full-service securities or insurance firm only so long as the company’s subsidiary depository institutions remained well capitalized and well managed and maintained at least a satisfactory CRA record. 

The ILC exception undermines each of these policies. It allows 

commercial and financial firms to operate insured ILC’s without 

complying with the activity restrictions established by Congress for 

the other corporate owners of insured banks. It also allows financial firms to acquire an insured bank without meeting the capital, 

managerial, and CRA requirements applicable to financial holding 

companies. 

In addition, the ILC exception allows firms to avoid the supervisory framework that Congress has established for the corporate 

owners of insured banks. On this point, let me be clear that the 

Board has no concerns about the adequacy of the supervisory 

framework governing ILC’s themselves. However, unlike the parent 

company of an ordinary bank, the parent company of an ILC is not 

considered a bank holding company and is not subject to Federal 

18

supervision on a consolidated basis under the Bank Holding Company Act. 

This creates a supervisory gap because the supervisory authority 

over bank holding companies and their non-bank subsidiaries 

under the BHC Act is significantly broader than the supervisory 

authority that the primary Federal supervisor of an ILC has with 

respect to the holding company and non-bank affiliates of the ILC. 

This gap exists for foreign banks as well. In 1991, Congress made 

consolidated supervision a prerequisite for foreign banks seeking to 

acquire a bank in the United States. This is a trend in supervision 

that is growing worldwide. The ILC exception, however, allows a 

foreign bank that is not subject to consolidated supervision in its 

own country to evade this requirement and acquire an insured 

bank in the United States. 

The Board applauds the subcommittee for holding this hearing 

on these important issues. The Board believes that the Nation’s 

policies on banking and commerce and the framework for supervision of federally insured banks and their affiliates are important. 

These are policies that have shaped, and will continue to shape, 

the structure and development of our Nation’s financial system and 

the economy. 

The Board believes that the decisions on these important policies 

should be made by Congress acting in the public interest after deliberate and careful consideration and not through the exploitation 

of what was intended to be a limited exception. 

I’d be pleased to try to answer the committee’s questions. 

[The prepared statement of Mr. Alvarez can be found on page 80 

of the appendix.] 

Mrs. KELLY. Thank you, Mr. Alvarez. Without objection, all of 

the panel’s written statements will be made part of the record and 

each of you are recognized for 5 minutes. 

I didn’t feel the need to describe the lights. I believe that you 

have all testified here before. You know what the light systems 

are—red, yellow, and green. So let’s go on to the next witness. 

Mr. Jones. 

STATEMENT OF DOUGLAS H. JONES, ACTING GENERAL 

COUNSEL, FEDERAL DEPOSIT INSURANCE CORPORATION 

Mr. JONES. Thank you, Madam Chairwoman. 

Madam Chairwoman, Representative Frank, and members of the 

subcommittee, I appreciate the opportunity to testify on behalf of 

the Federal Deposit Insurance Corporation concerning Industrial 

Loan Companies. Although I cannot comment on specific pending 

applications, my testimony this morning will discuss the history 

and characteristics, current industry profile, and supervision of 

ILC’s. 

Industrial Loan Companies and industrial banks are State-chartered banks supervised by their chartering States and the FDIC, 

their primary Federal regulator. The ILC’s have existed since 1910. 

The FDIC has been involved in the supervision of ILC’s since it 

first insured banks in 1934. The modern evolution of ILC’s began 

in 1982 with the passage of the Garn-St Germain Depository Institutions Act, which expanded ILCs’ eligibility to apply for Federal 

deposit insurance. 

19

Shortly thereafter, in 1987, the Competitive Equality Banking 

Act clarified which institutions would be subject to the Bank Holding Company Act, exempting any company that controls one or 

more ILC’s from the BHC Act generally if the ILC met certain conditions specified by statute. 

ILC’s comprise a relatively small share of the banking industry, 

numbering less than 1 percent of the total 8,790 insured depository 

institutions and 1.4 percent of the assets. As of March 31, 2006, 

there were 61 insured ILC’s with 48 of the 61 operated from Utah 

and California. ILC’s also operate in Colorado, Hawaii, Indiana, 

Minnesota, and Nevada. California, Nevada, and Utah are the 

most active in chartering ILC’s. 

The powers of the ILC charter are determined by the laws of the 

chartering State. Typically, however, an ILC may engage in all 

types of consumer and commercial lending activities and all other 

activities permissible for insured State banks. 

ILC’s are owned by a diverse group of financial and commercial 

firms. Of the 61 existing ILC’s, 43 are either independently owned 

or affiliated with a parent company whose business is primarily financial in nature. These 43 ILC’s comprise approximately 90 percent of the ILC industry’s assets and deposits. The remaining 18 

ILC’s are associated with parent companies that can be considered 

non-financial. They account for approximately 10 percent of the 

ILC assets and deposits. 

The largest ILC, Merrill Lynch Bank, on its own holds approximately 40 percent of ILC assets and 48 percent of ILC deposits. 

Among the ILC’s associated with firms that can be considered nonfinancial, GMAC Commercial Mortgage Bank is the largest, holding just under $4 billion in assets and accounting for 2.6 percent 

of ILC industry assets and 2.9 percent of ILC industry deposits. Today, the assets in ILC’s are approximately $155 billion. This reflects growth from $4.2 billion in 1987. Four financial services 

firms alone accounted for over 60 percent of this growth. 

ILC’s have a good safety and soundness record to date. Overall, 

the FDIC’s examination experience with ILC’s has been similar to 

the larger population of insured institutions and the causes and 

patterns displayed by problem ILC’s have been like those of other 

institutions. The authorities available to the FDIC to supervise 

ILC’s have proven to be adequate thus far for the size and types 

of ILC’s that currently exist. 

Recognizing the dynamic nature of the ILC industry, however, 

the FDIC is examining whether additional authorities could prove 

useful in ensuring the safety and soundness of these institutions. 

ILC’s are supervised by the FDIC in the same manner as other 

State non-member banks. They are subject to regular examinations, including examinations focusing on safety and soundness, 

consumer protection, community reinvestment, information technology, and trust activities. ILC’s are subject to FDIC rules and 

regulations as well as restrictions under the Federal Reserve Act 

governing transactions with affiliates and tying practices. 

Just as for all other insured banks, ILC management is held accountable for ensuring that all bank operations and business functions are performed in a safe and sound manner and in compliance 

with Federal and State banking laws and regulations. Four of the 

20

largest and most complex ILC’s are subject to near-continuous onsite supervision. 

The primary difference in the supervisory structures of the ILC’s 

and other insured financial institutions is the type of authority 

over the parent organization. The Federal Reserve and the OTS 

have explicit supervisory authority over bank and thrift holding 

companies, including some holding companies that currently own 

ILC’s. 

The FDIC has the authority to examine affiliate relationships 

with the ILC, including its parent company and any other third 

party, as may be necessary to determine the relationship between 

the ILC and the affiliate, and to determine the effect of such relationship on the ILC. 

The FDIC also possesses a variety of authorities to restrict or 

prohibit a supervised institution from engaging in activities with 

an affiliate or any third party that may cause harm to the insured 

institution. Actions can range from civil money penalties to divestiture in appropriate circumstances. The FDIC has the authority to 

enforce conditions or written agreements that apply to ILC’s and 

their parent organizations. 

The FDIC generally follows the same review process for applications for deposit insurance and notices of changes of control relative to ILC’s as it does for such requests from other applicants. 

Decisions whether to impose specific conditions are based upon the 

totality of the application and investigation, and may consider such 

issues as the complexity and perceived risk of the business plan, 

adequacy of capital management, relationships with affiliated entities, and sufficiency of risk management programs, among other 

considerations. 

This concludes my statement. The FDIC appreciates the opportunity to testify regarding the profile and supervision of ILC’s and 

I will be happy to answer any questions the subcommittee may 

have. 

[The prepared statement of Mr. Jones can be found on page 148 

of the appendix.] 

Mrs. KELLY. Thank you, Mr. Jones. 

Mr. Leary. 

STATEMENT OF G. EDWARD LEARY, COMMISSIONER, UTAH 

DEPARTMENT OF FINANCIAL INSTITUTIONS 

Mr. LEARY. Good morning, Madam Chairwoman, and members of 

the subcommittee. Thank you for the opportunity to testify on industrial banks. 

I’m Edward Leary, the Commissioner of Financial Institutions 

for the State of Utah. I’ve been involved with banking for 32 years, 

first as a community banker, then 15 years in bank examiner positions with the Utah Department, and for the last 14 years as its 

commissioner. 

The choice of charter remains a vital component of the checks 

and balances of the dual banking system. State-chartered institutions, in attempting to survive and meet the needs of their customers, have fostered creativity and experimentation. State-chartered institutions can innovate in a controlled environment that 

limits systemic risks. 

21

Dual banking is built upon the ability to freely choose the supervisory structure under which the insured entity operates. This 

foundation contributes to a competition and excellence amongst the 

financial institution regulators. If I was invited to participate in 

this hearing today because of Utah’s history and experience in 

chartering and regulating industrial banks, my view and statement 

is that industrial banks are the embodiment of what is right and 

proper in the dual banking system. 

The reality is that Utah’s chartering and regulating of industrial 

banks has been commensurate to the risk. Utah, in partnership 

with the FDIC, has jointly created a supervisory model for industrial banks that has worked for 20 years in that no Utah industrial 

bank has failed. My belief is that this committee should not consider rewriting banking laws because particular industry groups or 

trade associations desire to suppress competition. Nor should Congress change, much less outlaw, a proven, successful regulatory 

structure because some groups have concerns about a particular 

applicant. 

I urge this committee and Congress to focus on the adequacy of 

the current regulatory process. Without an example of regulatory 

failure, there is no underlying fundamental reason for public policy 

change. 

Industrial banks are subject to the same laws and regulations 

and held to the same standards, if not higher standards, than other 

banks. Supervisory emphasis is placed on Regulation W and Sections 23A and B, which closely regulates all parent and affiliate 

transactions. Utah takes its supervisory role seriously. It is an active participant with the FDIC in all industrial bank examinations 

and targeted reviews, wherever they are conducted. 

Utah is one of the few States performing CRA compliance examinations. Utah is also participating with the FDIC in the large bank 

supervision program for four industrial banks. What Utah is engaged in has been called bank-up supervision. The FDIC has more 

accurately described the regulatory structure as bank-centric. The 

evolving supervisory processes have fine-tuned the procedures that 

insulate a bank from potential abuses and conflicts of interest by 

a parent. Critical controls have been developed. 

To me, the separation of banking and commerce is a debatable 

notion, not a reality. There have always been ways for commercial 

interests to affiliate with banks and the ability of regulators to prevent potential abuses. Conversely, as the experience of the industry 

shows, the wall separating banking and commerce is elastic. 

The industrial bank experience, like the experience of credit card 

banks, non-bank banks and other institutions with commercial parents, shows that fears about merging banking and commerce are 

unfounded. The worst case scenario the detractors have postulated 

is of a holding company filing bankruptcy or getting into financial 

difficulty. We have experienced both. While no regulatory relishes 

stressful circumstances, we can say that we weathered the storm. 

In one case, Conseco filed for bankruptcy protection. Conseco 

Bank’s corporate firewalls and the regulatory supervision proved 

adequate in ensuring the bank’s safety and soundness. Thus, the 

case of Conseco serves as an example of the bank-centric approach 

working. 

22

In another case, Tyco, the parent of a Utah industrial bank, encountered financial difficulties and decided to spin the industrial 

bank group off in an IPO which was completed and approved. The 

Utah Industrial Bank continues operations today. 

What has received little attention in the current debate is that 

industrial bank supervision is supplemented by holding company 

oversight by other Federal regulators. The SEC and the OTS have 

oversight over many industrial bank holding companies. As of 

March 31, 2006, they have 75 percent of Utah’s assets under their 

jurisdiction. If the Federal Reserve’s supervision of the parent of 

two industrial banks are included, the total is 90 percent of Utah 

assets. 

I believe we need to keep in perspective that the entire industrial 

banking industry, even with the growth during the last 20 years, 

totals only approximately 1.4 percent of banking assets. 

Thank you. 

[The prepared statement of Mr. Leary can be found on page 185 

of the appendix.] 

Mrs. KELLY. Thank you, Mr. Leary. 

Mr. Hillman. 

STATEMENT OF RICK HILLMAN, DIRECTOR, FINANCIAL MARKETS AND COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY OFFICE 

Mr. HILLMAN. Madam Chairwoman, and members of the subcommittee, I’m pleased to be here today to discuss the results of 

our 2005 report on Industrial Loan Corporations. My remarks 

today are primarily based on our 2005 report and focus on the following three objectives: one, the growth and permissible activities 

of the ILC industry; two, how the FDIC supervisory authority over 

ILC holding companies and affiliates compares with a consolidated 

supervisor’s authority; and three, the extent to which the ILC charter enables commercial holding companies to mix banking and commerce. 

In summary, ILC’s began in the early 1900’s as small, Statechartered loan companies that primarily served the borrowing 

needs of industrial workers unable to obtain non-collateralized 

loans from banks. Since then, the ILC industry has experienced 

significant asset growth and has evolved into a diverse industry 

that includes some of the Nation’s largest and more complex financial institutions. 

For example, from 1987 to March 31, 2006, ILC assets have 

grown over 3,900 percent, from $3.8 billion to over $155 billion. 

With limited exception, we also found that the ILC’s in a holding 

company structure may generally engage in the same activities as 

other depository institutions and, as a result, from an operations 

standpoint, pose risks to the Deposit Insurance Fund similar to 

other FDIC-insured institutions in a holding company structure. 

However, parents of insured depository institutions that present 

similar risks to the bank insurance fund are not being overseen by 

bank supervisors that possess similar powers. Under the Bank 

Holding Company Act, the Board of Governors of the Federal Reserve is responsible for supervising bank holding companies and 

has established a consolidated supervisory framework for assessing 

23

the risks to the depository institution that could arise because of 

their affiliation with other entities in the holding company structure. 

The Office of Thrift Supervision has similar authority with respect to savings and loan companies. The board and OTS each take 

a systemic approach to supervising depository institution holding 

companies and their non-bank subsidiaries and may look across 

lines of business at operations such as risk management, information technology, or internal audit, in order to determine the risk 

that these operations may pose to the insured institution. 

Because of a provision in the Bank Holding Company Act, a company that owns or controls a federally insured ILC can’t conduct 

banking activities through the ILC without becoming subject to 

this supervisory regime. Since these ILC’s have federally insured 

deposits, they are subject to supervision by the FDIC as well as 

their respective State regulators. 

However, the FDIC lacks the explicit authority to regulate ILC 

parent companies and their activities. The FDIC has, however, employed what is termed a bank-centric supervisory approach that 

primarily focuses on isolating the insured institution for potential 

risk posed by holding companies and affiliates rather than assessing these potential risks systemically across a consolidated holding 

company structure. 

While the FDIC’s cooperative working relationship with State supervisors and ILC holding company organizations combined with 

its other bank regulatory powers has allowed the FDIC, under certain circumstances, to assess and address the risk to the insured 

institution, questions remain about the extent to which the FDIC’s 

supervisory approach and authority addresses all risks posed 

through an ILC from its parent holding company and non-bank affiliates and how well the FDIC’s approach would fare for large, 

troubled ILC’s during times of stress. 

Another area of potential concern about ILC’s is the extent to 

which they can mix banking and commerce through the holding 

company structure. The Bank Holding Company Act maintains the 

historical separation of banking and commerce by generally restricting bank holding companies to banking-related or financial activities. 

However, because of the ILC exemption in the Bank Holding 

Company Act, ILC holding companies, including non-financial institutions such as retailers and manufacturers, are not subject to Federal activity restrictions. Consequently, they have greater latitude 

to mix banking and commerce than most other financial institutions. 

Our report includes matters for Congressional consideration designed to better ensure that insured institutions providing similar 

risks to the Fund are overseen by bank supervisors that possess 

similar powers. In this regard, we determined that it would be useful for Congress to consider several options such as eliminating the 

current Bank Holding Company Act exception for ILC’s and their 

holding companies from consolidated supervision, or granting the 

FDIC similar examination and enforcement authority as a consolidated supervisor. 

24

In addition, we concluded that it would also be beneficial for 

Congress to more broadly consider the advantages and disadvantages of mixing banking and commerce to determine whether allowing ILC holding companies to engage in this activity more than 

the holding companies of other types of financial institutions is 

warranted. 

Madam Chairwoman, this concludes my prepared remarks and 

I’d be pleased to respond to any questions at the appropriate time. 

