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H.R. 698, THE INDUSTRIAL BANK

HOLDING COMPANY ACT OF 2007

HEARING

BEFORE THE

COMMITTEE ON FINANCIAL SERVICES

U.S. HOUSE OF REPRESENTATIVES

ONE HUNDRED TENTH CONGRESS

FIRST SESSION

APRIL 25, 2007

Printed for the use of the Committee on Financial Services

Serial No. 110–25

(

(II)

HOUSE COMMITTEE ON FINANCIAL SERVICES 

BARNEY FRANK, Massachusetts, Chairman

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 

JULIA CARSON, Indiana 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

DENNIS MOORE, Kansas 

MICHAEL E. CAPUANO, Massachusetts 

RUBE ́ N HINOJOSA, Texas 

WM. LACY CLAY, Missouri 

CAROLYN MCCARTHY, New York 

JOE BACA, California 

STEPHEN F. LYNCH, Massachusetts 

BRAD MILLER, North Carolina 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

MELISSA L. BEAN, Illinois 

GWEN MOORE, Wisconsin, 

LINCOLN DAVIS, Tennessee 

ALBIO SIRES, New Jersey 

PAUL W. HODES, New Hampshire 

KEITH ELLISON, Minnesota 

RON KLEIN, Florida 

TIM MAHONEY, Florida 

CHARLES WILSON, Ohio 

ED PERLMUTTER, Colorado 

CHRISTOPHER S. MURPHY, Connecticut 

JOE DONNELLY, Indiana 

ROBERT WEXLER, Florida 

JIM MARSHALL, Georgia 

DAN BOREN, Oklahoma 

SPENCER BACHUS, Alabama 

RICHARD H. BAKER, Louisiana 

DEBORAH PRYCE, Ohio 

MICHAEL N. CASTLE, Delaware 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

RON PAUL, Texas 

PAUL E. GILLMOR, Ohio 

STEVEN C. LATOURETTE, Ohio 

DONALD A. MANZULLO, Illinois 

WALTER B. JONES, JR., North Carolina 

JUDY BIGGERT, Illinois 

CHRISTOPHER SHAYS, Connecticut 

GARY G. MILLER, California 

SHELLEY MOORE CAPITO, West Virginia 

TOM FEENEY, Florida 

JEB HENSARLING, Texas 

SCOTT GARRETT, New Jersey 

GINNY BROWN-WAITE, Florida 

J. GRESHAM BARRETT, South Carolina 

JIM GERLACH, Pennsylvania 

STEVAN PEARCE, New Mexico 

RANDY NEUGEBAUER, Texas 

TOM PRICE, Georgia 

GEOFF DAVIS, Kentucky 

PATRICK T. MCHENRY, North Carolina 

JOHN CAMPBELL, California 

ADAM PUTNAM, Florida 

MICHELE BACHMANN, Minnesota 

PETER J. ROSKAM, Illinois 

KENNY MARCHANT, Texas 

THADDEUS G. McCOTTER, Michigan

JEANNE M. ROSLANOWICK, Staff Director and Chief Counsel 

(III)

C O N T E N T S 

Page 

Hearing held on: 

April 25, 2007 ................................................................................................... 1

Appendix: 

April 25, 2007 ................................................................................................... 51

WITNESSES 

WEDNESDAY, APRIL 25, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance Corporation .......... 9

Colby, Robert, Deputy Director, Market Regulation, Securities and Exchange 

Commission ........................................................................................................... 14

Connelly, Arthur R., Chairman and Chief Executive Officer, South Shore 

Bancorp MHC, on behalf of America’s Community Bankers ............................ 37

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

Services Association ............................................................................................. 41

Ghiglieri, James P., Jr., President, Alpha Community Bank, on behalf of 

the Independent Community Bankers of America ............................................ 38

Isaacs, Amy, National Director, Americans for Democratic Action ..................... 35

Kohn, Donald L., Vice Chairman, Board of Governors of the Federal Reserve 

System ................................................................................................................... 12

Lackritz, Marc E., Chief Executive Officer, Securities Industry and Financial 

Markets Association ............................................................................................. 43

Leary, G. Edward, Commissioner, Department of Financial Institutions, State 

of Utah .................................................................................................................. 17

McVicker, Earl D., Chairman and Chief Executive Officer, Central Bank 

& Trust Company, on behalf of the American Bankers Association ............... 40

Reich, Hon. John M., Director, Office of Thrift Supervision ................................ 13

Stevens, Thomas M., Immediate Past President of the National Association 

of Realtors ............................................................................................................. 45

APPENDIX 

Prepared statements: 

Bair, Hon. Sheila C. ......................................................................................... 52

Colby, Robert .................................................................................................... 71

Connelly, Arthur R. .......................................................................................... 82

Douglas, John L. ............................................................................................... 87

Ghiglieri, James P., Jr. .................................................................................... 95

Isaacs, Amy ....................................................................................................... 113

Kohn, Donald L. ................................................................................................ 121

Lackritz, Marc E. .............................................................................................. 138

Leary, G. Edward ............................................................................................. 149

McVicker, Earl D. ............................................................................................. 172

Reich, Hon. John M. ......................................................................................... 183

Stevens, Thomas M. ......................................................................................... 200

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Gillmor, Hon. Paul E.: 

Letter from the American Bankers Association ............................................. 210

Letter from America’s Community Bankers .................................................. 211

Letter from Independent Community Bankers of America .......................... 212

Letter from the National Association of Realtors .......................................... 214

Letter from the Sound Banking Coalition ...................................................... 215 

Page

IV

Gillmor, Hon. Paul E.—Continued

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

Coalition ......................................................................................................... 217 

(1)

H.R. 698, THE INDUSTRIAL BANK 

HOLDING COMPANY ACT OF 2007

Wednesday, April 25, 2007

U.S. HOUSE OF REPRESENTATIVES, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The committee met, pursuant to notice, at 10:08 a.m., in room 

2128, Rayburn House Office Building, Hon. Barney Frank [chairman of the committee] presiding. 

Present: Representatives Frank, Waters, Maloney, Watt, Sherman, Meeks, Moore of Kansas, Baca, Scott, Green, Cleaver, Davis 

of Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter, Donnelly, 

Marshall; Bachus, Castle, Royce, Gillmor, Manzullo, Feeney, 

Hensarling, Brown-Waite, Barrett, Pearce, Neugebauer, and 

Bachmann. 