[The prepared statement of Mr. Hillman can be found on page 

106 of the appendix.] 

Mrs. KELLY. Thank you very much, Mr. Hillman. I’m going to 

start with the questions and I have just one. 

ILC’s owned by firms under consolidated supervision by the SEC 

play an important role in our economy, particularly in facilitating 

trading and asset management that should not be displaced. I 

know the member companies of the SIA are committed to good regulation and are willing to work with the committee to ensure this. 

I would like to ask the witnesses what regulatory relief steps 

they would recommend that would allow banks wishing to exchange an ILC charter for a sound traditional State or Federal 

charter elsewhere to do so without suffering large tax and administrative costs that could harm the economy, and I’m going to throw 

this open to every member of the Board and start with you, Mr. 

Alvarez. 

Mr. ALVAREZ. Madam Chairwoman, certainly Congress has within its power the ability to confer tax benefits on any organization 

for transfers. In fact, Congress has done that under the Bank Holding Company Act in several instances where it had required that 

companies—for example, in 1970 when companies—when the Bank 

Holding Company Act was amended to allow—to require that companies that owned just one bank would become subject to the Bank 

Holding Company Act, they required divestiture for many companies that couldn’t meet the activities restrictions at the time, Congress granted specific tax benefits to those companies that sold 

their banks as a result of that requirement. That’s something that 

Congress could certainly do. 

Mrs. KELLY. Mr. Jones? 

Mr. JONES. I don’t know that I could add much to that. I mean, 

I agree that it’s something that if that were to occur, it would have 

to be done much as the relief that’s been done in the past. I think 

it’s within the Congressional prerogative, but I don’t know if we 

have any further suggestions than that. 

Mrs. KELLY. Mr. Leary? 

Mr. LEARY. I would defer and say that is a Federal tax issue. My 

point in stressing the OTS SEC supervision was to reinforce the 

point that there is Federal oversight of the holding companies. Two 

of the Utah industrial banks have oversight by the Federal Reserve. Our second largest is a financial holding company. 

But the fact that there is Federal oversight was my point in 

stressing that. 

Mrs. KELLY. Thank you. Mr. Hillman. 

Mr. HILLMAN. It’s my understanding that Congress certainly 

does have the authority with which to make changes to the extent 

to which institutions would have expenses associated with changVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
25

ing their charters and in so doing, under a time when we are modifying potentially the ILC charter and its organizations, it would 

seem appropriate to look at the chartering activities of other institutions. 

Mrs. KELLY. Thank you very much, gentlemen. I’m going now to 

Mr. Ford, I guess. 

Mr. FORD. Yes, ma’am. Thank you. 

Let me start, if I can, first just by saying thank you and ask one 

or two questions. 

The first, for really anyone on the panel, concerns the GAO report. The GAO report noted that some industry participants asserted that mixing banking and commerce may offer benefits such 

as increased competition but at the same time empirical evidence 

documenting this evidence is mixed or may not always be available. 

It seems to some of us, or at least to me, that much of this debate focuses on potential issues and not any tangible or existing 

problems or benefits. I’m interested in knowing kind of in a tangible way what the concrete findings are supporting the pros or 

cons of allowing these charters and/or ownership, and if any of you 

feel comfortable or are able to elaborate on some of the empirical 

evidence mentioned in the GAO report, I’d appreciate it. 

Mr. LEARY. I will speak up. From the State’s perspective, that’s 

why I emphasized the point that there has been no FDIC-insured 

industrial bank that has failed in Utah in 20 years of overseeing 

them. I think it is significant that the GAO report gave scant attention to the fact that there were other options besides Federal 

Reserve supervision and jurisdiction in that the OTS and the SEC 

has jurisdictions also over these institutions. 

Mr. JONES. I guess if I could—if I understood your question, I 

think your question was aimed to some extent at whether there 

has been an advantage so far from the mixing—to the extent 

there’s a mixing of banking and commerce. From our perspective, 

we haven’t seen an advantage at this time, for the institutions that 

we are supervising as ILC’s. They are subject to a number of restrictions which should, if applied properly, limit that, through Sections 23A and 23B of the Federal Reserve Act, the tying restrictions, and many of the other provisions to try to prevent unsafe or 

unsound actions. 

But those, as you said, are focused on today’s transactions that 

we’ve had. 

Mr. FORD. Has there been, to date, any of the certified ILC’s that 

have been dissolved or threatened to dissolve—are we facing any 

problem with them? Because some of this—the legislation—I’m still 

trying to decide where I stand on this—just—where is the problem, 

I mean, because it seems to me that we’re looking to fix something 

that isn’t quite broken yet. 

So if you’d give me a little sense on what we’re fixing here. 

Mr. LEARY. From my perspective— 

Mr. FORD. Talking about acting—this group here has certainly 

done an amount of acting. We—yesterday we got on Internet gaming, North Korea fired missiles, so we love acting on things that 

don’t really have a lot to do with what’s happening in the world. 

So I’m just curious; what are we fixing here? 

Mr. LEARY. That is my question, also. 

26

Mr. ALVAREZ. Congressman, I think I would respond that we are 

at a time when we see an exception in the law that is being used 

in an unintended way and is growing in a very dramatic fashion. 

Things are no longer the way they were in 1987 when this exception was initially provided. 

Now, as I mentioned in my statement, the ILC’s which were relatively small in 1987, one of them now is the twelfth largest insured bank in the United States. There’s been a dramatic change. 

We believe that is a reason for Congress to pause and take a look 

at this exception and make sure that the exception is doing what 

Congress intended it to do. 

It definitely has the potential to undermine the separation of 

banking and commerce. It is creating a gap in supervision. The 

holding companies, as you get larger, more complex organizations 

owning ILC’s that are not supervised themselves, that creates a set 

of risks that we want to make sure Congress is aware of and it’s 

something that we believe Congress should address. 

So we’re coming to you before missiles are launched with the 

idea that now is the opportunity to take some action. 

Mr. JONES. If I could add to that, Congressman. I mean, I think 

you raised the issue—the issue is perhaps more the future than the 

current— 

Mr. FORD. Than the present. 

Mr. JONES.—we don’t—ILC’s, in our experience, operate no differently, have no greater risk operationally than any other insured 

institution. Their problem rates—their failure rates are no different. If we supervise them just like any other bank, I think as 

noted in the GAO report—they indicated that operationally there 

is no greater risk—they saw no greater risk in the current ILC’s 

nor any other insured institution. 

Mr. FORD. So how big should they get? Because I hear—I tend 

to—counsel, I tend to—now you’re getting somewhere here. I’m trying to figure out what threshold or what—I mean, I take it you all 

want to have a little more of a regulatory say in this thing. What 

would be your say? 

Mr. ALVAREZ. Well, we think that they’re already expanding in 

a way that now is the time to act, that now is the time to impose 

the same supervisory regime on owners of ILC’s that apply to all 

the other owners of insured banks, so we have reached that threshold. And we think that the issue of banking and commerce is one 

Congress needs to grapple with, and that this is the perfect opportunity for that. 

Mr. LEARY. May I reinforce the point? If you speak in terms of 

Merrill Lynch, there is OTS/SEC supervision of the parent company. What you’re hearing is that it is not subject to the Federal 

Reserve. 

Mrs. KELLY. Thank you very much, Mr. Ford. Mr. Gillmor. 

Mr. GILLMOR. Thank you very much, Madam Chairwoman. 

Let me, if I could, go to Mr. Jones. Could you provide additional 

details regarding the current authority of the FDIC to impose capital requirements on the ILC parent and is that authority different 

for a new charter versus a change in control? 

Mr. JONES. The FDIC doesn’t have the authority to impose capital requirements on the parent of an ILC. 

27

Mr. GILLMOR. Okay. Let me ask Mr. Leary of Utah —you made 

a speech in which you were very laudatory about the GAO and the 

fact that they were doing a study and said wonderful things. Now 

that you’ve seen the results, how do you feel? 

Mr. LEARY. I still think they did a very professional job. I disagree with a couple of their conclusions or outcomes. I take comfort 

from the fact that they said from an operational perspective they 

are regulated. That’s my message. 

Mr. GILLMOR. As we know it, an ILC, a non-financial holding 

company is not regulated in the same way that a holding company 

of other banks are regulated which creates I think a pretty serious 

dichotomy. Would you support—so that we have consistency, do 

you support repealing the Bank Holding Company Act and relieving the other financial institutions of that regulatory obligation? 

Mr. LEARY. Let me say that you probably understood that I’m a 

lifelong regulator. Despite what is here, I’m not a risk-taker. I do 

not support removing the Bank Holding Company Act, but I believe 

the exception granted under Federal law is appropriate for the circumstances and we try to regulate to that level, yes. 

Mr. GILLMOR. Would you explain to me why it’s necessary to regulate the holding company in the other area but because of an ILC 

that they’re somehow so unique that we don’t—let me preface that 

by saying failure of appropriate regulation can have extraordinarily 

serious consequences. I came to this Congress right after the collapse of the savings and loans and that was a failure of regulation 

and it cost us about $300 billion in taxpayer money. 

And I felt kind of like the guy who had to clean up after the 

party that I didn’t attend. And, we heard the same statements 

about how well-regulated these S&Ls were, but in fact they 

weren’t. I guess I’m having a little trouble getting the confidence 

from you that what you’re promoting really works. 

Mr. LEARY. Let me preface by saying, number one, I was an examiner at the time of that savings and loan crisis, and the issues. 

I was one of the people in the field or in a supervisory role dealing 

with the issues as they collapsed around me. 

I have a Naval officer background. I would tell you I would much 

rather go to sea with an experienced captain than with somebody 

who is not experienced. I think part of the regulatory structure 

that we created in Utah, the checks and balances we’ve created, ensure that those kinds of things will not happen again. 

I emphasize that it is an evolving process. As we learn lessons, 

we constantly add new requirements and new structures into it. 

Congress has also. They’ve added a lot of requirements on the 

banking; all of those requirements added by Congress apply to the 

industrial banks. 

I have a concern with doing away entirely with the bank holding 

company, which is what I was answering, but I also have a confidence in what we’ve done, both the State and the FDIC, in ensuring the proper supervision regulation of these institutions from the 

bank out. 

Mr. GILLMOR. I appreciate your comments. I’m still having a little difficulty with having similar situations differently regulated. 

I do want to ask Mr. Hillman, in the GAO September 2005 report on the ILC issue, GAO recommends that Congress address the 

28

discrepancies between the Federal Reserve and the FDIC and regulatory authority at the holding company level. Could you tell me if 

the approach which we’re taking or proposing to take in H.R. 5746 

is similar to the recommendations of the GAO? 

Mr. HILLMAN. The bill that you refer to includes provisions that 

would provide the FDIC with powers in compelling holding companies to provide reports, to provide powers to the FDIC to examine 

holding companies and affiliated structures, and it provides powers 

to the FDIC to enforce those actions similar to the authorities that 

a consolidated supervisor would have over a holding company 

structure. 

And from that standpoint, Congressman, it is very consistent 

with a matter for Congressional consideration made in our report 

that the Congress provide the FDIC with similar consolidated supervisory powers. 

Mr. GILLMOR. Thank you very much. I don’t know if I’ve used up 

my time. If I haven’t, I wanted to follow up and ask if you’re able 

to describe the experiences of Japan and Germany in the mixing 

of banking and commerce. Was that part of some of the issues you 

considered? 

Mr. HILLMAN. That wasn’t a specific focus of our work but we 

have noted that within Europe and within Japan they do allow for 

a greater mixing of banking and commerce. However, within Europe, they do require consolidated supervision. 

Mr. GILLMOR. Which we do not with ILC’s. 

Mr. HILLMAN. Correct. 

Mr. GILLMOR. And as I recall, in Japan, within about a decade 

or so ago you virtually had a collapse of the banking system that 

had to be bailed out, which I think makes a point about the regulation that’s needed. 

Mr. HILLMAN. That’s correct. While their regime is different from 

ours, they had encountered significant problems with non-performing loans which brought their industry to near-collapse. 

Mr. GILLMOR. Thank you very much. I yield back. 

Mrs. KELLY. Thank you, Mr. Gillmor. Mr. Frank. 

Mr. FRANK. Thank you, Madam Chairwoman. I apologize for the 

back and forth, but we have a bill on the Floor today for this committee on the credit rating agencies, and I was asked to go over 

there and speak on the rule. 

I do want to make clear that there are different levels here. A 

lot of the argument has been about ILC’s. Certainly the approach 

that the gentleman from Ohio and I have taken is not an anti-ILC 

bill. In the first place, it does not disrupt any existing entity, and 

secondly it puts restrictions only on those that are not 85 percent 

financial. 

So that’s why when people say, look, the history is that there 

have been no problems, if history were to remain unchanged this 

would not be a big issue, but what we have is a large number of 

new applications. We are about to enter a future, if we don’t 

change things, which will be very different. So the history becomes 

almost irrelevant. 

But let me ask the commissioner from Utah there, and I understand that ILC’s play a very constructive role in the State of Utah 

and if I didn’t know that before, having met the gentleman from 

29

Utah, Mr. Matheson, I would know it now. It is a mantra of his, 

legitimately, because this is important to his State. 

What percentage of the assets held by ILC’s in Utah would be 

affected by the 85/15 restriction? 

Mr. LEARY. The number is difficult to compute with any accuracy. We have ballparked it that it would be approximately 93 percent of the assets that would be under financial— 

Mr. FRANK. So we are talking here about approximately 7 percent of the assets. I understand there’s a plus or minus margin of 

error here. But again, I want to be clear. This is no wholesale assault even on the ILC’s in Utah; 93 percent of the assets would not 

be affected by the legislation we’re talking about, although it could 

be by other legislation involving supervision, although that’s not 

necessarily restrictive. 

Next question for the FDIC. Wal-Mart has told us that they’re 

asking for a restricted charter. They’re not looking at getting into 

banking; they say they want to maintain the relationships they 

have with branch banks in their stores and they’re really looking 

for a more restricted kind of paper processing in their ILC. 

Does the FDIC have the legal authority to grant a restricted 

right to operate? That seems to be a very important question. 

When Wal-Mart says that this is all it wants to do, that it doesn’t 

want to do these other things, does the FDIC have the authority 

to grant them only as much as they have asked for, or maybe less 

than they asked for. Or once you grant it, is it simply a question 

of what enforcement mechanism would hold them to whatever limitations they were to get if they were to get limitations? 

Mr. JONES. I can’t speak specifically to the Wal-Mart application 

but in general— 

Mr. FRANK. Yes, in general. 

Mr. JONES. In general, we do have—we have the authority to restrict an application when we approve insurance based on prudential considerations or based upon— 

Mr. FRANK. Can you restrict it in terms of the activity? In other 

words, suppose some unknown, unnamed entity said, ‘‘Look, all I 

want to do is process my credit card papers here; I don’t plan to 

take deposits of any kind, and I don’t plan to make loans. I just 

want to be an ILC so I can just do this sort of back office stuff.’’ 

Could you give them the right to do that that would in fact contain legally enforceable limits on their going any further? 

Mr. JONES. Let me give you a two-part answer. Yes, we could, 

to the extent that that’s all someone asked for, and that’s all we 

considered for deposit insurance; we could limit it. But it is a situation where they could ask on a future date to change it and we’d 

have to reconsider it if they asked to change it in the future. 

Mr. FRANK. Well, what would be the basis for changing it? Would 

it be like a de novo application or would they gain some leverage 

from the fact that they already had it there? 

Mr. JONES. That would be very fact-specific in any circumstance, 

but it would— 

Mr. FRANK. Okay. So in fact, if they were to ask for something 

now and get it, you could limit it to what they ask for now but they 

could come back at any period of time and ask for more. 

Mr. JONES. And we would have to evaluate it— 

30

Mr. FRANK. Yes. 

Mr. JONES.—risk to the insurance fund and the activity itself. 

Mr. FRANK. Let me ask all of our witnesses here—I described the 

situation. Home Depot is a very good company. If I ever renovated 

a home, I suppose I’d consider buying stuff from them, but that’s 

not what I do, so I’m not going to ever do that. I mean, I wouldn’t 

want to live in a home that I was in charge of renovating. 

But if Home Depot owns the bank, is it a problem if a contractor 

seeking to maintain the favorable relationship with that bank, 

which we know exists—if the contractor felt pressured to buy from 

Home Depot as opposed to its competitors, would that be troubling? 

Let me ask each of you, starting with the Federal Reserve. 