Also present: Representative Matheson. 

The CHAIRMAN. The hearing will come to order. The Committee 

on Financial Services meets today to consider legislation dealing 

with the Industrial Bank Holding Company Act, which was filed by 

myself and the ranking minority member of the Committee on Financial Services, the gentleman from Ohio, Mr. Gillmor. It deals 

with the question of whether or not the entity known as the Industrial Loan Corporation ought to be expanded or maintained at its 

current level. 

I begin by saying that there’s been a debate about the ILCs. It 

does seem to me that those who profess to be strong supporters of 

the Industrial Loan Corporation form ought to be the ones initiating legislation. That is, if you genuinely believe that the ILCs are 

an important financial institution, how does anyone justify limiting 

them so that only six States can charter them? I know of no other 

generally approved entity which can only be chartered by six 

States. 

So I understand people who think ILCs are a wonderful thing 

and would therefore like to have them freely chartered. I understand those of us who think that we should restrict them. It is hard 

for me to understand a rational argument for the status quo in 

which we have this entity that exists in only a few States. Why 

would anyone do that? 

Let me put it this way. It is inconceivable to me that anyone 

starting from scratch in a situation would say, ‘‘Okay, here’s a nice 

institution we ought to have; we’re going to call it an industrial 

loan corporation, and let’s pick six States that are allowed to charter it.’’ I don’t know how you would pick the six States. I assume 

a dartboard would be an essential part of that decisionmaking 

2

process. In other words we have what is the result of a historical 

accident, and it seems that we go one way or the other. 

There are also people who argue that we have had the ILCs for 

this considerable period and there has not been any problem. Well, 

those of us who support this legislation generally agree with that 

because we are trying to preserve the status quo. Nothing that is 

being proposed would undo the current situation with regard to 

ILCs that exist. 

Indeed, we had previously been told by the State of Utah where 

they are important, and I note the presence of our colleague from 

Utah, a former member of this committee, whose disagreement 

with us was sufficiently strong to cause him to return. And he has 

been a very able advocate of the interests of his State. But I do 

note that the last information we had was that over 90 percent of 

the ILC assets in the State of Utah would be unaffected by our legislation because they would meet the test of 85 percent financial. 

But I do return to the point that we have an anomaly. I can understand going forward, I can understand going backward, but I do 

not see how anyone public policy can justify staying where we are. 

Now what we find is—and people said, ‘‘Why are you dealing 

with this now if they haven’t caused problems?’’ But what we are 

confronted with is people who have decided to significantly expand 

this entity, including major commercial organizations. 

Again, I understand the argument from those who say that the 

distinction between commercial and banking activities is an artificial one, that it should fall. But if you believe that, then where’s 

the language to repeal the restriction? Again, why this halfway, to 

put it in a way that will meet the rules of propriety, approach to 

a situation? What again is the justification for maintaining the 

general principle of a separation between banking and commerce 

and allowing this one narrow exception? 

We, I hope, will go forward. We are trying again not to disturb 

the status quo. We have had some conversations with a kind of a 

border area involving securities, border in the sense, these are financial institutions and we will be—we have been working and 

having conversations and I want to thank—Chairwoman Bair is 

here and she has, on this as in so many other issues, been extremely helpful. 

We are trying to work out the various regulatory approaches that 

should go forward. I do want to say that this has been one of the 

rare occasions in my memory when the Federal Reserve has been 

very flexible, and I hope that this is a pattern that we will see 

going forward. 

But I think we have a very reasonable approach in the legislation. Obviously we are prepared to listen. And with that, I will recognize the ranking member. 

Mr. BACHUS. I thank Chairman Frank for holding this hearing 

on H.R. 698, which is the Industrial Bank Holding Company Act 

of 2007. This legislation would enhance regulatory supervision of 

our ILCs, grandfather existing ILCs, and at the same time, prohibit commercial firms in the future from acquiring ILC charters. 

At the outset, I want to commend the chairman and the gentleman from Ohio, Mr. Gillmor, who both worked tirelessly over the 

past several years to craft legislation on this complex issue. 

3

Today’s hearing will hopefully help us to better understand ILCs 

and the regulatory framework that surrounds the ILC charter. As 

ILCs have grown in size, number, and complexity, several supervisory and policy questions have arisen, including whether current 

regulatory structure for overseeing ILCs is adequate. 

Insured ILCs are subject to State banking supervision and FDIC 

oversight as State, non-member banks. Nonetheless, owners of 

ILCs do not have to be bank holding companies subject to the Federal Reserve’s consolidated supervisory authority. 

In the absence of Federal Reserve’s supervision of ILC holding 

companies, 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. Some 

have suggested that this regulatory regime does not provide sufficient protection against the potential risk that parent companies 

and non-banking affiliates may pose to the safety and soundness 

of ILCs. 

Another matter of concern about ILCs is the extent to which they 

can mix banking and commerce through the holding company 

structure. An 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. 

Certainly 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 ILCs when other similarly situated commercial entities 

already own them. 

Once again, I want to thank Chairman Frank and Ranking Member Gillmor for their work on this important issue, and look forward to hearing from our witnesses today on their views on the legislation before us. 

The CHAIRMAN. I will now recognize for 5 minutes one of our 

members who has been most active in this, the gentleman from 

Georgia, Mr. Marshall. And I will exercise my option to go to 15 

minutes. The gentleman from Alabama may, if he wishes to, as 

well. So Mr. Marshall is recognized for 5 minutes. 

Mr. MARSHALL. Thank you, Mr. Chairman. I don’t believe I’ll 

need 5 minutes. I appreciate the Chair recognizing me, and giving 

me an opportunity to say a few words on this particular subject. 

It’s kind of interesting. The first major problem we had in this 

country with mixing business and commerce resulted in legislation 

back in 1838 in New York and Georgia. Georgia actually took the 

lead in 1838 in forcing the separation of banking and commerce. 

We’ve had other instances during our Nation’s history where we 

inadvisably mixed the two. I shudder to think what kind of consequences we might have had had we not had those kinds of rules 

and we saw the collapses of entities like WorldCom, Enron, etc. 

It just seems to me that we are in a very poor position to understand all of the complexities of the typical business operation in today’s world and appreciate fully the risks associated with mixing 

those complex business operations with banking. It’s tough enough 

for us just to regulate our banks without mixing—attempting to adVerDate 0ct 09 2002 18:13 Aug 13, 2007 Jkt 036820 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\36820.TXT HFIN PsN: TERRIE
4

ditionally understand all the complexities associated with some of 

our current financial operations. 

That said, clearly we have to grandfather, and it seems to me 

that the grandfathering provisions we should consider wouldn’t 

simply stop at those ILCs that have been authorized thus far, but 

might consider those ILC applications that have been submitted in 

reliance upon the performance of the board with regard to granting 

ILCs because there are a number of entities that have legitimately 

gone out and relied upon the expectation that their ILC application 

will be approved, to their detriment if in fact this legislation is successful, and the cutoff is actually acquiring an ILC before the legislation is approved. 

I do think that no further ILCs should be approved pending our 

consideration of this legislation. And then I’ll simply add that 

there’s a parallel here, it seems to me, between this issue and the 

question of whether or not banks should own real estate companies 

and other ventures that banks are sometimes interested in. 

It seems to me that the banking industry, which is interested in 

not having commerce compete with banks through ILCs, should acknowledge that in fact banks should not be competing with commerce through business ventures like real estate, etc. 

And I think perhaps, Mr. Chairman, if the chairman will move 

in that direction, it’s something that we ought to consider. I appreciate the opportunity to say a few words, and I yield back, Mr. 

Chairman. 

The CHAIRMAN. I now am pleased to recognize the coauthor of 

this bill, the ranking Republican on the Financial Institutions and 

Consumer Credit Subcommittee, the gentleman from Ohio, Mr. 

Gillmor, for 5 minutes. 

Mr. GILLMOR. Thank you very much, Mr. Chairman, and let me 

also say that I have appreciated the opportunity over the past 

three Congresses to work with you on this issue. 

We have been successful in the House; our amendment has 

passed two Congresses in a row. It didn’t make it through the Senate, but I think that probably the third time is the charm, and I 

think we may get a different result in the Senate this time and get 

legislation to the President’s desk. 

I also want to commend Chairman Bair and the rest of the FDIC 

Board for their work on this issue. I want to thank all of our bank 

regulators for recognizing that the issue of the future of ILCs is a 

question that Congress should address. It is good and effective regulation that’s the first line of defense in protecting the safety and 

soundness of our financial systems. 

The principle here is real simple; it’s the separation of banking 

and commerce. And financial systems which have not followed that 

principle have had a number of problems and, in fact, have had a 

number of crises because of it. 

The United States codified this principle after the problems in 

the 1920’s and the Great Depression. Over the last several decades, 

loopholes and exemptions in bank law have gradually been closed. 

In 1999, during consideration of Gramm-Leach-Bliley, Congress 

eliminated the unitary thrift loophole, and now it’s time to close 

the ILC exception, which allows for full service banking by commercial firms. 

5

This is a kind of historical accident, and frankly it wasn’t much 

of a problem when there were only a few out there in existence, but 

what has happened is that a number of commercial and industrial 

firms have discovered this loophole, are applying for charters, and 

are going to try to drive a train right through the loophole unless 

Congress acts responsibly to close that loophole. 

The bill that we’ve introduced, H.R. 698, would bolster the authority of the FDIC, limit the business activities of certain ILCs already in existence, and most importantly establish a cutoff date for 

new, commercially owned ILCs. Today we have approximately 120 

cosponsors on the bill, and it’s my hope that this bipartisan legislation will receive consideration in the committee in the near future 

and on the House Floor shortly thereafter. 

And Mr. Chairman, I would ask that the following materials be 

submitted for the record: H.R. 698 support letters written by the 

Realtors, by the ICBA, by ACB, and by the ABA. Also, submitted 

testimony by former Congressman Tom Bliley on behalf of the 

Sound Banking Coalition, and a letter of support from the Coalition. And I would also ask unanimous consent to enter into the 

record a March 2007 GAO report which details suggestions for collaboration among the consolidated regulators. 

[The GAO report referenced above (GAO–07–154) is available 

from the Government Accountability Office—www.gao.gov.] 

The CHAIRMAN. Without objection, it is so ordered. 

And now, on the unanimous consent—because I mentioned before, we’ve been joined here at the podium by a former colleague, 

our colleague from Utah, and he does represent a State where 

these are very important, so I would ask unanimous consent that 

the gentleman from Utah be allowed to participate in the hearing 

today. 

I thank the ranking member. It is important that we get the diversity of views. 

I will now recognize the chairwoman of the Financial Institutions 

and Consumer Credit Subcommittee, but I also want to explain. In 

about 5 minutes, I will be going around the corner to testify on the 

issue of fishing safety. The City of New Bedford, which I represent, 

is the leading fishing port in the country and we’ve had some safety issues. So I will be abstaining myself for a few minutes, but I 

will be back. We do appreciate—and I mentioned some of the regulators, Mr. Reich, it is very helpful to us to have had the cooperation of all the regulators in this as we have worked together on this 

operation, and we appreciate that, and the SEC as well. 

The gentlewoman from New York is now recognized for 5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. I appreciate your 

holding this hearing to discuss a bill that you and Mr. Gillmor 

have worked so hard on, and I join Mr. Gillmor in hoping that the 

third time is a charm. As he mentioned, there is a strong cross-section of support for this bill. 

And in the bill, this committee has struggled to balance the need 

for the financial services that ILCs can provide with the primary 

imperative to preserve the safety and soundness of the banking 

system. This bill, in my view, has largely succeeded in doing that. 

6

I am particularly sensitive to this issue since the savings and 

loan crisis, the bailout of the savings and loans crisis, was really 

the first issue that I voted on when I came to Congress, so I am 

keenly attuned to safety and soundness issues, and I hope we won’t 

confront that again. 

For the past year, the debate over ILCs has been largely shaped 

by the application of big commercial concerns and major auto companies—their push to own ILCs. Many members felt that these 

large companies were exploiting a loophole in Federal banking laws 

to merge commerce and banking, a combination that traditionally 

has been tightly restricted in the United States. 

Last year, the Government Accountability Office issued a report 

specifically addressing these type of applications, saying that allowing commercial firms to own ILCs would ‘‘pose unnecessary risk,’’ 

to the Federal Government’s deposit insurance funds. Though the 

FDIC does have authority over insured ILCs, the GAO concluded 

that the fact that this authority does not explicitly extend to ILC 

holding companies, and therefore is less extensive than the authority that the consolidated supervisors have over banks and thrift 

holding companies, means that from a regulatory standpoint these 

ILCs, in their opinion, pose more risk of loss to the bank insurance 

fund than other insured depository institutions operating in a holding company. 