Mr. ALVAREZ. There are two statutory restrictions that your example brings up. One is a Federal anti-tying prohibition, so a bank 

is not allowed to tie the availability or price of its product— 

Mr. FRANK. Right. And it would be bad policy in your judgment. 

Mr. ALVAREZ.—and it would be bad policy to do it. And then 

there’s also Sections 23A and 23B which restrict— 

Mr. FRANK. Okay. 

Mr. ALVAREZ.—transactions— 

Mr. FRANK. But I want to—let me just go down the list. Do you 

think this is something we should try to prevent from happening? 

Mr. JONES. Well, I think—as Mr. Alvarez mentioned, I think that 

has been dealt with at least in part by statute by restricting— 

Mr. FRANK. Okay. I understand that. A lot of things have been 

dealt with by statute but, you know, you heard about the statute 

of limitations. I’m going to give you a new concept—a limitation of 

statutes. Just because it’s in the statutes doesn’t mean that it’s 

going to happen. 

So do you think that is something public policy should try to prevent? 

Mr. JONES. That’s something that we— 

Mr. FRANK. Yes or no? It’s an opinion—is it something public policy should try to prevent? 

Mr. JONES. That is something that we would be concerned about, 

yes. 

Mr. FRANK. Okay. Let me ask, Commissioner, do you think that 

this is a problem if that were the practice? Do you think we should 

try to prevent it? 

Mr. LEARY. To me? Sorry. 

Mr. FRANK. Yes. 

Mr. LEARY. The fact and circumstance—I would mirror what the 

Federal Reserve said. There are two issues—two laws— 

Mr. FRANK. No, I’m not asking what the law is. 

Mr. LEARY. I understand. My problem in answering that is it’s 

an application in front of me so I don’t want to answer it. 

Mr. FRANK. All right. Forget Home Depot. Is it a problem in the 

abstract if a seller of products owns a bank and people doing business with the bank would feel some pressure to then otherwise buy 

that product? Do you think that’s something we should be— 

Mr. LEARY. In the abstract, I would say that there are two Federal Reserve regulations in place now that would address that— 

Mr. FRANK. Okay. Excuse me. Madam Chairwoman, can I make 

a new rule: No lawyers to testify. You ask a lawyer his opinion, he 

31

tells you what the law is. You’re not in court. I want to know, as 

public policymakers, what you think public policy ought to be, not 

what the regulation is. What do you think public policy ought to 

be in that regard? 

Mr. LEARY. I think I have a difficult time answering that without— 

Mr. FRANK. Well, that’s obvious. Okay. 

Mr. LEARY.—conflict on my— 

Mr. FRANK. Let me move to the GAO. 

Mr. HILLMAN. Congressman Frank, the policy generally separating banking and commerce is based primarily on limiting the potential risk that may result to the financial institution, the deposit 

insurance fund and— 

Mr. FRANK. Okay. I thank you. Go ahead. 

Mr. HILLMAN.—and there’s three major risks that we’re trying to 

avoid. One of those three risks is what you’re referring to, increasing the conflicts of interest associated with having a commercial 

entity own an insured institution. 

Other risks include the potential expansion, as mentioned by the 

Federal Reserve, of the Federal safety net provided to banks to 

those commercial entities, and third, an increased economic power 

potentially being exercised by large conglomerates. 

Mr. FRANK. I appreciate that. And there’s a second conflict of interest, and that is even more troubling. If I am the potential borrower from the bank owned by Home Depot, and the bank knows 

that since I’ve been involved with this contract, if I get the loan I’m 

going to buy Home Depot’s product. It seems to me human nature 

that the decision on the loan is not going to be made purely on the 

loan. 

And I understand that these are against the law—let me go back 

to the limitation of statutes—but it is not prudent to give regulators very hard things to enforce. And I think that the practicality 

of enforcing the anti-tying rules is greatly multiplied when you 

allow sellers of products unrelated to the financial institution to be 

in a position where the bank that they own can benefit in two 

ways, one from the loan, and one from the sale of the product. 

Yes, we can make laws against tying but it seems to me wholly 

imprudent to multiply the opportunities in which regulators who 

are pretty busy have to read people’s minds and try and enforce 

those laws. 

Thank you, Madam Chairwoman. 

Mrs. KELLY. Thank you, Mr. Frank. 

I’m turning now to Mr. Leach. Mr. Leach has asked for this hearing and has asked the courtesy to be here, so I’m going to call on 

him. Are you prepared, Mr. Leach? 

Mr. LEACH. Thank you very much, Madam Chairwoman. I appreciate your recognizing me. 

First, I would like unanimous consent to place a letter of January 20, 2006, from the former Chairman of the Federal Reserve, 

Alan Greenspan, into the record if I could. 

Mrs. KELLY. So moved. 

Mr. LEACH. At the end of that letter—and I’d like to turn to Scott 

for a second—a statement is made, the bill you have introduced, 

H.R. 3882, would subject the corporate owners of ILC’s to the same 

32

prudential framework, including consolidated supervision requirements, bank level capital managerial and CRA criteria enforcement 

mechanism, and activities limitations, that apply to the financial 

holding companies under the BHC Act and other Federal banking 

laws. This approach would address the Board’s concerns and ensure a fair and level competitive playing field for all banking organizations. 

Now, I understand that this is the Federal Reserve’s position 

today. Is that correct? 

Mr. ALVAREZ. Chairman Bernanke has said the same thing, Mr. 

Leach. 

Mr. LEACH. One of the aspects of this that has gotten little attention that, I would like to stress, is that there’s an issue of commerce in banking that we all understand. Secondly, there’s an 

issue of competitive equality and regulatory equality for financial 

companies abroad and at home. 

And, for example, as I understand it, Scott, under the current 

law, a foreign commercial company can apply for an ILC without 

any oversight of the foreign company’s commercial endeavors; it 

might be the holding company. Is that correct? 

Mr. ALVAREZ. That’s correct. A foreign company or a foreign bank 

could. That’s correct. 

Mr. LEACH. And so what we have under current law, if we don’t 

change it, is an enormous advantage to foreign companies that we 

may know nothing about obtaining an ILC charter. And this really 

cries out for thinking through. Secondly, and this is a little bit of 

a difficulty for this committee to deal with, there are competitive 

equities here at home. 

And so, for example, if a financial company in the United States 

has an ILC that doesn’t come under Federal Reserve supervision, 

but let’s say a commercial bank under the Bank Holding Company 

Act does, the one has a less comprehensive supervision than another. Is that not true, Scott? 

Mr. ALVAREZ. That’s true. 

Mr. LEACH. And that presents a dilemma because we have this 

circumstance of seeking the lowest common denominator. And 

again, I think it’s a reason that we ought to think this through. 

Let me ask the FDIC representative, does the Federal Deposit 

Insurance Corporation have a position on the issue of commerce in 

banking? Do you favor it or do you disfavor it? 

Mr. JONES. No, sir, we do not have a position. We view that as 

a prerogative of Congress. 

Mr. LEACH. So you think that’s appropriate for Congress to deal 

with, and you’re not intervening in that. And I think that’s a correct position of the FDIC. This is a matter for the Congress to deal 

with. The FDIC argues that it is applying certain standards, and 

that’s absolutely true, to its supervision. 

But isn’t it also true that you do not have the power of the Federal Reserve by law, as the GAO has pointed out, to look at the 

holding company structure of ILC’s held by commercial companies? 

Mr. JONES. We can look at certain aspects as they relate to the 

bank but we do not have the overall authority to— 

Mr. LEACH. And that’s what I’m saying. That’s a dilemma, too. 

Now, I have an enormous amount of respect for the FDIC. I am, 

33

however, perplexed that there is no sense of wanting to share accountability and that’s one of the reasons that I frankly prefer a 

little bit our approach to that of Mr. Frank, although Mr. Frank’s 

approach is a very respectable approach, and far better than the 

current playing field, as far as I’m concerned. 

And that is—that relates to shared accountability on how one 

goes about overall supervision. And here I would like to say to 

some of the parties, and particularly representatives here from the 

securities industry, if you take an approach that wants to give comparable authority to the FDIC—and that may or may not occur—

vis-a-vis having shared accountability, one of the things you have 

to ask is what does the FDIC lend to the situation. 

And I have long held that one of the anomalies in America is 

that the Treasury has no treasury in an emergency. The Federal 

Reserve of the United States has unending pockets under current 

legal authority without act. And therefore, if I am an investment 

bank that gets into difficulty, I would sure want to be under Federal Reserve supervision and close to the Federal Reserve, rather 

than have the Federal Reserve out of the window. And I hope as 

one looks at differing approaches, the securities industry thinks 

that through. 

But my only strong suggestion here is that if we change the law 

and move in a direction that tightens up ILC oversight, and it’s imperative for Congress to do this, that we do it in such a way that 

there is a notion of shared accountability, not exclusive accountability, in a way that there is competitive equity in the financial 

landscape. 

Now, the gentleman from Utah is right. There is some other 

oversight beyond the Federal Reserve that does exist, but it’s not 

exactly the same. And these other oversight agencies are just like 

the Treasury; they have no treasury. 

Mr. PRICE. [presiding] The gentleman’s time has expired. Would 

any of the members of the panel wish to respond or make comment? Mr. Leary? 

Mr. LEARY. May I? 

Mr. PRICE. You may. 

Mr. LEARY. Responding to the Representative’s concern, I can 

think of one foreign bank that is an industrial bank, and that is 

UBS. It is a financial holding company subject to the Federal Reserve jurisdiction. The only other two foreign entities that own industrial banks directly are Volkswagen and BMW, both of which I 

understand have significant banking operations in Europe, and are 

under the consolidated regulatory system in Europe. 

Mr. PRICE. I thank the panel. The Chair would remind folks that 

we have a panel after this one, and that there is another committee 

hearing at 2:00 p.m., and so we understand everybody’s interest in 

all of this, but we would appreciate it if members would keep their 

questions brief, and the panel as well. 

And Mr. Meeks, you’re recognized for 5 minutes. 

Mr. MEEKS. Thank you. 

I come at this really undecided as to where I’m at on this issue. 

And my question is somewhat—that I just heard—whether or not 

there is more of a danger—because I’m trying to figure out where 

the greatest danger—is there more of a danger in mixing banking 

34

and commerce than it is with the mixing of investment banking 

with financial management with travel services with credit card 

companies—you know—because we’re in this age where we see 

things, everybody is trying to do—have the parent company with 

the subsidiary of that and keep it all in-house. 

And I’m trying to see, is there a difference, is there something 

that I’m missing here that makes a difference in the two? 

Mr. ALVAREZ. Congressman, I think that there is a difference between the two, and that Congress has recognized the difference. 

The motivation behind the Gramm-Leach-Bliley Act where Congress repealed the Glass-Steagall Act, and allowed the affiliation of 

banks and financial firms, was that there was a lot of substitution 

going on in the marketplace between the products offered by banks, 

deposits and investment products, and the kinds of products offered 

by securities firms and insurance firms. 

There’s a synergy among those three types of financial institutions and the financial products that they offer. There’s always 

been a conceptual difference between those kinds of financial investment products and manufacturing steel, or selling washing machines, or making cars, which is more the commercial side. 

And the history in the United States has been to think carefully 

before we allow banks to be affiliated with the commercial entities 

because of the potential for trouble in those commercial entities to 

bleed into the banks and cause contagion that might cause the failure of the bank, and the potential that the safety net that the bank 

operates under might benefit the commercial company so that 

those that own a bank have an advantage over those that don’t 

own a bank, and also for some of the concerns that Congressman 

Frank was mentioning about the internal conflicts of interest that 

may occur when a bank is trying to consider whether to offer credit 

to a customer of its affiliate versus a customer of some other competitor or make a loan to a competitor as opposed to making a loan 

to the affiliate itself. 

So there’s a lot of concerns like that that have kept banking and 

commerce apart so far and those are the kinds of things we think 

deserve a full debate here in Congress before Congress makes a decision on this. And Congress should make the decision rather than 

letting an exception in the Bank Holding Company Act determine 

the future of commerce and banking and take that decision out of 

the hands of Congress. 

Mr. MEEKS. So really, what I’m trying to decipher is the benefits 

to my constituents and to my community. For example, currently, 

say GM, who has an ILC, is primarily for their financial company 

so if I go in and there’s zero percent interest if I use their finance 

company, because that’s a subsidiary of the parent company, the 

benefit comes to the consumer. 

Likewise, if there’s a large chain—I don’t know whether it’s WalMart or whether it’s Home Depot, etc., if there is a way to bring 

down the cost to the consumers that would be to their benefit, 

without creating the dangers that I guess you’re talking about as 

far as the commingling of the funds, etc.—what I’m trying to—why 

would that be a bad thing? 

Mr. ALVAREZ. There’s certainly benefits that folks have argued 

would come about from the mixing of banking and commerce, and 

35

you’ve referenced a couple. The other side is to consider that the 

taxpayer also stands behind the Federal safety net that supports 

the bank and so we want to be able to balance and think through 

carefully what the cost to the taxpayer would be, as well as the potential benefits that might accrue to customers. 

And whether we have the right framework to go forward in 

banking and commerce is an open question, and that’s really what 

this is, in part, about. 

Mr. MEEKS. My last question—and I agree that, you know, Congress should—for example, the FDIC—do you have the power to 

regulate that now or would it be important for Congress to give you 

additional power to regulate the parent company of an ILC? 

Mr. PRICE. The gentleman’s time has expired but you may respond. 

Mr. JONES. We do have—at this stage, at least, we believe we 

have the power to deal with the institutions that are out there that 

we’ve experienced to date. We believe the issue from our perspective is really the safety and soundness of the institution and to 

date, under the existing authority, we’ve attempted to isolate or insulate the institution from its affiliate or its parent. 

We do recognize that it’s a very dynamic area, and it’s a very 

changing area, so one of the things we are considering right now 

and evaluating is whether we need more authority or power. But 

we think whatever outcome comes out, whether the existing authority or the new authority, ultimately the goal should be to protect the institution and make sure it’s protected from the temptations that have been discussed. 

Mr. PRICE. Thank you. Mr. Pearce, you’re recognized for 5 minutes. 

Mr. PEARCE. Thank you. Mr. Leary, if I understand your testimony correctly, it’s basically at the end of the day that we’re doing 

it well in Utah and really there’s not much cause for alarm. When 

I look at the situation of long-term capital, which was a hedge 

fund, it really was in my readings not doing anything against the 

law; they just began to do a lot of what they were doing and doing 

it recklessly and many, many institutions then had to pay to bail 

that situation out. 

So you’re saying that everything is right now legal, that everybody is running well in the system and you don’t see any potential 

case where a parallel situation, not with a hedge fund but with an 

ILC, beginning to lend to itself and beginning to really pull in more 

and more capital could create a problem? You just don’t see that? 

Mr. LEARY. I would like to say that I’m a regulator, so I worry 

day and night. I’m a paid professional regulator. But the regulatory 

structure that is in place has been commensurate to the risk. That 

is what I have identified. Will there be problems in the future? Undoubtedly. But there’s problems across banking into the future. 

We’re getting into new technology, new products, and new services, 

and each of those have to ferret out what’s appropriate. 

But I would represent to you that we are comfortable with the 

level of supervision in place at this point in time. But I clearly 

want to say that there’s always the future, and that’s why I stress 

it is an evolving process; as risks are identified, we’ll respond at 

the State level as rapidly as we can. 

36

Mr. PEARCE. And so in Utah you’re not allowing any of the ILC’s 

to fund themselves or lend to themselves or lend to—to form a very 

close relationship between their customers and themselves? 

Mr. LEARY. I would represent only semi-tongue-in-cheek I think 

we’ve become Sections 23A and 23B experts at the State level as 

well as the FDIC, as much as the Federal Reserve, yes. We are 

very cognizant, very aware of that. That is a supervisory emphasis 

at every examination where there is a parent. 

Mr. PEARCE. Your written testimony indicates that you feel no 

qualms about the association of commerce and banking, yet when 

I review the Japanese banking system to where they bought companies, then the companies did two things, invested heavily in real 

estate, and invested heavily in their own operation; they were 

funding—loaning to themselves to operate. 

Then when the real estate market crashed, it began to put pressure on the banks, the banks crashed, and then the ultimate companies that were involved crashed. And, for me, that’s a concern 

but when I read your testimony and listen to you today you say basically no sweat, no big deal, we’ve run it okay in Utah. 

But I—going back to the long-term capital thing, I’ve just—I’m 

sorry—there are events that spin out of control that extend beyond 

the ability for you to slow them down. The regulators, I suspect, 

were trying to do something about long-term capital but they just 

down there sunk the economic ship in the United States, and so 

when I look at long-term capital and the Japanese market, I’m not 

so reassured by Utah. 

Do you have something that will be the magic potion to reassure 

me at this point in the day? 

Mr. LEARY. What I would give you in a short answer is, I think, 

the Federal Reserve—we have good confidence in Sections 23A and 

23B and the anti-tying provisions which have been identified. I 

don’t know if we have more confidence in the Federal Reserve, but 

we have confidence in that ability. 

We have also taken some prudential—what we call prudential 

standards. We mandate that all industrial banks have a majority 

outside unaffiliated directors. We mandate that management is in 

Utah, so I believe we have a hand on the bank. 

What you’re asking me, is there some threat in the future that 

may cause an issue, and I would say as a regulator, I’m a realist 

and a pragmatist— 

Mr. PEARCE. Okay. Let me ask some more questions. 

Mr. LEARY.—there may be. 

Mr. PEARCE. My time is—have you had any—you say you’ve had 

no failures, no bankruptcies of ILC’s. Have you had any small community banks just cease to operate, close down? 

Mr. LEARY. Yes. I have the unenviable distinction of having the 

last bank in the county close. 

Mr. PEARCE. And that’s my concern, again, in my opening statement. Rural areas depend on some source of capital and I will 

guarantee the rates of return in Hobbs, New Mexico, where I live, 

will never be what they are in Albuquerque, New Mexico. If we 

don’t have some access to capital, then the economy of the whole 

United States has to stand on the shoulders of 20 or 30 large comVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
37

munities, or 20 or 30 large banks, and I just don’t think it can do 

it. And at the end of the day, that becomes a very compelling thing. 

Thank you, Mr. Chairman, for your time. 

Mr. PRICE. The gentleman yields back. Mr. Baca, you’re recognized for 5 minutes. 

Mr. BACA. Thank you, Mr. Chairman. This question is for Mr. 

Jones. The U.S. law has historically separated commerce and banking activities to avoid placing Federal deposit insurance fund, 

which currently amount to $49 billion, at risk if the banks fail. 

Without consolidation supervisory authority over the ILCs’ corporate owners, how can FDIC ensure that the ILCs’ safety and 

soundness—which is question number one—and then how can we 

be sure that a company as large as Wal-Mart won’t put our banking systems at risk if it fails and who will it impact most? 

Mr. JONES. As I mentioned when we were discussing earlier, our 

focus is on the safety and soundness of the institution. We have applied the same standards to the institution we do to any other, insulating the institution whether it’s an ILC or any bank from its 

parent and its affiliates to protect them. So we apply the same 

standards, we had the same focus. 

Indeed, with respect to the ILC’s, we have a number of them that 

we—I think at this stage we have 13, because of their size, that 

we put on what we call the large institution depository program 

where we evaluate them on a daily basis and at least four of them 

right now—four at this date we have almost dedicated examiners 

in there keeping track of them. So we’re applying the standards we 

can under the existing statutory authority we have. 

Again, our goal is to try to insulate the bank. Whether in fact 

there should be a consolidated supervisor is probably—is what this 

hearing is about and is really—ultimately will be a Congressional 

concern. We are applying the best standards we can under the statute we have right now. 

Mr. BACA. And if we were at risk, who will it impact mostly then, 

if it fails? 

Mr. JONES. Well, if we find—are you talking about the parents 

at this stage or the bank itself? 

Mr. BACA. The bank itself. 

Mr. JONES. The bank—the impact unfortunately is going to be 

the insurance fund, if it fails, will have the greatest impact. That’s 

our goal to prevent the bank from failing to the extent there’s been 

concern on the parent. That’s why we try to insulate the bank. 

And it was mentioned there have been a couple of instances in 

the past where a parent of an ILC has gotten in trouble and we 

have, working with the States, stepped in to insulate the bank, prevent the bank from bailing out the parent, setting the bank up so 

ultimately it was actually disposed of and sold so it was not 

harmed by the failure of the parent. And that’s our goal when we 

do the supervision. 

Mr. BACA. Okay. Mr. Alvarez, in September of 2005, the GAO advised Congress to consider improving the regulations of the ILCs’ 

banking and holding companies. Do we need to bring existing ILC’s 

and their holding companies under Federal Reserve supervision, 

which is question number one? And then two, do you think that the 

Federal Reserve is better equipped to handle them? And number 

38

three is, how would you recommend that we address the GAO’s 

concerns? 

Mr. ALVAREZ. We believe strongly that you should have consolidated supervision since the Federal Government stands behind the 

Federal safety net. There should be the same regime of supervision 

over owners of ILC’s as there are for the owners of other insured 

banks. 

And that means having a Federal supervisor that has full examination authority, capital authority, authority to have reports, and 

to bring enforcement actions. Those are the areas that we have 

under the Bank Holding Company Act and we have a full regime 

set up under the Federal Bank Holding Company Act and many 

years of experience in being the umbrella supervisor for owners of 

insured banks. So we think we’re very well equipped to handle the 

responsibility but we think it’s most important that Congress provide a Federal regulator with that authority and the responsibility. 

Mr. BACA. Mr. Jones, during its testimony to the FDIC in April, 

Wal-Mart cited its long-term lease with 1,150 store branches and 

more than 300 financial institutions as a reason why the company 

could not easily open branches in its stores. But there’s a reason 

to believe that the statement was inaccurate and that the renewal 

would also be at Wal-Mart discretion. 

What can the FDIC do to prevent Wal-Mart from branching into 

other States? 

Mr. JONES. I have to apologize. It is a pending application, so I 

can’t really discuss it. This almost is a two-part question, I guess, 

but I can’t discuss the actual application. I mean, in the issue of 

branching, in general we have—we have to approve any branch for 

any of our banks if it’s a State-supervised bank, State non-member 

bank, so any bank that is supervised by us would ultimately have 

to have FDIC permission to branch. 

Mr. BACA. Okay. Bottom line, if we allow branching into other 

communities, will the banking industry then be affected if we allow 

branching out? 

Mr. JONES. You’re talking in general, not with respect to WalMart? I mean, it’s hard to judge at this stage if you had this— 

Mr. BACA. I have 30 banks in one place; we allow branching to 

Wal-Mart or anybody else. Will it impact banking? 

Mr. JONES. I don’t know if it would impact banking any more 

than the large banks branching into the communities across the 

country today. It’s going to be a question, you know—it’s a competition issue. 

Mr. BACA. If you have access to one versus another one, does it 

impact them— 

Mr. PRICE. The gentleman’s time has expired. 

Mr. BACA. Thank you, Mr. Chairman. 

Mr. PRICE. Mr. Hensarling, you’re recognized for 5 minutes. 

Mr. HENSARLING. Thank you, Mr. Chairman. 

I always try to come to these hearings with an open mind, not—

just not an empty mind. And I’ve come to this hearing with a particularly open mind. Unlike some on this panel, I do not necessarily 

consider big to be bad, but I do tend to have a bias in thinking that 

more freedom is good and less freedom may be bad. 

39

And so as I listen to a lot of the testimony, and try to boil it 

down to—at least a portion of it to its lowest common denominator, 

I think I hear Mr. Jones saying that we can regulate these ILC’s, 

and Mr. Alvarez saying no, you can’t. So Mr. Jones, let me ask you 

the question. 

What is it that in your supervisory powers and structures that 

you have over the parent companies of ILC’s that would be different from the powers and regulatory structure that the Federal 

Reserve or the OTS would have over parent organizations of insured depositories? What’s the difference here? 

Mr. JONES. I guess first I’d like to break it down that I think 

you’ve raised two issues, whether we can supervise the ILC’s and 

whether we have the same powers as the Federal Reserve does 

over the parents. I don’t think anyone has raised any issues of 

whether FDIC or the States at this stage can supervise the ILC’s. 

We have the same authorities for those that we have for every insured institution, and I believe even in GAO’s report they indicated 

they found no operational failure on our part for the supervision of 

the institutions. 

The question I think you’re really directing is can we oversee or 

supervise— 

Mr. HENSARLING. Well, they have supervisory ability as opposed 

to authority. 

Mr. JONES. Well, supervising a bank, I think we have the same 

ability to supervise an ILC that we have for any institution. On the 

parent level, we don’t have the same authority as the Federal Reserve. We have some authorities. Largely our authorities apply to 

insulating the bank from the parent so the parent doesn’t pose a 

risk to it but as has been noted, we cannot apply consolidated capital to the bank. We don’t have the same reporting requirements, 

although we do—we are able to obtain a large number of reporting 

requirements through both cooperation and in some situations by 

agreement. 

So we don’t have the same authorities. We have attempted with 

the authorities that we do have to make sure we’re providing that 

proper supervision at the bank level. 

Mr. HENSARLING. Mr. Alvarez, how does this impact taxpayer exposure and safety and soundness? 

Mr. ALVAREZ. Well, Congress has decided that the most effective 

way to protect the Federal safety net and the taxpayer is to have 

a two-part supervisory scheme, one that focuses on the depository 

institution directly, and another that looks at the holding company 

and its affiliates, and the strength of the holding company and its 

affiliates. 

As Doug mentioned, the FDIC has full authority to look at the 

bank. That part of the scheme isn’t what we question. For owners 

of ILC’s, however, there is no comparable supervision of the holding company itself and its affiliates, so there’s exposure to the taxpayer and the safety net through weaknesses that may occur at the 

holding company. Troubles at the holding company could bleed over 

into the bank and cause failure at the bank. Capital may be deficient at the holding company and that puts the bank at risk. 

So it is—having someone who has the authority to look at, examine, get reports from, and take enforcement actions against the 

40

holding company and its affiliates is the difference between the 

two. 

Mr. HENSARLING. Mr. Hillman, I have not reviewed your study 

but what are we observing in the real world here? Is there evidence 

that the FDIC has been less effective in supervising of institutions 

not owned by bank holding companies? 

Mr. HILLMAN. Our work suggests, Congressman, that the work 

done by the FDIC as it relates to supervising the ILC or the insured institution is similar to the authorities and approaches taken 

by other Federal regulators in insuring the institution. The question today, however, is the extent to which the FDIC has similar 

authorities to oversee the holding company structure, the parent 

organization and affiliate organizations, and in this regard, while 

the FDIC provides substantial authorities to try to isolate and limit 

the risks associated with ownership by the parent in a holding 

company structure to an ILC, it is not equivalent to the authority 

provided by the Federal Reserve or OTS. 

Mr. HENSARLING. In the limited time I have left, I want to 

replow a little bit of old ground that the ranking minority member 

brought up and that is it appears that by their testimony, WalMart and Home Depot are looking for a very limited purpose in 

their ILC charters, and I understand a couple of you gentlemen 

cannot comment because they are pending. 

But I really want to hone in and make sure I understand the answer. Is there an ability to limit the specific purpose that the ILC 

charter would have? And without commenting, I suppose, on those 

specific cases, Mr. Jones, could you answer that question yet again 

so I have a firm understanding of the answer? 

Mr. PRICE. The gentleman’s time has expired, but you may answer, Mr. Jones. 

Mr. JONES. We can—when we approve an application. We can 

place conditions on the application based upon either items we perceive as risk or items, if we have not made a thorough review, the 

limitation on what our review was so they’re not engaging in other 

activities. So we can place limitations on an approval that you 

can—and again, this is in general, but you can place limitations 

that an institution cannot engage in certain activities either without our consent or without giving prior notice to us so we can take 

an action on it. 

If they do not live up to those conditions, they face severe consequences in the sense of enforcement actions that we can take 

against them, all the way up to the level of a million-dollar-a-day 

fine if they’re violating a condition. But as I mentioned to Congressman Frank, these are conditions that are imposed at the time 

based on the facts before us. So to the extent at a later date if they 

come forward and ask us to re-review it, we have to consider it at 

that time based upon the facts that exist at that time as well. 

Mr. HENSARLING. Thank you. 

Mr. PRICE. Thank you, Mr. Jones. Mr. Crowley, you’re recognized 

for 5 minutes. 

Mr. CROWLEY. I thank the Chair for recognizing me. 

Let me say I, unfortunately, was unable to be here for your testimony, but I have your written testimony, and I will review it. As 

in my opening statement, I made reference to the fact that what 

41

has made this country great is the level of competition amongst 

members of particular industries. And I see the same here in the 

ILC debate, creating opportunities for competition to thrive here in 

the States and to—it’s what’s made our country strong. 

So I want to just really reiterate my opening statement to a degree, and that is I do support the ILC’s in concept, and I don’t believe in creating a separate standard for one particular entity to 

keep one out of the market. 

And with that, I will yield the balance of my time to the gentleman from Utah, Mr. Matheson. 

Mr. MATHESON. I thank Mr. Crowley for yielding. 

I think the line of questioning that Mr. Hensarling just went 

through really helped crystallize what one of the issues is here that 

I think we need to acknowledge. 

There’s nobody arguing that the FDIC and the Federal Reserve 

have the same ability to look at the holding company, at the parent. I don’t think there’s anybody who thinks that is the case. The 

operative question here ought to be under what does the FDIC 

have its jurisdiction, and the States, does this industry have adequate regulation? 

So I want—I think that was very helpful to clarify that, and a 

lot of people pursued this question. There is no question that the 

FDIC doesn’t have all the authority the Federal Reserve does to 

look at the holding company, but is only one form of regulation appropriate or are there multiple forms of regulation that may be appropriate? And that is the purpose of this hearing today—to determine if the Industrial Loan Companies, under FDIC and State regulation, are adequately regulated. 

In terms of the GAO report, Mr. Hillman, there are a couple of 

conflicting statements in the report because in the GAO report you 

first say that, as a number of people mentioned, from an operations 

standpoint, ILC’s do not appear to have a greater risk of failure 

than other types of depository institutions. But then one of the conclusions—you say ILC’s may pose more risk of loss to the bank insurance fund than other insured depository institutions operating 

in a holding company. 

How do I reconcile those two statements in your report? 

Mr. HILLMAN. Thank you for an opportunity to clarify that. 

In our report, we did state and truly believe that from an operational standpoint, ILC’s pose no additional risk to the bank insurance fund than do other depository institutions, that the main 

issues associated with risk to the depository insurance fund have 

to do with the quality of the institution’s business plan or type of 

activities undertaken, strength of the management and the like. 

And with an ILC or a bank you’re encountering those same types 

of issues. 

We did conclude, however, that from a regulatory standpoint, 

there were differences in powers between that of the Federal Reserve under a consolidated supervisory regime, and that of the 

FDIC, to oversee the holding company of the insured institution. So 

therefore, from a regulatory perspective, we concluded that, yes, 

ILC’s would pose additional risk. 

42

Mr. MATHESON. Did you find any empirical evidence that that’s 

the case, that ILC’s have created a greater risk in terms of to the 

depository insurance fund? 

Mr. HILLMAN. Our review focused on the extent to which the 

Federal Reserve’s consolidated supervisory approach and the 

FDIC’s approach to isolate the bank from a potential risk were different, and we found that the FDIC’s approach was not equivalent. 

Mr. MATHESON. Well, as I said when I started, we all acknowledge they’re different, the authority of the FDIC and Federal Reserve. I’m not going to argue about that. And I know at GAO you 

often are restricted in the scope of your study by the way the request is made and the questions that are asked. 

But did you find any evidence that this industry has posed any 

greater risk in terms of what’s happened, particularly in the last 

20 years since Steagall was passed in 1987, when this industry has 

obviously had substantial amount of growth? Is there any evidence 

that this industry has posed any greater risk to the deposit insurance fund? 

Mr. HILLMAN. Certainly since the mid-1990’s, I would like to concur with points previously made by prior FDIC Chairman Donald 

Powell that the banking industry is undergoing a golden age in 

which the industry is very strong and is thriving. One of our concerns is that the approach that the FDIC follows in its oversight 

over ILC’s and their parents is that this regulatory regime has 

emerged during a time which has been a golden age in banking— 

Mr. MATHESON. I understood that. Let me ask you that. Wouldn’t 

that be true as well for the Federal Reserve’s ability to supervise 

large financial holding companies that were first allowed in 1999 

to engage in formally prohibited securities, investment banking, 

merchant banking, and insurance activities? And since all that experience has also been during these so-called good times, does the 

GAO think it would be appropriate to question the Federal Reserve’s ability to supervise these new entities? 

Mr. PRICE. The gentleman’s time has expired, but Mr. Hillman, 

you may respond. 