In the wake of the GAO report, the Federal Reserve, including 

former Federal Reserve System Chairman Alan Greenspan and 

current Chairman Ben Bernanke, call for changes that would extend the regulations that apply to banks and bank holding companies to the ILCs and the companies that own them. 

The need for new legislation arises in large part because of the 

change in the ILC industry over the past 20 years. ILCs were created in 1910 as limited purpose institutions to allow workers for 

big companies to get credit when they couldn’t otherwise get loans. 

But according to the GAO report, ILC assets grew more than 3,900 

percent between 1987 and 2006 to more than $155 billion, up from 

$3.8 billion. 

ILCs also changed their character from small, community-based 

entities to large, company-based ones. From 1987 to 2006, the number of ILCs actually declined 42 percent, dropping to 61 from 106. 

As of March 2006, 9 of the country’s ILCs were among the 271 financial institutions in the United States that hold more than $3 

billion in assets. Six ILCs own more than 80 percent of the assets 

in the ILC industry with more than $125 billion in assets and $68 

billion in FDIC-insured deposits. 

Large ILCs divide between those that are owned by financial 

companies, subject to functional regulation by the SEC, such as 

Merrill and Morgan Stanley, and those that are owned by commercial firms, such as Target and GE. The bill very sensibly treats 

them differently and includes limits on activities to non-grandfathered entities to make sure that this distinction is preserved. I 

support this distinction but only to the extent that it is squared off 

soundly with safety and soundness, which is first on the agenda for 

this committee. 

7

I look forward to the testimony. I see that Sheila Bair is back 

before us again; we have kept her very busy in this Congress. I 

look forward to all of the testimony. Thank you. 

Mr. SCOTT. [presiding] Thank you. The gentleman from California, Mr. Royce, is recognized for 3 minutes. 

Mr. ROYCE. Thank you, Mr. Chairman. Thank you very much for 

holding this hearing as well, and I want to thank our witnesses 

today for their testimony. 

It has been mentioned that ILCs have been in existence in this 

country for, oh, I guess, about a hundred years. And it’s very, very 

recently, I think, that the charter has garnered a great deal of attention. I encourage an open and honest debate on this, but I believe some of the criticisms of ILCs are misguided. 

The amount of regulatory authority over the relationship between the ILC and their parent company continues to be a point 

of criticism for those who are opposed to the existence of ILCs, and 

some have expressed concern that an ILC might be used to subsidize a parent’s cost to capital. Others have suggested that the 

ILC regulatory structure, in their view, is deficient because some 

ILC parents are not subject to supervision at the holding company 

level. 

Well, just the beginning point I’d like to lay out is that industrial 

loan companies are regulated in a similar manner to all other federally insured depository institutions. They are subject to the same 

minimum capital standards, and subject to the same prompt corrective action provisions as every other bank we oversee in this 

committee. They must adhere to sections 23A and 23B of the Federal Reserve Act, just as all other FDIC-insured depository institutions do. 

And as you know, these two provisions in the Federal Reserve 

Act subject all ILCs to very strict rules when it comes to relationships with any of their affiliates. Just to go down the rules very 

quickly: an ILC’s total covered transactions with any affiliate cannot exceed 10 percent of the bank’s capital; the ILC’s total covered 

transaction with all affiliates combined cannot exceed 20 percent of 

the bank’s capital; and with few limited exceptions, covered transactions must be fully secured with qualifying capital, and an ILC 

cannot purchase a low qualifying asset from an affiliate. 

In addition, an ILC must deal with an affiliate on market or 

arm’s length’s term. It cannot, as a fiduciary, purchase securities 

or other assets from an affiliate unless permitted by statute or 

court order and the ILC cannot purchase securities while an affiliate is a principal underwriter for those securities. Neither the ILC 

nor its affiliate may purchase any advertisement or make any 

agreement stating or suggesting that the ILC shall in any way be 

liable for the obligations of the affiliate. 

So that’s the law. That’s the current law. And in closing, the bill 

put forth today does nothing more than shield incumbent banking 

institutions, in my view, from competition. While I welcome the 

discussion on the fate of future industrial loan companies, I am 

concerned this bill could have some unintended consequences, 

which could have adverse impacts on the financial services industry and the economy as a whole. Industrial loan companies have 

proven their ability to create more competition in the industries, 

8

resulting in better prices and services for consumers in this country. 

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

look forward to hearing from our witnesses. 

Mr. SCOTT. Thank you. The gentlelady from California, Ms. Waters. 

Ms. WATERS. Thank you very much. Good morning ladies and 

gentlemen. I want to thank Chairman Frank and Ranking Member 

Bachus for holding today’s hearing on H.R. 698, the Industrial 

Bank Holding Company Act of 2007. 

Industrial loan companies, that is ILCs, state-chartered, FDICinsured banks, were first established early in the 20th century to 

make small loans to industrial workers. Today’s ILCs, which are 

supervised to some extent by the FDIC as well as by the chartering 

State, have grown dramatically in number and size and scope of activity. From 1997 to 2006, the assets held by Utah ILCs increased 

nearly 500 percent, from $25 billion to $150 billion, and the deposits held by Utah ILCs increased by more than 800 percent, from 

$11.9 billion to $107 billion. 

A special exemption in current law, however, permits any type 

of company, including a commercial or retail firm to acquire an ILC 

in a handful of States, principally Utah, California, and Nevada, 

and to avoid the activity restrictions and supervisory requirements 

imposed on bank holding companies under the Federal Bank Holding Company Act. 

ILCs were mostly small, local institutions that had limited deposit taking and lending powers until 1997 when Utah changed 

this law to permit Utah-chartered ILCs to call themselves banks 

and exercise the same powers as state-chartered commercial banks, 

resulting in the stampede of ILCs. Thus, Utah-chartered ILCs now 

may engage in any type of lending activity. The ILC charter is also 

a way for companies to avoid the activity restrictions and consolidated supervisory capital, managerial, and community reinvestment act requirements imposed on bank holding companies under 

the Bank Holding Act. 