Mr. HILLMAN. Many of the organizations that the Federal Reserve is overseeing, or all of the organizations that the Federal Reserve is overseeing, are entities that operate in a regime that is financial in nature and their oversight over those financial-oriented 

entities provides them with the necessary expertise and wherewithal to assess, measure, and understand the risks associated 

with those organizations. 

When you’re talking about Industrial Loan Corporations, to date, 

the vast majority of these entities have been financial in nature as 

well, but when you have an exemption which allows for organizations that are not financial in nature to obtain ownership of depository institutions, then yes, that is a risk that I believe needs consideration. 

Mr. MATHESON. I know my time has expired, but that wasn’t my 

question. You didn’t answer my question. 

Mr. PRICE. Well, you’ll be having time to come. Mr. Miller, you’re 

recognized for 5 minutes. 

Mr. MILLER OF CALIFORNIA. Thank you very much. 

43

This is something we’ve been talking about for quite a while. 

Some have expressed some concern, some have made suggestions 

that ILC’s and holding companies are not adequately regulated and 

that ownership of ILC’s by commercial entities pose some potential 

risk, you know, based on the relationship between the parent company and the ILC. 

And rather than just making assumptions, it would be nice to 

look at some form of history. And I believe, Mr. Hillman, you’d 

probably be the most appropriate one to answer this. Have ILC’s 

owned by commercial entities posed safety and soundness problems 

to a greater or lesser extent than those depository institutions 

owned by traditional bank holding companies? 

Mr. HILLMAN. To date, the number of institutions that are commercial in nature have not been great, nor has their asset base 

necessarily been great. But for those commercial entities who have 

owned depository institutions, their default history is similar to 

those institutions that were owned by financial organizations. 

Mr. MILLER OF CALIFORNIA. So there’s not a greater or a lesser 

risk based on everything we see today from one entity to another 

entity? They’re both pretty much the same, as far as risk or history 

of loss. 

Mr. HILLMAN. When you’re looking at the past, the number of institutions and the amount of insured deposits are relatively modest. However, when you look into the future now and you look at 

the extent to which commercial entities have an increasing interest 

in acquiring an insured institution, the situation may not continue 

to be the same. 

Mr. MILLER OF CALIFORNIA. Do you see, then, a problem with—

it seems like if you have more competition, you have more liquidity. 

And coming from the real estate background I have, it always 

seems that competition has always been good for the marketplace. 

My support of GSE’s has always been consistent because of liquidity in the marketplace. 

Would this not apply in some fashion to this expansion? 

Mr. HILLMAN. That clearly is a decision that the Congress needs 

to decide. The competition within the industry has generally been 

limited to entities that are financial in nature, except for this exemption with the ILC’s. 

Mr. MILLER OF CALIFORNIA. Okay. Mr. Jones, I believe, if we talk 

about a bright line separation between entities of commercial banking and you look at the FDIC oversight, is it adequate to ensure 

that there’s a bright line separation between the entity and—that 

in some way does not compromise safety and soundness as far as 

the FDIC is concerned? 

Mr. JONES. Could I ask you to ask that question again, please? 

Mr. MILLER OF CALIFORNIA. Do you think that current regulations and FDIC oversight are sufficient to ensure a bright line separation between an entity’s commercial and banking activities so 

that there’s no compromise of safety and soundness as far as the 

FDIC is—is there a complete separation that’s very clear and identifiable between the commercial entity and the banking activities 

that they’re involved in? 

Mr. JONES. As we’ve discussed, we have attempted to make sure 

we have an insulation between the bank—and frankly, its parent, 

44

whether it’s a financial concern or a non-financial concern—to 

make sure that the bank is not influenced by its parent in a way 

that can be adverse to the institution. 

We have a lot of safety and soundness provisions and abilities to 

protect and to try to prevent any influence in the sense of—it’s 

been discussed, 23A and 23B, Federal Reserve, Reg O, the tying 

provisions, to try to keep the separation. It is an area, though, that 

we ourselves have recognized that there’s a change going on so 

we’re trying to do more of an analysis ourselves to see if there’s a 

change occurring that perhaps does require more powers than we 

have today. 

Mr. MILLER OF CALIFORNIA. So you’re taking into consideration 

that—is there a potential for abuse by a parent company of an ILC 

and based on current law, are we adequately protected without further regulations being implemented? 

Mr. JONES. We always have that in mind no matter who the parent is, whether it’s a potential of abuse, and that temptation is always there so we have powers—the same powers we have for all 

institutions and all their affiliates. It is a bright line and we attempt to enforce it. It’s just—it’s a question of whether there’s a 

change going on which we haven’t seen, at least to date. 

Mr. MILLER OF CALIFORNIA. Should Congress decide that this is 

not what they would deem appropriate to allow whether it be Target or Home Depot or whatever to enter into the sector that we’re 

talking about restricting, how does that impact current companies 

that are out there working legally within mini states, you know, 

GMAC, many others out there? How would that affect—would that 

not literally put them out of business if we changed the Federal 

law? 

Mr. JONES. Well, I guess in part that depends on how you change 

the law, whether you have a grandfathering-type provision that allows those that currently exist to continue or whether you— 

Mr. MILLER OF CALIFORNIA. And that’s what raises concern. If 

there’s necessity for grandfathering, why would we be changing it 

to begin with? If we’re allowing something that’s currently operating, as Mr. Hillman said, above board and in compliance with the 

bank holding companies, why would we implement anything that 

would allow a grandfathering of something that’s obviously egregious or questionable or risky? 

Mr. PRICE. The gentleman’s time has expired, but you may respond. 

Mr. JONES. I have to say that sits within the purview of Congress 

on why you would allow one and not allow the other, so I don’t 

have an answer for you. 

Mr. MILLER OF CALIFORNIA. I just wanted to point that out. 

Mr. PRICE. Thank you. 

Mr. MILLER OF CALIFORNIA. For the record, may I submit testimony of the National Association of Realtors, testimony just for the 

record? 

Mr. PRICE. Without objection. 

Mr. MILLER OF CALIFORNIA. Thank you, sir. 

Mr. PRICE. Mr. Green, you’re recognized for 5 minutes. 

45

Mr. GREEN. Thank you, Mr. Chairman, and I also thank the 

ranking member, and I thank the members of the panel for being 

here today. I have greatly enjoyed listening to your comments. 

We all agree that we don’t live in a perfect world. In a perfect 

world, Enron would still be around. In a perfect world, we wouldn’t 

have had some of the bank failures that we had in the 1980’s. And 

given that we don’t live in a perfect world and that people don’t 

have to meet to make decisions that can be adverse to the best interests of others, that things can be done by way of an understanding as opposed to a conspiracy, there is great concern about 

equality of competitiveness, and I have great concern with reference to conflicts of interest. 

Mr. Alvarez, you have indicated that there are laws that—as well 

Mr. Jones—that can help to thwart—that’s my term—some of these 

concerns. But—and they may have been efficacious and effective 

with reference to how we were able to work with these bank holding companies, these holding companies for ILC’s in the past but 

as we go into the future with just the size of what we’re looking 

at now, and given the fact that we’ll have the commercial side, does 

this not create a greater amount of concern for you in terms of our 

ability to make sure that the competitive nature of the holding 

company the ILC does not prevent good sound business practices 

in making loans? 

Mr. ALVAREZ. Congressman, that’s a good question. And the two 

laws that Doug and I referred to, Sections 23A and 23B, which limits transactions between a bank and its affiliates and then the antitying rules are very important to address specific kinds of abuses. 

But they don’t address all the potential concerns that could come 

up from the affiliation of a bank with another company, and that’s 

the reason that Congress has imposed this dual system of supervision where there’s supervision of the holding company as well as 

supervision of the bank. 

I think all of us have testified that ILC’s are banks in the same 

way as any other insured bank. There is no real difference about 

ILC’s so the risks of those organizations are the same. But the system we have for managing those risks is very different and that, 

I think, is the concern that we want to bring to your attention. 

The system of managing those concerns right now involves twopart supervision, and we only have one part of the supervision 

when it comes to Industrial Loan Companies and the owners of Industrial Loan Companies. 

I think the other thing to keep in mind is when you think about 

competitive equity, the exception is being used now in a way that 

wasn’t originally intended by Congress and threatens to undermine 

the general approach that applies to all other owners of insured 

banks. 

So there is now a competitive inequality that is developing between the ones that are subject to full supervision at the holding 

company, all the panoply of supervision at the bank, and restrictions on mixing banking and commerce, and those who operate 

under the Industrial Loan Company exception which have a much 

lighter supervisory scheme and no restrictions on their competitive—on their mixing of banking and commerce. That creates an 

46

unbalanced playing field and gives advantages to some that may be 

things that Congress wants to be concerned about. 

Mr. MILLER OF CALIFORNIA. Mr. Jones, do you concur with the 

premise that the playing field is unbalanced? 

Mr. JONES. From the bank perspective, we think if you have the 

same—it’s the same for both. I mean, whether it’s an ILC, whether 

it’s a bank, if they’re working under the same rules and they’re 

under the same restrictions and prohibitions in the sense of protecting the bank, it’s no different than how the bank is operating, 

and that’s our goal to make sure there is no difference. 

And I know that there’s concern expressed about affiliations with 

commercial concerns and—or if we’re concerned about temptations 

here. Yes, we are, but we’re concerned about temptations from any 

affiliate and, as you mentioned, we’ve experienced the same thing 

in the 1990’s from bank holding company affiliate situations, and 

we hope we’ve learned lessons from the period in the 1990’s, and 

we hope we learn our lessons as we go forward on issues to try to 

deal with them. 

From the viewpoint of whether it’s a banking and commerce 

issue and whether that’s a competitive issue, that’s one that we believe is really a Congressional—for Congressional consideration and 

determination. 

Mr. MILLER OF CALIFORNIA. Mr. Alvarez, one more question— 

Mr. PRICE. The gentleman’s time has expired. 

Mr. MILLER OF CALIFORNIA. Well, I thank you, Mr. Chairman. 

Mr. PRICE. Chairman Bachus, you’re recognized for 5 minutes. 

Chairman BACHUS. Thank you. 

Mr. Jones, you were asked earlier whether or not you thought 

the FDIC had enough authority to regulate the ILC’s and you said 

you thought that they did have adequate authority. Is that correct? 

Mr. JONES. No, I—we have used the authority we have today and 

we think it’s succeeded based upon the institutions that we have 

today, and the operations we’ve seen today, but we have, and we 

mentioned in our testimony— 

Chairman BACHUS. You said you were looking at it. 

Mr. JONES.—we’re looking, reviewing to see whether we need 

more, to make sure that the institutions— 

Chairman BACHUS. Can you— 

Mr. JONES.—are safe and sound. 

Chairman BACHUS. You know, could you be a little more specific 

as opposed to just that you’re looking at it? What’s the status of 

the review or—can you be more specific what authority or powers 

you’re looking— 

Mr. JONES. We have no specific recommendations at this stage. 

I guess I have to fall back on the fact that we do have a new chairman who is part of that consideration, and she’s only been on board 

at the FDIC for 2 weeks. So we’re working with her. She views this 

area as a very important area. She’s been briefed a number of 

times in this area but— 

Chairman BACHUS. How long has this review been going on? 

Mr. JONES. Within some range, it’s always going on but it’s something which I think there has been more focus on recently as a result of some of the changes that we see going on in the industry. 

47

Chairman BACHUS. When do you think you might be in a position to report to Congress your findings as to whether or not you 

feel you need more— 

Mr. JONES. I can’t give you a date on that. I mean, it’s something 

which, once we make the evaluation, if we see the need either for 

changes within our own structure or needs from legislation, certainly for legislation we’d come to Congress and ask for it. 

Chairman BACHUS. But there is an active review ongoing? 

Mr. JONES. There is a process of reviewing what’s going on; yes. 

Chairman BACHUS. Okay. Mr. Leary, some ILC’s are subject to 

the jurisdiction of either the OTS or the SEC. 

Mr. LEARY. That is correct. 

Chairman BACHUS. What is your working relationship with those 

agencies and how does it compare with your—the shared supervision you have with the FDIC? 

Mr. LEARY. Well, I would tell you since it is a day-to-day relationship with the FDIC, I have used the term repeatedly and continue to believe wholeheartedly it is a partnership with regard to 

the FDIC. The working relationship is very well developed, wellfounded, and I believe we have an ability to communicate on all 

levels. 

With respect to the OTS and SEC, it is not as good simply because we do not work with them as much. I will add that it’s probably more a decision on their part. The outreach is there from our 

part to try and have more of a dialogue, more of a cooperative discussion with those agencies. 

Chairman BACHUS. So you would welcome more of the partnership-type relationship that you have with— 

Mr. LEARY. Very much so, but I would also tell you we extend 

that kind of relationship and offer for coordination cooperation with 

the Federal Reserve. I wish we had a better one there than we do. 

Chairman BACHUS. All right. Thank you. Mr. Hillman, Congress 

has provided, as you know, three models for regulating companies 

that control insured depository institutions. The Federal Reserve 

bank holding company model, the OTS savings and loan holding 

company model, and the FDIC affiliate model all focus, I think, primarily on the depository institution to see that it’s at least adequately capitalized, that the parent is able to provide financial support, and that no affiliate can undermine or misuse the depository 

institution. 

And then I think that under all these models, all the agencies 

have a broad catch-all authority to supplement their express powers, if necessary. Would you comment on whether any agency 

under those models lacks the necessary powers to be effective regulators, and particularly in the context of ILC’s? 

Mr. HILLMAN. In our review, one of the major areas that we 

looked at was the extent to which the consolidated supervisory authorities afforded to the Federal Reserve and the Office of Thrift 

Supervision were identical to those powers offered by the FDIC and 

its bank-centric approach to overseeing an insured institution. 

And we identified in our report eight authorities that we focused 

on. For two of those areas there was consistent and equivalent 

powers across all three organizations in six areas, importantly, 

dealing with the extent to which an organization can compel reVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00055 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
48

ports from the holding company, the extent to which an organization can examine affiliates of a holding company that has no transactions with an entity, and the extent to which an organization can 

enforce actions on the parent or affiliate transactions, we found 

that the FDIC’s authority was not equivalent to that of the OTS 

or the Federal Reserve’s authority. 

Mr. PRICE. The gentleman’s time has expired. Mr. Matheson, 

you’re recognized for 5 minutes. 

Mr. MATHESON. Thank you, Mr. Chairman. 

Mr. Jones, as a representative of the FDIC, who regulates ILC’s, 

I want to get your opinion on a statement that was just made in 

response to Mr. Green’s questioning. Mr. Alvarez, you said that 

when it comes to ILC’s—and I wrote this down so I get it right—

there are no restrictions on mixing of banking and commerce. 

Mr. Jones, is that true? There are no restrictions on ILC’s? 

Mr. JONES. From the bank perspective, we feel that it has the 

same protections that anyone else has, the ones we’ve discussed 

with respect to whatever the parent is, that there’s restrictions on 

the activities it can have with the parent or, in the sense of tying, 

or in the sense of relationship with the parents— 

Mr. MATHESON. Thank you. I wanted to make sure we got that 

on the record. 

Mr. Alvarez, you described numerous potential abuses in your 

testimony that might occur from allowing banks to be affiliated 

with commercial firms or with financial firms not regulated by the 

Board. Do you have an answer why, in your opinion, none of these 

abuses have actually occurred over the past 2 decades? 

Mr. ALVAREZ. Well, there has been very little mixing of banking 

and commerce in the last 50 or 60 years. It is something that is 

now a recent phenomenon that’s happening more through this ILC 

exception. So it’s not surprising that there hasn’t been historical 

failures by this time. We believe that it’s time because things have 

progressed so far for Congress to be aware that this exception is 

being used in a particular way so that you can deal with the future 

as it’s developing and unfolding. 

Mr. MATHESON. Let me ask you, does the Federal Reserve have 

any opposition to trade associations controlling a bank? 

Mr. ALVAREZ. I’m not sure I understand the question. 

Mr. MATHESON. The ICBA controls a bank. Do you think that 

that’s appropriate? 

Mr. ALVAREZ. The ICBA has a limited purpose credit card bank— 

Mr. MATHESON. That’s correct. 

Mr. ALVAREZ.—that is—that’s right, has a limited purpose credit 

card bank, not a full-service bank, not a bank— 

Mr. MATHESON. Okay. Referring to what they do— 

Mr. ALVAREZ.—that is an Industrial Loan Company or has the 

power— 

Mr. MATHESON. Understood. I didn’t say it was an ILC. Do you 

have concerns about what it does have? 