CRA has been an effective tool to require banks to make investments in low- and moderate-income communities. So should ILCs 

be subject to CRA? In 1997, the number of Utah ILCs had tripled 

and now there are more than 30 ILCs chartered in Utah, including 

a number that are owned by commercial companies such as General Electric, BMW, Pitney Bowes, and Sears. Home Depot is seeking to acquire an existing ILC. 

The largest ILC at the time of the exemption adopted in 1987 

had assets of less than $400 million. The largest ILC today has 

more than $62 billion in assets and $54 billion in deposits, making 

it the 12th largest insured bank in the United States by deposits. 

Importantly, the ILC exemption does not limit the chartering of 

new ILCs. Utah and other States that are grandfathered by the exemption may continue to grant new ILC charters without limit. 

Congress maintains the separation of banking and commerce and 

reaffirmed this policy in the Gramm-Leach-Bliley Act of 1999, 

when it closed the unitary thrift loophole and authorized banks to 

affiliate only with companies that are generally engaged in financial activities. 

9

Congress determined in the GLB Act that with regard to financial affiliations, a bank holding company could only affiliate with 

a full service securities or insurance firm if the bank holding company held all its subsidiary depository institutions well-capitalized 

and well-managed in its subsidiary depository institutions, maintain at least a satisfactory CRA rating. 

The ILC exception disadvantages bank holding companies and 

undermines these requirements by allowing some financial firms to 

operate federally insured ILCs without meeting these requirements. The parent companies of exempt ILCs are not subject to 

consolidated supervision under the Bank Holding Company Act. 

For this reason, the GAO concluded that ILCs may pose a greater 

risk to the deposit insurance funds than banks operating within 

the bank holding company structure. 

Since 1956, consolidated supervision has been a fundamental 

component of bank supervision in the United States. It provides 

the board with both the ability to understand the financial strength 

and risk of the overall organization and the authority to address 

significant management, operational capital, and other deficiencies 

within the overall organization before these deficiencies pose a danger to a subsidiary bank in the Federal safety net. 

The FDIC itself has acknowledged that it does not have the same 

supervisory, capital, and enforcement authority with respect to the 

holding companies of an ILC that the Board has with respect to 

bank holding companies. The ILC exemption also allows foreign 

banks to enter the banking business in the United States without 

meeting the requirements in the Bank Holding Company Act that 

the bank be subject to comprehensive consolidated supervision in 

its home country. 

I believe this loophole must also be addressed. Therefore, I am 

pleased to hear from our witnesses today on ILCs, and I yield back 

the balance of my time. 

Mr. SCOTT. Thank you, Ms. Waters. We’ll get right to the witnesses. Just one point I wanted to mention, BMW and Target have 

ILCs and I think that brings up 2 questions that might be significant here this morning. Number one, how do we tell the average 

American why Ford and Home Depot should not be able to have 

what these other companies have? And number two, what studies 

have been done or what evidence or information do we have that 

BMW or Target are threatening to destroy our system of banking? 

So with those questions, we’ll get right to our witnesses. We’ll 

start with Chairman Sheila Bair of the Federal Deposit Insurance 

Corporation. Thank you. 

STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, 

FEDERAL DEPOSIT INSURANCE CORPORATION 

Ms. BAIR. Thank you very much. Members of the committee, I 

appreciate the opportunity to testify on behalf of the Federal Deposit Insurance Corporation concerning Industrial Loan Companies. The FDIC strongly supports efforts to provide statutory guidance on the key issues regarding the ILC charter, especially the 

issue of commercial ownership. 

Many of the issues surrounding ILC ownership involve important 

public policy considerations that are best left to Congress for resoVerDate 0ct 09 2002 18:13 Aug 13, 2007 Jkt 036820 PO 00000 Frm 00013 Fmt 6633 Sfmt 6633 K:\DOCS\36820.TXT HFIN PsN: TERRIE
10

lution. This hearing and congressional discussions regarding possible legislative solutions are encouraging developments that hopefully will lead to the resolution of key ILC-related issues by the end 

of the year. 

ILCs have existed for almost 100 years, and for most of that time 

they operated similar to finance companies, providing loans to 

wage earners who could not otherwise obtain credit. ILCs have 

proven to be a strong, responsible part of our Nation’s banking system and have offered innovative approaches to banking. Many have 

contributed significantly to community reinvestment and development. For example, a nonprofit community development corporation operates an ILC designed for the express purpose of serving 

the credit needs of people in east Los Angeles. Other ILCs serve 

customers who have not traditionally been served by other types of 

financial institutions such as providing credit for truck drivers to 

buy fuel far from home. The record to date demonstrates that the 

overall industry has operated in a safe and sound manner and that 

the FDIC has been a vigilant, responsible supervisor of that industry. 

ILCs represent a very small part of the overall banking industry, 

composing less than 1 percent of the almost 8,700 insured depository institutions in this country, and only 1.8 percent of the assets. 

Of the 58 existing ILCs, 43 are either widely held or controlled by 

a parent company whose business is primarily financial in nature. 

These ILCs represent approximately 85 percent of ILC assets and 

89 percent of ILC deposits. The remaining 15 ILCs are associated 

with parent companies that may be considered non-financial. 

There has been significant growth in the ILC industry since the 

passage of CEBA in 1987 when the industry had $4.2 billion in assets. Over the years, total ILC industry assets have grown to 

$212.9 billion. Most of the growth has occurred since 1996 and has 

been concentrated in a small number of financial services firms. 

In addition to the growth in the ILC industry, the character of 

ILCs has been changing. In the current business environment, 

many ILCs tend to be more complex and differ substantially from 

their original consumer lending focus. In many instances these 

ILCs serve a particular lending, funding, or processing function 

within a larger organization or directly support one or more affiliate’s commercial activities. 

Under this kind of ownership model, consolidated supervision 

may not be present and the current supervisory infrastructure may 

not provide sufficient safeguards to address safety and soundness 

issues and risks to the Deposit Insurance Fund. 

To address these developing concerns, the FDIC has taken a 

number of actions regarding ILCs since this committee’s last hearing on the topic. In July 2006, the FDIC Board of Directors adopted 

a 6-month moratorium on all applications for deposit insurance and 

change in control notices for ILCs. 

During this pause in processing ILC applications, the FDIC 

sought public comment on 12 specific questions that focused on developments in the industry, the supervisory framework, and the 

issues surrounding commercial ownership. In response, the FDIC 

received more than 12,600 comment letters. 