Mr. ALVAREZ. Well, this is another exception that Congress has 

created in the Bank Holding Company Act—Congress allows anyone to own a credit card bank if it limits its operations, and we enforce the law as best we can. 

49

Mr. MATHESON. Sure. Let me ask you this. You have concerns 

about mixing banking and commerce when a commercial entity is 

owned by a corporation. In light of the fact that many independent 

banks are owned by business people who own other local businesses, does the Federal Reserve’s concern about mixing banking 

and commerce extend to common individual or family ownership of 

banks and non-financial commercial businesses? 

Mr. ALVAREZ. We haven’t had the same concerns about individuals owning both a bank and a commercial entity because we— 

Mr. MATHESON. Someone who owns the auto dealership in the 

town and the community bank in the town, do you have a concern 

that there could be a mixing of banking and commerce there? 

Mr. ALVAREZ. I think there’s a rational basis for making a decision that you don’t want to restrict individuals from owning where 

you might want to restrict corporations from owning both banks 

and commerce because corporations are perpetual entities that 

have much more access to capital. They can be much larger and 

the opportunities for mixing their internal activities are much 

stronger than with individuals. 

So we have—again, that’s a policy set by Congress that we have 

followed. 

Mr. MATHESON. Okay. Mr. Leary, earlier, one of the members in 

their opening statement called into question the capabilities of the 

Utah Department of Financial Institutions to regulate this industry 

because of smaller staff size and whatnot and I thought you ought 

to be given an opportunity to respond to that. 

Mr. LEARY. Thank you. Of record, we have 37 field examiners; 

we have authorization to increase that to 42 this year. I think of 

note in this regard is that the industry supported a fee increase because they wanted to maintain the quality supervision from the 

Department, including the ILC’s, and in fact the largest ILC was 

the witness supporting the fee increase for the Department. 

Being conveyed from the industry, they want us as a strong, 

well-established regulator. It does them no good, does the State no 

good if we are not. 

Mr. MATHESON. Do you have any—I assume you disagree with 

some of the criticisms of your supervision of ILC’s. Do you have any 

specific responses to what has been put in the other testimony? 

Mr. LEARY. Well, I would limit my comment to a reinforcement 

of the point, in 20 years there has not been a failure of a Utah industrial bank. I think the Federal Reserve even has concurred that 

the regulation of the bank has been appropriate commensurate to 

the risk. Will we always be able to say that? I don’t know. I’m a 

regulator. I live with it day-in and day-out. 

My relationship with the FDIC has been such that I think we 

have performed admirably in that role as a regulator. 

Mr. MATHESON. Let me ask one more because my time’s about 

to expire. 

A couple of folks have tried to compare circumstances in Japan 

with what’s going on with Industrial Loan Companies. I do not presume that you’re an expert on the Japanese banking system, but 

is that really a fair apples to apples comparison or are we talking 

about different circumstances? 

50

Mr. LEARY. I think we are talking about different circumstances. 

I think the Federal Reserve rules in place have provided prudential 

safeguards. The ones we put in at the State level have provided 

prudential safeguards that would help ensure the safety and 

soundness of the bank. 

Mr. MATHESON. Thank you. I yield back, Mr. Chairman. 

Mr. PRICE. The gentleman yields back the balance of his time. 

The Chair recognizes Chairman Bachus. 

Chairman BACHUS. Thank you, Vice Chairman Price. I appreciate you supervising the hearing and taking over the Chair. 

We have votes on the Floor at this time and I think it would be 

appropriate to dismiss the first panel. I’d ask unanimous consent 

that the GAO report, if it has not already gone into the record, that 

it go into the record and— 

Mr. PRICE. Without objection. 

Chairman BACHUS.—the letter from OTS. 

Mr. PRICE. Without objection. 

Chairman BACHUS.—and at this time that we recess and at the 

conclusion of the votes on the Floor we return here and commence 

the second panel. 

Mr. PRICE. Fine. I want to thank the Chair. I want to thank the 

panel for coming. The Chair notes that some members may have 

additional questions for this panel, which they may wish to submit 

in writing. Without objection, the hearing record will remain open 

for 30 days for members to submit written questions to these witnesses and to place their responses in the record. 

Once again, I want to thank the panel members. We have a couple of votes on the Floor. I would anticipate about 1:15, maybe a 

few moments before that, for folks’ planning purposes. 

This hearing stands in recess. 

[Recess] 

Chairman BACHUS. Good afternoon. We are going to go ahead 

and get started. We’re under a time constraint. Another committee 

is scheduled to meet in this room at 2:00 p.m., so the good news 

there is that you probably won’t be subjected to intense cross examination, but I’m going to recognize Mr. Matheson to introduce Mr. 

George Sutton. 

Mr. MATHESON. I just very briefly wanted to introduce a constituent of mine from the State of Utah, George Sutton, who is here 

today representing the SIA group. And Mr. Sutton has a long history in the banking sector. He has in the past worked as a head 

of financial institutions in Utah. He has worked as a head of two—

CEO of two industrial banks and he’s currently with the law firm 

of Callister, Nebeker, and McCullough, and I appreciate him participating today. 

Chairman BACHUS. Thank you, Mr. Matheson. I should have introduced the rest of the panel and then come back to you. 

Our second panelist, Ms. Terry Jorde, is chairman and president, 

CEO of the Country Bank in Cando, North Dakota. Of course we’ve 

heard of that as Dick Armey’s hometown and you said his mother 

still lives there? Is that right? Or his parents or brother or someone. 

Ms. JORDE. Sibling, yes. 

51

Chairman BACHUS. Thank you. And she is representing the—she 

is actually the chairman of the Independent Community Bankers 

of America, the ICBA. We welcome you. 

Mr. John L. Douglas, partner in Alston & Bird, on behalf of the 

American Financial Services Association. 

Mr. Arthur C. Johnson, chairman and CEO of the United Bank 

of Michigan, on behalf of the American Banking Association. 

Where is the United Bank of Michigan located? 

Mr. JOHNSON. In Grand Rapids, Michigan. 

Chairman BACHUS. Grand Rapids, Michigan. And we welcome 

you. And Professor Lawrence J. White, professor of Economics at 

the Stern School of Business at New York University. 

Thank you. 

Mr. WHITE. It’s located in Manhattan. 

Chairman BACHUS. That’s fine. NYU. 

Mr. WHITE. That’s right. 

Chairman BACHUS. Thank you. And a fine institution. We welcome your testimony. 

And Mr. Michael J. Wilson, director of legislative and political 

action department at the United Food and Commercial Workers 

International Union. Welcome to you, Mr. Wilson. 

And at this time, we’ll start with Mr. Sutton for opening statements. 

STATEMENT OF GEORGE SUTTON, FORMER COMMISSIONER, 

UTAH DEPARTMENT OF FINANCIAL INSTITUTIONS, ON BEHALF OF THE SECURITIES INDUSTRY ASSOCIATION (SIA) 

Mr. SUTTON. Thank you, Mr. Chairman, and thank you, Congressman Matheson, for the introduction. 

Mr. Chairman and members of the subcommittee, I am George 

Sutton, and I appear today on behalf of the Securities Industry Association. As Congressman Matheson mentioned, I am an attorney 

practicing in Salt Lake City, Utah, with the firm of Callister, 

Nebeker, and McCullough. My firm represents many commercial 

and community banks, two local bank trade associations, and about 

half of the industrial banks based on Utah, including several of the 

banks owned by SIA members. At year-end 2005, Utah-based 

banks owned by securities firms held more than 75 percent of the 

industrial banks’ $120 billion in assets. 

I’ve been involved in banking regulation for more than 23 years, 

first as an attorney in the Utah Department of Financial Institutions, and then as the commissioner from 1987 to 1992. Since then, 

I have been primarily involved in organizing banks and providing 

other legal services to banks in Utah, which has grown into the 

ninth largest banking center in the Nation. 

I would like to use my limited time today to clarify some of the 

misinformation that has infected the debate over industrial banks 

during the past few years. First, there is no safety and soundness 

issue regarding industrial banks. And I realize that’s repetitive but 

we keep hearing this, and I think it’s worth repeating again. The 

industrial banks in Utah are one of the strongest and safest group 

of banks that has ever existed. 

Second, there is no deficiency in the regulation of the industry. 

It is equal to, and in some respects stronger than, the regulation 

52

of all other banks. There is extensive and effective regulation of the 

holding companies and affiliates, and industrial banks’ regulators 

have the authority to examine holding companies and their affiliates, issue cease and desist orders, assess civil money penalties, remove officials, and force divestiture of the bank, if necessary. I 

have seen these authorities exercised firsthand and they are effective. 

In addition, the SEC comprehensively regulates many SIA members and the OTS also regulates Federal savings banks owned by 

many SIA members. There is no structural risk in allowing banks 

to be owned by companies that engage in activities other than 

banking. This is well established within the history of this industry. There is simply no evidence that affiliates engaging in other 

businesses pose any inherent risk to a bank. 

Transactions with affiliates must be carefully monitored for compliance with Sections 23A and 23B of the Federal Reserve Act, and 

those laws have proven to be workable and effective to ensure that 

affiliate transactions pose no risk to the bank. 

Nor is it the case that a traditional holding company regulation 

provides better protection for a bank’s subsidiary. In reality, most 

traditional bank holding companies provide little support to their 

subsidiary banks. I can tell you from a great deal of personal experience during my regulatory days that a traditional holding company provides only minimal support to a bank and is essentially irrelevant if the bank is failing. 

In contrast, diversified holding companies often provide a high 

level of support to a bank. Diversified parents tend to be much 

larger than the bank and provide extensive financial support, including capital, if problems arise. In some instances, a diversified 

holding company could easily recapitalize a subsidiary bank if it 

suffered a total loss of its loan portfolio. Diversified parents also 

typically provide the bank with an established business so the 

bank is large and profitable from the outset. 

Finally, I would like to briefly discuss the separation of banking 

and commerce issue. The real public policy underlying that doctrine is credit availability. Separation of banking and commerce 

began when banks were the primary providers of credit and it was 

important to maintain separation so all businesses had equal access to credit. But the economy has fundamentally changed during 

the past 30 years and keeping banking segregated is no longer necessary to assure adequate access to financial services for everyone. 

The U.S. economy has become the most prolific and diversified 

producer of credit that ever existed. Today, companies of every kind 

increasingly offer financial services. Companies operating outside 

the traditional bank holding company structure have become major 

providers of credit and may now provide most of the credit in the 

economy. 

Many of those companies want access to a depository charter because it enables them to provide their financial services more efficiently and cost-effectively. That is what has caused the dramatic 

growth in the industrial banks over the past 20 years. The real 

issue in the industrial bank debate is whether the large number of 

businesses in our Nation that offer bank-quality products and servVerDate 0ct 09 2002 17:15 Feb 05, 2007 Jkt 031535 PO 00000 Frm 00060 Fmt 6633 Sfmt 6633 F:\DOCS\HBA193.150 HFIN PsN: TERRIE
53

ices will be allowed to operate in the most efficient and profitable 

manner. 

That concludes my oral presentation, Mr. Chairman. I’d be glad 

to take questions. 

[The prepared statement of Mr. Sutton can be found on page 197 

of the appendix.] 

Chairman BACHUS. Thank you. 

Ms. Jorde. 

STATEMENT OF TERRY JORDE, CHAIRMAN, PRESIDENT/CEO, 

COUNTRYBANK USA, CANDO, ND, & CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF AMERICA (ICBA) 

Ms. JORDE. Thank you, Mr. Chairman. 

Mr. Chairman and members of the subcommittee, my name is 

Terry Jorde. I’m president and CEO of CountryBank USA in 

Cando, North Dakota, and I’m also chairman of the Independent 

Community Bankers of America. 

Mr. Chairman, thank you for holding this hearing on a matter 

of critical importance to our Nation. 

The ILC specter looms over our financial system as an ever-increasing number of commercial companies seek to exploit the ILC 

loophole as a back door entry into banking. This flood of new applications for ILC charters threatens to eliminate the historic separation of banking and commerce and undermine the system of holding company supervision, harming consumers and threatening financial stability. 

Both Federal Reserve Chairman Ben Bernanke and former 

Chairman Alan Greenspan agree that Congress must address this 

issue. Chairman Bernanke recently wrote, ‘‘The question of whether or to what extent the mixing of banking and commerce should 

be permitted is an important issue and one that we believe should 

be made by Congress.’’ 

In one of his final letters as Chairman, Greenspan wrote, ‘‘These 

are crucial decisions that should be made in the public interest 

after full deliberation by the Congress. They should not be made 

through the expansion and exploitation of a loophole that is available to only one type of institution chartered in a handful of 

States.’’ 

Former Senator Garn recently told the FDIC that the ILC charter was grandfathered in 1987 and exempted from the Bank Holding Company Act to serve narrow purposes. Until recently, that is 

how most ILC holding companies operated. But that is rapidly 

changing as the Wal-Mart and other applications demonstrate. The 

narrowly-intended ILC exception could eventually swallow the general rule and a charter based in one State could irreversibly change 

our financial landscape and our national financial policy without 

Congress having any say in the matter. 

My written statement details the harms that will flow from the 

exploitation of the ILC loophole and the breach of the separation 

of banking and commerce. It puts the safety and soundness of the 

financial system at risk. Problems in a holding company’s commercial sector could bleed over into the bank. Just imagine if Enron 

or WorldCom had owned ILC’s. 

54

Wal-Mart’s plan to process its payments through its own bank 

could undermine the integrity of the Nation’s payment system and 

impose great risks. Its stated plan is to process hundreds of billions 

in payments and is backed by a purely nominal amount of capital. 

The Home Depot application presents a clear conflict of interest. 

The Home Depot Bank will make loans to customers so they can 

buy products at Home Depot stores. This violates the clear strength 

of our financial system, the impartial allocation of credit. 

The nationwide expansion of ILC’s threatens local communities 

and small businesses. It is unlikely that a bank owned by a major 

retail company will lend money to its competitors. Deposits would 

instead be gathered locally but deployed for larger corporate purposes. 

Unfortunately, the FDIC currently lacks clear statutory authority to take all these broad policy implications into account as it considers the pending ILC applications. Representative Jim Leach’s 

bill, the Financial Safety and Equity Act of 2005, H.R. 3882, provides the ideal solution. It would require that any company that 

owns an ILC conform to the Bank Holding Company Act and divest 

non-financial activities. 

ICBA commends Mr. Leach for his leadership. His work was critical in earlier efforts to close the non-bank bank and the unitary 

thrift holding company loopholes. Without his pioneering work, the 

separation of banking and commerce would have been long lost and 

we would likely be dealing with severe problems. 

If Congress cannot enact the Leach bill, there is a strong alternative plan drafted by Representatives Paul Gillmor and Barney 

Frank. Like Mr. Leach, Representatives Gillmor and Frank have 

worked tirelessly to address the ILC challenge. The new Gillmor/

Frank bill, the Industrial Bank Holding Company Act of 2006, 

would address both elements of the ILC loophole, the separation of 

banking and commerce, and the need for consolidated supervision 

of ILC holding companies. 

Like much good legislation, the Gillmor/Frank bill includes realistic compromises. It would grandfather existing firms with some 

restriction, however, it would prevent the FDIC from approving 

any applications by commercial firms for new ILC’s or for acquisitions of existing institutions. The ICBA strongly endorses this bill. 

This issue has gone well beyond the interests of a few companies 

in a handful of States. What Congress grandfathered nearly 20 

years ago as a narrow exception threatens to quickly become a way 

for the Nation’s retail and industrial firms to skirt our Nation’s financial laws, breach the separation of banking and commerce, and 

enter into full service banking. 

There are 14 applications for ILC charters or acquisitions pending today; more will almost certainly be filed. The financial system’s safety and soundness, integrity, and ability to serve local 

communities and small businesses are all at great risk. Fortunately, Congress has before it strong legislative proposals that will 

effectively address these risks. ICBA urges Congress to take 

prompt and positive action before it is too late. 

Thank you. 

[The prepared statement of Ms. Jorde can be found on page 170 

of the appendix.] 

55

Chairman BACHUS. Thank you. 

Mr. Douglas. 

STATEMENT OF JOHN L. DOUGLAS, PARTNER, ALSTON & BIRD, 

LLP, ON BEHALF OF THE AMERICAN FINANCIAL SERVICES 

ASSOCIATION (AFSA) 

Mr. DOUGLAS. Thank you, Mr. Chairman. 

My name is John Douglas. I’m a partner in the law firm of Alston & Bird and I am pleased to represent the American Financial 

Services Association before this panel today. AFSA’s members include finance companies, credit card issuers, mortgage lenders, industrial loan banks, and other providers of commercial and consumer credit. 

AFSA strongly believes that the industrial bank represents a 

safe and appropriate means to deliver financial services to the public. They do so in a framework of stringent supervision, strong enforcement, and a structure of laws and regulations that provide the 

FDIC with all of the tools it may need to address any hypothetical 

and unproven evils raised by opponents of the charter. 

I also come with some personal experience on this issue. I was 

general counsel of the FDIC during the late 1980’s and have a real 

appreciation for the need for a safe and sound banking system, for 

strong supervision and clear enforcement powers. 

We’ve heard much of the evils of mixing banking and commerce 

and the dangers inherent in this unintended loophole being exploited by commercial firms. As I point out in my written remarks, 

these two propositions are simply historically inaccurate and we 

should be clear on this point. Affiliations between banking and 

commercial firms have always existed in this country, and on numerous occasions Congress has addressed and blessed and regulated those affiliations. 

But I want to focus my oral remarks on something else we’ve 

heard, that the unregulated owners of industrial banks would 

somehow wreak havoc on our financial system, given the lack of 

comprehensive supervision. This proposition ignores the existing 

legal framework governing all financial institutions, including industrial loan banks, and likewise ignores the substantial power 

and indeed belittles the capacity of the FDIC to supervise, examine, and enforce any laws and regulations designed to assure safety 

and soundness and prevent abuses. 

In testimony before the House Capital Markets Subcommittee, 

former Federal Reserve Chairman Greenspan once observed, ‘‘The 

case is weak in our judgment for umbrella supervision of a holding 

company in which the bank is not the dominant unit and is not 

large enough to induce systemic problems should it fail.’’ There is 

no question he was right and I would go even further. 

Our comprehensive system of laws and regulations provide 

ample protection against any risk associated with commercial ownership of industrial banks. I make four points. 

First, industrial banks are subject to the same comprehensive 

framework of laws and regulations that govern normal banks. They 

have no special power or authority and they’re exempt from no 

statute or regulation. 

56

Second, the FDIC has been given ample authority to supervise 

and regulate these institutions and can exercise the full range of 

enforcement powers. I was a participant in the process that led to 

FIRREA and worked closely with members of this committee and 

others in Congress with the intention of giving the FDIC all the 

powers it needed to protect our banking system. 

There is no question of its power over industrial banks, over the 

owners or their affiliates. It has all of the normal cease and desist, 

removal, and civil money penalty powers, and may take any action 

it deems appropriate to remedy a violation of law, regulation, rule, 

or commitment, or an unsafe practice, including even forcing the 

divestiture of the industrial bank by its owner. 

Third, I can attest from experience that the FDIC regularly and 

vigorously exercises these powers. 

Fourth, the experience of the FDIC with respect to industrial 

loan banks belies any fundamental concern over threats to our 

banking system. The two failures of industrial banks—FDIC-insured industrial banks owned by holding companies, neither of 

which, by the way, were commercial enterprises, and neither of 

which failed as a result of self-dealing or conflicts of interest, stand 

in sharp contrast to the hundreds of bank failures and holding 

company structures, many of which cost the FDIC billions of dollars; Continental Illinois, First Republic, First City, MCorp, Bank 

of New England, and so on, all of which were subject to this muchvaunted comprehensive supervision or consolidated supervision by 

the Federal Reserve as the holding company regulator that is now 

offered as a cure for something that hasn’t proven to be a problem. 

Critics assert that the industrial bank would somehow favor its 

affiliates, discriminate against competitors, or create other unfair 

advantages. I’d like to point out, however, that if potential discrimination were the issue, banks should not be affiliated with any type 

of business. Indeed, Bank of America should not be affiliated with 

Banc of America Securities lest it somehow favor the customers of 

its securities affiliate to the exclusion of customers of Merrill 

Lynch. 

And if we were really concerned about the potential for abuses 

and adverse effects, we might more closely evaluate the propriety 

of small business owners owning controlling interests in banks in 

small communities where alternative sources of credit are much 

more limited. Congress has never acted to preclude these affiliations, nor should it, as our existing framework of laws and regulations is more than adequate to prevent abuse. 

Finally, if we were really concerned about the potential dangers 

of mixing banking and commerce, we should roll back the merchant 

banking powers granted under Gramm-Leach-Bliley, eliminate the 

FDIC’s power to permit commercial activities for banks granted by 

FDICIA, and maybe even strip commercial lending powers for the 

few relationships giving a bank a greater interest in or more power 

over a commercial enterprise than the primary source of its credit. 

Our financial system is blessed with competition, innovation, 

strength, and breadth that is the envy of the world and we should 

be clear about one aspect of those markets. Throughout our history, 

there has always been, and Federal law has always blessed, some 

form of affiliation between banking and commerce. 

57

In our modern era, these relationships have been carefully considered and accompanied by a statutory and regulatory framework 

designed to prevent abuse and make sure our authorities have substantial power. I think Congress should carefully consider the full 

implication of any change that could choke off these affiliations, denying our system the flexibility and innovation that’s been its hallmark under the guise of advancing concepts with an attractive rhetorical resonance. 

Thank you very much. 

[The prepared statement of Mr. Douglas can be found on page 94 

of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Johnson. 

STATEMENT OF ARTHUR C. JOHNSON, CHAIRMAN AND CEO, 

UNITED BANK OF MICHIGAN, ON BEHALF OF THE AMERICAN 

BANKERS ASSOCIATION (ABA) 

Mr. JOHNSON. Mr. Chairman, I’m going to attempt to abbreviate 

my remarks in the interest of time. I’d like to point out that in addition to my responsibilities as chairman of United Bank in Grand 

Rapids, Michigan, I’m also the chairman of the American Bankers 

Association Government Relations Council, and today I’m testifying 

on behalf of the ABA. 

Today I would like to make three points. First, the ILC industry 

of today bears little resemblance to the ILC industry of 1987 when 

the current ILC law was enacted. I’ll not elaborate on this point 

too much because much has been said about the history of ILC’s, 

other than to reiterate the point that from 1987 to 2004, the aggregate growth in ILC assets has increased by almost 4,000 percent. 

A big change. 

The second point is that the existing statutory approach is inconsistent with the policy of separating banking from non-financial 

commerce. The current regulatory approach is inconsistent with 

the policy of separating banking from non-financial commerce. Congress consistently has acted to close avenues through which nonfinancial commercial entities could own depository institutions 

while giving due consideration to the equity of those holding existing investments in such companies. 

The ABA consistently has supported and continues to support 

this policy. We believe Congress should act consistent with its prior 

efforts to close the ILC loophole. To do otherwise would be to leave 

open an outdated provision of law that could undermine the legislative steps that you have taken to keep banking and non-financial 

commerce separate. 

And my third point, Congress should act or prohibit future ownership of ILC’s by commercial firms. The current statutory landscape, by continuing to permit more non-financial commercial companies to enter the banking field, compounds concerns that conflicts of interest could develop in a more broad-based systemwide 

way. These policy concerns may have been tolerable when the current ILC exemption was passed and the ILC marketplace was very 

small. Now, however, with the potential entry of the world’s largest 

retailer, they are not. 

58

The most effective way to ensure that the ILC charter is not misused is to limit ownership of ILC’s to companies that are financial 

in nature. Thus, the ABA recommends that Congress require any 

company that seeks to establish or acquire an ILC to be a financial 

firm. 

ABA recognizes the legislation affecting ILC’s, like previous legislation addressing the banking and commerce issue, will almost 

certainly grandfather existing owners of ILC’s in an effort to strike 

a balance going forward. However, we urge Congress to bring any 

grandfathered institution within the jurisdiction of a Federal bank 

regulator. 

I should note that since my written testimony was submitted, 

Congressmen Paul Gillmor and Barney Frank have introduced 

H.R. 5746 which prohibits future acquisitions of ILC’s by commercial firms, and strengthens the existing regulatory structure. ABA 

supports H.R. 5746 and will work with the authors and this committee moving forward. 

In closing, we believe the time is right for Congress to act on this 

important issue. I thank you for the opportunity to share the ABA’s 

views and would be happy to answer any questions that you may 

have either here today or in written form that we could respond 

to at a later date. 

[The prepared statement of Mr. Johnson can be found on page 

138 of the appendix.] 

Chairman BACHUS. Mr. Johnson, when I introduced you, did I 

mention that you were representing the ABA? I’m not sure that I 

did. 

Mr. JOHNSON. I’m not sure. 

Chairman BACHUS. Okay. I hope that I did. If I didn’t, I apologize, but you are representing the American Banking Association. 

Mr. JOHNSON. Indeed, I am. Thank you. 

Chairman BACHUS. Thank you. Professor White. 

STATEMENT OF PROFESSOR LAWRENCE J. WHITE, PROFESSOR OF ECONOMICS, STERN SCHOOL OF BUSINESS, NEW 

YORK UNIVERSITY 

Mr. WHITE. Thank you, Mr. Chairman. Thank you for the opportunity to be here today to testify on this important topic. 

My name is Lawrence J. White, and I’m a professor of economics 

at the NYU Stern School of Business. I’m a former board member 

of the Federal Home Loan Bank Board, but I’m here testifying 

today on my own. I have not been asked by any organization to testify on its behalf. 

In my written testimony, I lay out a principles-based approach 

for the regulation of banks, really all depository institutions, and 

of their owners. I’ll summarize this statement quickly today. I’m 

going to have to speak quickly but since I’m a New Yorker, that 

comes naturally. 

My approach basically relies on five principles. First, banks are 

special. That’s why we’re here today. Second, because banks are 

special, they require special regulation—safety and soundness regulation. At the heart of safety and soundness regulation are capital 

requirements, activities limitations, and management competency 

59

requirements, and all of this is backed up and enforced by a field 

force of examiners and supervisors. 

Third, the restricted activities of a bank should be only those 

that are examinable and supervisable. By that I mean the activities for which bank regulators can knowledgeably assess risks and 

set capital requirements and judge managerial competence. 

Activities that are not examinable and supervisable should not 

be allowed for banks, but they should be allowed for the bank’s 

owners, whether that owner is the local car dealer or a large industrial or commercial enterprise, so long as the activity is otherwise 

legitimate. 

Fourth, any person or organization should be allowed to own a 

bank so long as that entity is financially capable, has a sound business plan for the bank, and is of sound character. Again, this covers the local car dealer as well as large industrial and commercial 

companies. 

Fifth, and perhaps the most important, regardless of who owns 

the bank, the relationships and transactions between the bank and 

its owners must be monitored tightly by bank regulators because 

banks are special, because it is too easy to drain the bank so as 

to benefit the owners at the expense of the depositors or at the expense of who is backing up the depositors, the deposit’s insurer. 

This is the logic that underlies Sections 23A and 23B of the Federal Reserve Act, and it’s a very sensible position. 

The application of these principles shows that ILC’s are a wholly 

sensible and worthwhile model for public policy with respect to 

banks and with respect to who may own them. Indeed, it is a model 

that should be applied far more widely in the banking sector. 

Also, and the topic came up earlier today, there’s been lobbying 

testimony on behalf of the National Association of Realtors on this 

particular topic. They point out that the logic of the ILC and its 

owners and the logic of whether banks should be allowed to enter 

real estate activities such as real estate brokerage are the same. 

They are correct. It is the same logic, and it should have the same 

answer. 

Banks, depository institutions, should be allowed to be owned by 

a wide range of organizations along the principles that I’ve just laid 

out, and banks should be permitted to enter real estate brokerage. 

Thank you for the opportunity to testify, and I’d be happy to answer any questions. 

[The prepared statement of Professor White can be found on page 

211 of the appendix.] 

Chairman BACHUS. Thank you. 

Mr. Wilson. 

I’m not thanking you for getting into the real estate banking 

issue. 

Mr. WHITE. I couldn’t not say it, Mr. Chairman. 

Chairman BACHUS. I’m just kidding. 

Mr. Wilson. 

60

STATEMENT OF MICHAEL J. WILSON, DIRECTOR, LEGISLATIVE 

AND POLITICAL ACTION DEPARTMENT, UNITED FOOD AND 

COMMERCIAL WORKERS INTERNATIONAL UNION 

Mr. WILSON. Thank you, Chairman Bachus, and members of the 

subcommittee, for holding this hearing and for the opportunity to 

testify. I am here today representing the United Food and Commercial Workers International Union. With 1.4 million members in 

the United States and Canada, the UFCW represents workers in 

every State in the United States. 

You have my written statement which I submitted earlier this 

week. I will summarize that, as the last speaker, in order to allow 

time for questions. 

The topic of ILC’s and their regulation has been of great concern 

to the UFCW for several years. The potential mixing of commerce 

and banking is very troubling. The trend we are seeing today is 

somewhat reminiscent of an earlier era in American history, an era 

in which the company town was prevalent. 

These company towns were places where workers were dependent on a single company, not just for their jobs but for their housing, for their healthcare, and for their retail needs. Many of the 

companies that ran these towns developed a track record of unsafe 

working conditions and abusive dealings with employees on everything from the wages they paid to the amounts they charged for 

basic staples, to unbelievably high interest rates. 

These abuses included practices such as underpaying workers by 

falsely reporting the amounts those workers produced. What our 

country learned was that if a company is too powerful and people 

have to rely on it for too many things, the imbalance of power almost inevitably leads to abuses. 

The record push of commercial companies looking to get into the 

banking industry through ILC exception should remind us all of 

this lesson. The policy of the United States has long been to explicitly keep banking and commerce separate. That has proven to be 

sound economic policy and has benefitted consumers who might 

otherwise find themselves at the mercy of a single large firm for 

too many of the goods and services they need. 

It has also provided for a vibrant and competitive financial services industry that offers many products and services to customers. 

Our history has included advocacy on the Federal level, on the 

State level, and internationally, as well. We supported efforts on 

the Gramm-Leach-Bliley legislation to specifically prohibit the purchase of a thrift in Broken Arrow, Oklahoma, by a large retail concern. Just 2 years later, our Canadian locals joined with us to stop 

the purchase of Toronto Dominion Bank, which was eventually denied by the Office of Thrift Supervision. And in California, the 

State Legislature and the Governor enacted legislation closing the 

ILC loophole in that State. 

In 2003, we joined with several other associations to form the 

Sound Banking Coalition. Wal-Mart, of course, looms large over the 

present ILC debate. Given its size as the largest corporation in the 

country, that may be quite appropriate. We are seeing that WalMart is forging a path that many other commercial firms are intending to follow. 

61

There are now a record number of non-financial firms applying 

to get ILC’s, from Blue Cross Blue Shield to Home Depot. This is 

not, however, a debate about a single company but about Federal 

policy regarding ILC’s and how regulators and Members of Congress can provide security and sound policymaking to our Nation. 

We believe that Congress should act. Governors and State legislatures have recognized this and five States—Iowa, Maryland, 

Vermont, Virginia, and Wisconsin—have already enacted new laws 

in the last year to restrict ILC’s from branching into their States. 

In fact, just yesterday, Governor Matt Blount of Missouri signed 

legislation to restrict ILC’s from branching into that State. 

More States are poised to act and we are engaged in active discussions encouraging States, in the absence of Federal legislative 

activity, to take appropriate steps. But States should not be forced 

to take a piecemeal approach to deal with an issue that can be and 

should be appropriately dealt with at the Federal level. 

Representatives Gillmor and Frank have introduced H.R. 5746, 

the Industrial Bank Holding Company of 2006, to address this 

problem. We believe that it is a good step in the right direction and 

that legislation would help address the problems we’ve discussed 

regarding ILC’s. 

In closing, I would say that members of the United Food and 

Commercial Workers do not want to live in a company town. We 

seek to live in a Nation of laws and opportunity, and we thank you 

for your time and for the opportunity to testify. 

[The prepared statement of Mr. Wilson can be found on page 223 

of the appendix.] 

Chairman BACHUS. Thank you, Mr. Wilson. At this time, I’m 

going to recognize Mr. Gillmor for questions. 

Mr. GILLMOR. Thank you very much, Mr. Chairman. 

First I’d like to ask unanimous consent— 

Chairman BACHUS. One thing. Mr. Gillmor has another hearing 

so— 

Mr. GILLMOR. I just want to thank the gentleman from Iowa and 

the chairman. 

I’d first like to ask unanimous consent to introduce two letters 

into the record from the American Bankers Association and the 

American Community Bankers. 

Chairman BACHUS. Without objection. 