11

The 6-month moratorium allowed the FDIC to evaluate public 

and industry comments, assess developments in the industry, and 

consider how to best supply the Corporation’s statutory powers for 

oversight of these charters. It is clear that the most significant concern regarding ILCs is their ownership by companies engaged in 

non-financial activities. 

Based on the FDIC’s analysis, the FDIC Board recently voted to 

extend the moratorium for an additional year. Under the extended 

moratorium, the FDIC will not take any action on any application 

for deposit insurance or any change in control notice for any ILC 

that would be controlled by a company primarily engaged in commercial activities. 

Although commercially owned ILCs have not resulted in serious 

problems to date, the FDIC will continue to closely monitor existing 

ILCs that currently are controlled by commercial companies in 

light of the concerns that have been expressed. 

The moratorium extension does not apply to ILCs that would be 

controlled by a company engaged only in financial activities or that 

would not be part of a holding company structure. 

In addition to providing the FDIC with time to examine the appropriate supervisory structure for the changing ILC industry, extending the moratorium provides additional time for Congress to 

consider legislation. Although the FDIC is not endorsing any particular legislative approach, H.R. 698 does provide a workable 

framework for the supervision of ILC holding companies. 

In closing, ILCs have a good safety and soundness record to date 

and have proven to be a strong, responsible part of our Nation’s 

banking system. Yet the types and number of ILC applications 

have evolved in recent years and these changes do pose potential 

risks that deserve further study and raise important public policy 

issues. 

The FDIC has a responsibility to consider applications under existing statutory criteria and make decisions. While it is appropriate 

to proceed cautiously, the FDIC cannot defer action on these matters indefinitely. 

The current statutory exemption providing for the ILC charter is 

quite broad. By providing clear parameters to the scope of the charter, Congress can eliminate much of the uncertainty and controversy surrounding it. Resolving these issues will enhance the 

value of the ILC charter going forward. 

The FDIC looks forward to working with Congress in the coming 

months as you work to bring these matters to closure. This concludes my statements, and I will be happy to answer any questions 

the committee might have. 

Thank you, Mr. Chairman. 

[The prepared statement of Chairman Bair can be found on page 

52 of the appendix.] 

Mr. SCOTT. Thank you. Thank you very much. Now we’ll hear 

from Mr. Donald Kohn, Vice Chairman of the Board of Governors 

of the Federal Reserve System. 

12

STATEMENT OF DONALD L. KOHN, VICE CHAIRMAN, BOARD 

OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM 

Mr. KOHN. Thank you. I am pleased to be here today to provide 

the Federal Reserve Board’s views on Industrial Loan Companies 

and H.R. 698. The Board commends the committee for considering 

the important public policy issues raised by the special exemption 

for ILCs. 

ILCs are state-chartered and federally insured banks that have 

virtually all the powers and privileges of other insured banks. They 

operate under a special exception to the Federal Bank Holding 

Company Act that allows any type of company to acquire an ILC 

and avoid the restrictions Congress has established to separate 

banking and commerce. The exception also creates a special safety 

and soundness risk by allowing a company or foreign bank that is 

not subject to supervision on a consolidated or group-wide basis to 

acquire an insured bank. 

By its nature, the exception creates an unlevel playing field that 

gives a growing number of firms a competitive edge over other community-based, regional, or diversified organizations that own an insured bank. When the special exception was adopted in 1987, most 

ILCs were small, locally owned institutions with limited powers. 

The size and activities of ILCs, however, have expanded significantly in recent years. Today many are controlled by large, internationally active firms. 

Importantly, there is no limit on the number of ILCs that a 

handful of grandfathered States may charter or on the size that 

these institutions may attain. If left unchecked, the growth of ILCs 

threatens to undermine the policies that Congress has established 

governing the separation of banking and commerce and the proper 

supervisory framework for companies that own a federally insured 

bank. 

That is why we believe congressional action is needed. Only Congress can address the full range of issues created by the ILC exception in a comprehensive and equitable manner. H.R. 698 takes an 

important step by granting the FDIC new consolidated supervisory 

authority for the corporate owners of ILCs that are not already supervised by a Federal agency. 

H.R. 698, however, would not fully address the other important 

regulatory and competitive issues raised by the exception. For example, the bill would allow additional firms to acquire an ILC and 

derive up to 15 percent of their revenues from commercial activities. 

This commercial basket is sizeable and at odds with the decisions 

made by Congress in the Gramm-Leach-Bliley Act to maintain the 

separation of banking and commerce. The Board believes that Congress should consider carefully the costs and benefits of changing 

the Nation’s policies concerning the mixing of banking and commerce in a comprehensive way rather than to allow this policy to 

be eroded through the exploitation of a loophole. 

H.R. 698, as introduced, also would allow the owners of ILCs to 

avoid the CRA, capital, and managerial requirements that apply to 

financial holding companies, and it would allow foreign banks that 

are not subject to consolidated supervision in their home country 

to acquire an FDIC-insured ILC. 

13

These advantages granted, ILC owners would perpetuate competitive imbalances, provide incentives for firms to continue to exploit the exception, and undermine the prudential framework established for all other domestic and foreign firms that own an insured bank. The Board believes the best way to address these 

issues is to close the ILC loophole going forward. This approach 

recognizes the simple fact that ILCs are insured banks. It would 

prohibit additional firms engaged in commercial activities from acquiring ILCs, and would require that any new financial owner of 

an ILC operate under the same activity restrictions and regulatory 

framework that apply to bank holding companies. 

For reasons of fairness, the Board also supports grandfathering 

those firms that currently own an ILC, subject to appropriate restrictions. This mirrors the approach that Congress took in 1970, 

1987, and 1999, when earlier banking loopholes were used in unintended and potentially damaging ways. 

Thank you for the opportunity to testify on behalf of the Board. 

We would be pleased to continue to work with the committee in developing and improving legislation that addresses the very important public policy issues raised by the ILC exception. 

[The prepared statement of Mr. Kohn can be found on page 121 

of the appendix.] 

Mr. SCOTT. Thank you very much, Mr. Kohn. Now we will hear 

from the Hon. John Reich, who is the Director of the Office of 

Thrift Supervision. 

STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, 

OFFICE OF THRIFT SUPERVISION 

Mr. REICH. Thank you. Good morning, Mr. Chairman, Ranking 

Member Bachus, and members of the committee. I appreciate the 

opportunity to testify on H.R. 698, introduced by Chairman Frank 

and Mr. Gillmor to address the activities, ownership, and control 

of Industrial Loan Companies. I applaud your leadership and the 

work of other members of the committee who cosponsored this legislation. 