Mr. GILLMOR. First, Mr. Sutton, a question for you. You wrote an 

article in the Consumer Finance Law Quarterly in which you list 

some of the primary advantages of an industrial bank such as the 

ability to avoid penalties when receiving a less than satisfactory 

CRA rating and the ability to operate under generally less intrusive laws and regulations. 

It seems to me kind of a strange argument that you’re making 

in the public interest that we ought to be favoring institutions who 

don’t provide consumer protection and comply with CRA, and those 

are your words. 

Mr. SUTTON. Representative, I do not remember writing those 

words and, if I did— 

Mr. GILLMOR. It was spring of 2002. 

Mr. SUTTON.—I completely— 

62

Mr. GILLMOR. Consumer Finance Law Quarterly report. But in 

any event, that would be an accurate statement, though, wouldn’t 

it, that ILC’s could avoid penalties for a less than satisfactory rating more so than banks could who are under the Federal Reserve? 

Mr. SUTTON. Well, that’s not the case. In fact, all of the industrial banks operating in Utah have either an outstanding or a satisfactory CRA rating and if one of them were to receive a bad rating, they would be subject to all the penalties that would be applicable to any other bank. 

And in the industry itself—I mean, I’m confident the industry 

itself would condemn that. 

Mr. GILLMOR. I just quoted you so you probably want to write an 

addendum or something. 

Mr. SUTTON. It was my evil twin. 

Mr. GILLMOR. It must have been. Let me go to Mr. Douglas of 

AFSA. You say you think having strong loaners of depository institutions would diversify sources of income and might be more beneficial to the system. Let me ask you your view on the counter of 

that. 

If you don’t have regulation of the holding company, under current law, if they had thought of it at the time, I’m sure that Enron, 

WorldCom, and Tyco all would have bought an ILC because they 

would not be subject to regulation at the holding company level. 

In view of that, how do you justify not having regulation at the 

holding company level because the FDIC score in that area is tenuous at best. 

Mr. DOUGLAS. Well, a couple of items in response. First, of 

course, Tyco had an ILC and, notwithstanding the problems of the 

parent, the regulation—the bank-centric regulation that was 

present certainly protected that institution. 

Second, it wasn’t that long ago that we went through the thrift 

crisis and, frankly, the diversified sources of capital that came into 

the industry in the 1980’s were a blessing and not a curse to that 

industry. The experience of the FDIC with respect to diversified 

owners of industrial banks, similar to the experience of the OTS 

with respect to diversified owners of savings associations would indicate that this is not a problem but in fact a benefit. 

Mr. GILLMOR. Let me go to Mr. Johnson at ABA and—well, let 

me ask you this, before we leave. On the theory that everybody 

ought to be treated the same, do you feel we should repeal the 

Bank Holding Company Act so that the same would apply to commercial banks? 

Mr. DOUGLAS. I think the bank-centric model of regulation has 

served us well and obviously it’s up to Congress to decide what to 

do with respect to holding companies and holding company regulations. It’s clear that there’s an anomaly in the regulatory environment. It is not clear to me that the evidence would support that 

consolidated supervision is necessarily better for our system. 

Mr. GILLMOR. Well, would you explain to me the justification, 

whether it’s better or worse, from your point of view—why you 

would have one set of financial institutions with a different type 

and consolidated regulation while you would leave another set of 

institutions without regulation since, as has been pointed out, 

there’s less consumer protection for those institutions. 

63

Mr. DOUGLAS. Well, I would disagree with the assertion that 

there’s less consumer protection, but one of the benefits of our system is that we’ve provided a variety of charters and methods for 

people to deliver financial services in the innovation that’s been 

demonstrated through the industrial bank, similar to the innovation demonstrated through other charters. I think it’s been helpful 

to our economy and not harmful. 

Mr. GILLMOR. Let me go to Mr. Johnson of the ABA for one question. There are critics who believe that our bank laws are outdated 

and perhaps Mr. Douglas is one of them. I’m not sure. When it 

comes to separating banking and commerce, could you describe for 

the committee whether you feel it’s still relevant to have that separation? 

Mr. JOHNSON. Yes. We believe it is still relevant to have that 

separation. Reference was made earlier in the hearing to the Japanese model, the German model and I am—as a small banker from 

Grand Rapids, Michigan, am certainly not an expert on that. But 

what I do know is that the model that we have where the Congress 

has consistently acted to close exemptions to the division between 

banking and commerce as those exemptions have caused increased 

concern, that’s a model that has served us very well. And I think 

that with the strength of our economy that we’ve had, while operating under that model, has been such that we believe it would be 

a very dangerous experiment to tinker with it. 

Mr. GILLMOR. Thank you very much. And Mr. Chairman, I appreciate the courtesy in recognizing me and Mr. Leach in letting 

me crowd in line, and I yield back. 

Chairman BACHUS. Thank you. Mr. Matheson. 

Mr. MATHESON. Thank you, Mr. Chairman. I know you’re trying 

to wrap up this hearing and I’d just ask unanimous consent— 

Chairman BACHUS. You have your full 5 minutes. 

Mr. MATHESON. If I could just say, could we submit written questions to the witnesses— 

Chairman BACHUS. Absolutely. 

Mr. MATHESON. Okay. I just wanted to—we’ve heard reference 

from one of the—testimony and previous question mentions of 

Enron and WorldCom and what would have happened if they had 

an Industrial Loan Company. There are cases in—two situations in 

Utah, Conseco and Tyco, where the parent company did have financial difficulties. 

Mr. Sutton, could you tell everyone what happened with the ILC 

in those circumstances? 

Mr. SUTTON. Well, in the case of Conseco, the regulators were 

closely monitoring the situation at the holding company. They 

made sure that the bank was completely isolated from those problems. Eventually when Conseco became bankrupt, the consequence 

was that the subsidiary bank had to close and be liquidated. But 

it only held high quality bankable assets. It was able to sell that 

portfolio at a premium. With those funds, it paid all of its deposit 

obligations, it paid all of its other debts, and it paid a substantial 

liquidating dividend up to the parent company that was then distributed out to the bankruptcy creditors. 

64

Mr. MATHESON. So in that case there was no claim on FDIC insurance and the taxpayers are not left to help pay this because the 

parent company had financial problems. 

Mr. SUTTON. Exactly. Now, it might be worth adding that this is 

a very legitimate concern and it was a concern from the beginning 

of this industry. I remember when I was regulating I had a discussion with the regional director of the FDIC who said, let’s call it 

the Drexel Burnham test. He said, ‘‘I’m not going to grant insurance to any bank that could be owned by Drexel Burnham unless 

I am convinced that it’s safe and it’s not going to be a risk to the 

fund.’’ 

And there were some added features to the industrial bank regulatory model created at that time to ensure its independence, to ensure the competence of its management, and to ensure that it was 

protected from anything like that before this model was ever really 

allowed to develop. 

Mr. MATHESON. So while I guess we can never play the, ‘‘what 

if’’, game too much, but if those companies had industrial loan 

banks, at least based on our past history over the last 20 years, 

when you’ve had parent companies that have gone into bankruptcy, 

or at least faced significant financial distress, the bank-centric regulation model has protected that bank asset in a way where there 

was no claim on FDIC insurance. 

Mr. SUTTON. That’s the record thus far, yes. 

Mr. MATHESON. Okay. I want to make sure that’s the case because as I said, Mr. Chairman, in my opening comments, the focus 

of this hearing is whether or not this industry is adequately regulated. And while we have established that the FDIC has a different 

role with a bank-centric model compared to the Federal Reserve 

that does the comprehensive regulation, that doesn’t mean one is 

good and one is bad. And I think that the track record here is one 

that the ILC industry should be proud of, and the regulatory entities that regulate at both the States and the FDIC should be proud 

of, because of that track record. 

One other reference I want to make. My former senator, Senator 

Garn, was referenced in one of the testimonies saying that it was 

a narrow exemption. I would also point out Senator Garn has testified on behalf of the industrial loan industry. 

If I could just read four sentences from his participation in the 

FDIC hearing, and he said, ‘‘Congress expressly intended to exempt 

the parent companies of industrial banks from the Bank Company 

Holding Act when it enacted CEBA in 1987. That is the law, not 

a loophole, as some have characterized it. This exemption was debated for several years before it was enacted and Congress has not 

modified the exemption in any way in the nearly 20 years since it 

became law. Enacting that exemption has resulted in the development of a major financial services industry whose member banks 

today are among the safest, strongest and most successful banks in 

America.’’ 

Last question for Mr. Sutton. We’ve heard some comment—

what’s that? 

Chairman BACHUS. You have a full 5 minutes. 

Mr. MATHESON. Okay. Well, he’s going to take it—this is a good 

question, so—one issue I haven’t heard a lot of talk about today in 

65

the discussion, but we’ve heard a lot about, is some comments 

about industrial banks threatening the payment system. 

Can you comment on that issue and the role of industrial banks 

in that issue? 

Mr. SUTTON. You know, we’ve heard this concern raised and we 

really struggle to make any sense out of it. The payment system, 

of course, is the settlement of checks and credit card charges and 

debit charges and things like that at the end of the day where the 

banks get together and settle their accounts. 

Industrial banks play very little role in this system. There are 

no industrial banks offering checking accounts. The ones that offer 

NOW accounts, you know, in total amount to roughly one mediumsized community bank. There are some major credit card issuers 

but to the largest extent, the other banks do not get into credit 

card issuance. The ones that do, play by the same rules that everyone else does. 

So they really aren’t involved in the payment system and we 

haven’t been able to understand how, with that minimal involvement, they can be a threat to it. 

Mr. MATHESON. Okay. I’m going to do one more then, Mr. Chairman, since you gave me the full 5 minutes. 

Mr. Sutton, we’ve heard about this massive explosion of this industry over the last 20 years. Is it not true that industrial banks’ 

assets represent between 2 and 3 percent of all bank assets in this 

country? 

Mr. SUTTON. That’s my understanding. 

Mr. MATHESON. That’s right. And how would you describe this 

growth since 1987? Is this the result of new opportunities in the 

marketplace or why has this growth happened, even though it’s 

just 2 or 3 percent of the asset base in this country? 

Mr. SUTTON. Well, you know, the separation of banking and commerce really is an expression of a more primary policy which is ensuring that everybody has accessibility to credit and that was fashioned when banks were the primary providers of credit. 

What has happened in the last 30 years is that financial services 

have spread through the entire economy. You find businesses of 

every kind now in the financial services business. And as they get 

into it, and many of these are as competent as any provider you’ll 

ever find, they know the business well. Many of them invented 

these businesses to begin with. They’re very good at what they do 

and they figure out after a while that the most efficient way to run 

the business is to run it through a bank. 

And it’s these businesses that come to Congress, that come to the 

regulators and say we’re looking for a bank charter and we’re willing to run it in a way where we can give good assurance that it’s 

done safely and soundly and that’s the record of this industry thus 

far. 

Mr. MATHESON. Okay. Thank you for your patience, Mr. Chairman. 

Chairman BACHUS. Thank you, Mr. Matheson. 

Ms. JORDE. Mr. Chairman, could I just follow up on that question 

briefly? 

The concern that we have, and it’s already been brought out before, is not so much the history. It’s that the world is changing 

66

very, very rapidly right now and, in fact, that’s why we’re all here 

today. The number of applications that we have in place and particularly the Wal-Mart one brought it to everybody’s attention. I mean, Wal-Mart is proposing to capitalize a bank with $125 million in capital and process $170 billion in payments each year. 

That’s enormous risk and it’s not the type of credit risk that the 

banking system is used to covering with capital, but it’s the ability 

to be able to settle those payments. $125 million in capital is very, 

very little to be able to cover the potential problems that $170 billion of payments would have going through that system. 

Chairman BACHUS. Thank you. Let me conclude this hearing by 

saying, you know, at the start of this hearing I said that it was not 

about legislation. It was to look at the Industrial Loan Companies, 

their structure, their charter, and their regulation. 

One reason—and this is a personal opinion of mine, and this is 

a committee made up of 40-something members, so this is my own 

personal opinion. There’s a lot of unease out there about Industrial 

Loan Companies, but I’m still not sure that we’ve defined what the 

problem is. And legislation is a solution to a problem, but there 

can’t be a solution to the fact that we’re concerned about the future. 

Is the problem a safety and soundness issue? Mr. Sutton said 

that the Industrial Loan Companies in Utah—and I’ve really not 

seen any evidence to the contrary—I’m not sitting here as a judge, 

but that they’re not among our strongest financial institutions, so 

I don’t know if it’s a safety and soundness problem. 

I know that people have said, well, the Federal Reserve doesn’t 

regulate the holding companies but in probably 80 or 90 percent of 

the assets of these Industrial Loan Companies, or the companies 

themselves, it’s my understanding from testimony here today and 

what I’ve read before, that the SEC and the OTS have supervisory 

power over the holding companies. I think Mr. Leary mentioned 

that in his testimony. 

In fact, he said what has received no coverage in the current debate is the fact that industrial bank oversight by the States and 

the FDIC is supplemented by holding company oversight by financial regulators other than the Federal Reserve. The Securities and 

Exchange Commission and the Office of Thrift Supervision have 

regulatory oversight over many holding companies with Utah industrial banks and subsidiaries. 

And I think I’ve heard testimony somewhere that between 75 

and 90 percent of the assets and deposits fall into that category. 

So if we’re talking about large security companies owning industrial loan banks, which seems to be the case with 80 or 90 percent 

of these, then what I’m hearing from the panel that is concerned 

it’s about the commercial firms. It’s not 90 percent or 80 percent 

or 85 percent. 

And with the commercial firms, obviously, you know, that is a 

philosophical—I mean, it’s probably economic—philosophical. And I 

suppose that those who are opposed to that is—what I’m hearing 

from this panel is at least your concern is focused on those companies. 

But then if we get into a grandfather situation, where do you 

stop? I mean, then, you know—is Congress—is it fair to say that 

67

Target can have one, Wal-Mart can’t, and GMAC is right in the 

middle? So how does Congress—Congress is not very adept at determining fairness in sorting out winners and losers and if any of 

you would like to comment, we’ve got about a minute left. 

Ms. JORDE. I would comment on that briefly. I have a good friend 

who made the comment recently that, you know, if the barn door 

is open and half of the horses run out, what would you do? You’d 

probably close the barn door and try to keep the rest of them in 

and then the ones that had gotten loose, try to gain some control 

over those. 

I think we are at a point right now where the barn door has been 

open and there are a number of horses that are out, but more are 

right there at the door waiting to get out, and I think the Gillmor/

Frank legislation that’s been introduced very effectively looks at 

that issue of grandfathering those institutions that have effectively 

worked very well as ILC’s and it also addresses the commercial 

companies that are looking to go through that exception and to 

really mix banking and commerce, which for many, many years 

this Congress has closed over and over and over again. 

So I think the real issue here is the mixing of banking and commerce, the systemic risk created from that, the impartial allocation 

of credit, and the extension of the Federal safety net to commercial 

companies. That’s the real issue and I think that’s why we’re here 

today. 

Chairman BACHUS. I’ll either let Mr. Douglas or Mr. Sutton have 

a minute and then we’ll conclude the hearing. 

Mr. DOUGLAS. In some senses, we’re talking—we’ve spent a lot 

of time talking about—sorry about that; she didn’t want me to talk. 

Chairman BACHUS. No, she was helping you; she was moving it 

towards you. 

Mr. DOUGLAS. We’ve been talking about hypothetical problems 

that simply don’t exist today. Our system really has been blessed 

by diversified sources of credit, and credit comes through a number 

of sources, a number of avenues, and in a number of ways. One of 

those ways recently has been the industrial bank charter. 

The fact that the barn door is open is sort of an interesting analogy but it’s not relevant to the issue at hand. What we have is a 

financial system that provides for competition and innovation. 

There have been no problems with allocation of credit or conflicts 

of interest or abuses. We have a framework of laws that protects 

us as a society and our banking system as a system. This is something that we ought to let evolve and proceed and grow and reap 

the benefits of it. 

We have billions of dollars of credit that have been extended to 

consumers and small businesses by these industrial banks. This is 

a good thing and not a bad thing.

68

Chairman BACHUS. Thank you. This will conclude our hearing. I 

appreciate the testimony of the witnesses today. The Chair notes 

that some members may have additional questions for the panel 

which they may wish to submit in writing. Without objection, the 

hearing record will remain open for 30 days for members to submit 

written questions to these witnesses and to place their responses 

on the record. 

This hearing is adjourned. 

[Whereupon, at 2:23 p.m., the subcommittee was adjourned.] 

(69)

A P P E N D I X

July 12, 2006

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