H.R. 698 addresses several pending policy issues with respect to 

the key areas of the permissible activities and oversight of companies that own or control or seek to acquire or control an ILC. For 

our part, at the Office of Thrift Supervision, we appreciate the recognition in H.R. 698 of the important and continuing role that the 

OTS has in our oversight and supervision of several of the largest 

companies that currently own and control ILCs. 

OTS has statutory authority for the consolidated supervision of 

General Electric, Merrill Lynch, Morgan Stanley, Lehman Brothers, American Express, USAA, Bell Financial, and General Motors. 

The eight ILCs within these OTS-regulated savings and loan holding company structures control about two-thirds of the ILC assets 

in the country as of December 31, 2006. 

Functional regulation and consolidated regulatory oversight have 

been important considerations by the committee. H.R. 698 maintains a clear focus on the enterprise-wide safety and soundness of 

holding companies that own or control institutions with access to 

the Federal safety net. 

14

The bill also is sensitive to the potential exposure of the Federal 

safety net by a company that owns or controls an ILC by focusing 

on the interrelationships within an ILC holding company and how 

the ILC is integrated within the structure. Effective oversight of 

holding companies requires adequate regulatory controls to monitor 

and intervene when necessary without unduly interfering with the 

ongoing business operation and activities of an enterprise. It’s a 

balance, requiring judgement based on expertise in a wide range of 

areas. 

As detailed in my written statement, the OTS focuses and tailors 

its holding company supervision based on the complexity of the 

structure and the level of risk inherent in the holding company enterprise. Comprehensive holding company supervision is a combination of ongoing offsite monitoring, targeted reviews of key businesses or functions, and regular onsite examinations. 

This approach permits OTS to understand the business and its 

inherent risks as well as the affiliations and the transactions of the 

enterprise. It also enables us to assess the potential impact of the 

broader economy, the insured depository institution, and the potential exposure to the Federal safety net. 

As currently drafted, H.R. 698 preserves OTS’s statutory oversight of savings and loan holding companies that own or control 

ILCs, promotes functional regulation while promoting consolidated 

regulatory oversight and it maintains a risk-based focus on companies owning or controlling institutions with access to the Federal 

safety net. For these reasons, we support H.R. 698 as introduced 

by Chairman Frank, Congressman Gillmor, and other sponsors on 

the committee. 

Thank you, and I’ll be happy to take questions. 

[The prepared statement of Director Reich can be found on page 

183 of the appendix.] 

The CHAIRMAN. Thank you, and next we have Mr. Robert Colby, 

who is the Deputy Director of the Division of Market Regulation of 

the SEC. Mr. Colby, thank you. Please go ahead. 

STATEMENT OF ROBERT COLBY, DEPUTY DIRECTOR, MARKET 

REGULATION, SECURITIES AND EXCHANGE COMMISSION 

Mr. COLBY. Thank you. I’m very pleased to have the opportunity 

this morning to describe the Securities and Exchange Commission’s 

program for supervising U.S. securities firms on a consolidated 

basis and how this provides protection to all regulated entities in 

the consolidated group including industrial loan companies that are 

the topic of this morning’s hearing. 

And I appreciate the discussions we’ve had with Chairman Frank 

and his staff about possible amendments to H.R. 698 that would 

avoid subjecting U.S. securities firms already supervised by the 

Commission under comprehensive and effective program to a second and duplicative consolidated supervision regime. 

The Commission currently supervises five of the major U.S. securities firms on a consolidated or group-wide basis. For such firms, 

referred to as Consolidated Supervised Entities, or CSEs, the Commission oversees not only the U.S.-registered broker dealer, but 

also the holding company and all affiliates on a consolidated basis. 

These affiliates also include other regulated entities such as foreign 

15

registered broker dealers and banks as well as unregulated entities 

such as derivatives dealers. 

Four of the CSEs, Goldman Sachs, Lehman Brothers, Merrill 

Lynch, and Morgan Stanley own ILCs that account for 1.1-, .7-, 7.2-

, and 1.2 percent of their consolidated assets respectively. Three of 

the firms, Lehman Brothers, Merrill Lynch, and Morgan Stanley 

also own thrifts that account for 3.8-, 1.7-, and less than one onehundredth of one percent of their consolidated assets respectively. 

The CSE program provides consolidated supervision to investment bank holding companies that’s designed to be broadly consistent with the Federal Reserve oversight of bank holding companies. This prudential program is crafted to allow the Commission 

to monitor for and act quickly in response to financial or operational weakness in a CSE holding company or its unregulated affiliates that might place regulated entities, including U.S. and foreign registered investment banks and broker dealers or the broader 

financial system at risk. 

When a CSE firm has a regulated entity in the consolidated 

group that is subject to oversight by another functional regulator, 

the Commission defers to that functional regulator as the supervisor of the regulated affiliate. We also share relevant information 

concerning the holding company with our fellow regulators both domestically and internationally. The Commission’s CSE program has 

been recognized as equivalent to that of other internationally recognized supervisors, including the U.S. Federal Reserve, for purposes 

of the European Union’s Financial Conglomerate Directive. 

While maintaining broad consistency with the Federal Reserve 

holding company oversight, the CSE program is tailored to reflect 

two fundamental differences between investment bank and commercial bank holding companies. First, the CSE program reflects 

the reliance of securities firms on market-to-market accounting as 

a critical risk and governance control. Second, the design of the 

CSE program reflects the critical importance of maintaining adequate liquidity in all market environments for holding companies 

that do not have access to the external liquidity provider. 

The Commission’s concern regarding the need for group-wide risk 

monitoring, which developed over the course of a number of years 

beginning with the Drexel Burnham liquidation in 1990, was paralleled by the European Union’s Financial Conglomerate Directive, 

which essentially requires non-EU financial institutions doing business in Europe to be supervised on a consolidated basis. 

In response, in 2004, the Commission crafted a new, comprehensive consolidated supervision program that was intended to protect 

all regulated entities within a group, including broker-dealers. The 

rule restricted CSE eligibility to groups with large and well-capitalized broker-dealers. The Commission believed that it could only supervise on a consolidated basis those firms engaged primarily in securities business and not holding companies that are affiliated with 

the broker-dealer as an incident to their primary business activities. To this end, the rule effectively requires that the principal 

broker-dealer have a tentative net capital of at least $5 billion. 

The CSE program has five principal components. First, CSE 

holding companies are required to maintain and document a system of internal controls that must be approved by the Commission 

16

at the time of initial application. Second, before approval, and on 

an ongoing basis, the Commission examines the implementation of 

these controls. Third, CSEs are monitored continuously for financial or operational weakness that might put at risk regulated entities within the group or the broader financial system. Fourth, CSEs 

are required to compute a capital adequacy measure at the holding 

company level that’s consistent with the Basel standard. Finally, 

CSEs are required to maintain significant pools of liquidity at the 

holding company where these are available for use in any regulated 

or unregulated entity within the group without regulatory restriction. 

I’d like to point out that these five principal components are implemented in conjunction with the authority to protect regulated 

entities within the groups. When potential weaknesses are identified, the Commission has broad discretion under our rules to respond. For example, the Commission could mandate changes to a 

firm’s risk management policies and procedures, effectively require 

an increase in the amount of regulatory capital maintained at the 

holding company, or require an expansion of the pool of highly liquid assets held at the parent. 

These powers are not theoretical abstractions. All three of these 

steps have been taken at various CSEs over the past 2 years. 

This program of consolidated supervision reduces the likelihood 

that weakness within the holding company or an unregulated affiliate will place a regulated entity including the ILC or the broader 

financial system at risk. My written testimony describes in greater 

detail the means by which we monitor the financial operational 

condition of the holding company. 

In conclusion, while we generally support the goals of H.R. 698, 

the bill as introduced would subject the CSEs that are already 

highly regulated under the Commission’s consolidated supervised 

program to an additional level of duplicative and burdensome holding company oversight. We believe the bill should be amended to 

recognize the demonstrated ability of the Commission to comprehensively supervise the consolidated groups that are overwhelmingly in the securities business, especially given the heightened focus on these issues in an area of increased global competitiveness. 

Because the Commission has established a successful consolidated supervision program based on its unique expertise in overseeing securities firms, the CSE should be carved out of this legislation in the same way as the holding companies supervised by the 

Federal Reserve and OTS. 

Thank you again for the opportunity to speak on behalf of the 

Commission. 

[The prepared statement of Mr. Colby can be found on page 71 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Colby. And finally I want to 

again welcome Commissioner Leary from the Department of Financial Institutions, State of Utah. He has been very accommodating 

in appearing before the committee and helping us in our deliberations. Commissioner, thank you, and please proceed. 

17

STATEMENT OF G. EDWARD LEARY, COMMISSIONER, 

DEPARTMENT OF FINANCIAL INSTITUTIONS, STATE OF UTAH 

Mr. LEARY. Good morning. Thank you, Chairman Frank, Ranking Member Bachus, and members of the committee. Thank you for 

the opportunity to share Utah’s view on H.R. 698, the Industrial 

Bank Holding Company Act of 2007. 

I am Edward Leary, commissioner of financial institutions for 

the State of Utah. I have been involved with banking for 33 years, 

first as a community banker, then 15 years in various bank examiner positions with the Utah department and for the last 15 years 

as its commissioner. 

The Utah Department of Financial Institutions views H.R. 698 

as unnecessary and an effort to restrict and restrain state-chartered industrial banking without a valid safety and soundness concern or a crisis. Utah believes there is good supervision and good 

regulatory model over the industry without a question of the competency of the regulators in that there has not been an industrial 

bank failure warranting this change in public policy. 

I believe that I am here today because of the success of that regulatory model, not its failure. Utah, in partnership with the FDIC, 

has built a regulatory model to which the financial services market 

has reacted favorably. 

This regulatory model is not a system of lax regulation and supervision or inadequate enforcement. Utah industrial banks are 

safe, sound, and appropriately regulated by both the State which 

charters them, and the FDIC, which is the relevant Federal regulator and deposit insurance provider. 

I am told the articulated threat which warrants passage of this 

bill is a potential threat of misuse of the charter by holding companies which are non-financially oriented. This bill seeks to remove 

a potential threat even before the threat has materialized or manifests itself. 

We should be clear. We are talking about an industry today that 

constitutes 1.8 percent of banking assets. This is not a systemic crisis that threatens banking. 

An analysis of the numbers as of December 31, 2006, developed 

by Utah, indicates that we hold 88 percent of all industrial bank 

assets. Based upon our knowledge of the holding companies, we estimate that 86 percent of Utah industrial bank assets would be 

considered held by financial entities, constituting 22 companies, 

and 14 percent by non-financial entities, constituting 9 companies. 

Our analysis is that 7 of Utah’s industrial banks, representing 

approximately 80 percent of our assets are subject to consolidated 

Federal agency supervision at the holding company level. The Federal agencies we considered are: one, the Federal Reserve, with jurisdiction over our 2nd largest bank; the OTS, with jurisdiction 

over our largest, 3rd, and 4th largest banks; and the SEC, with jurisdiction over our 6th largest bank. 

The record of the last 18 months is that no de novo industrial 

bank charter was approved by the FDIC from November 4, 2005, 

until March 20, 2007. H.R. 698 will dismantle a Utah industrial 

banking industry of 31 charters and a regulatory structure that 

has matured over 20 years with a record of safe, sound operations 

to forestall one entity from being granted a charter. 

18

This bill, with its provisions that are designed to block any and 

all conceivable ways in which a retailer may employ an industrial 

bank charter today or in the future are disappointingly anti-competitive and anti-consumer. The targeted large retailer withdrew 

its application with the application having never been accepted by 

the Utah department. 

H.R. 698 provisions are being justified under the text of preserving the prohibition against the merging of banking and commerce. The broad brush strokes of this bill include as collateral 

damage large financial arms of entities which have been in the financial arena for decades, such as Daimler Chrysler and Ford. 

The former submitted an application for an industrial bank charter in May of 2005, which was approved by my State a year ago. 

Now, under the provisions of this bill, we will not be allowed to 

proceed. This is a disappointing outcome when other auto lenders 

have a bank charter. 

The supporters of 698 present the bill as a compromise piece of 

legislation. I am challenged to determine how this bill is a compromise when industrial banks do not receive additional powers or 

authorities or have any of the current restrictions lifted, let alone 

given the right to issue commercial mal accounts as has previously 

been passed by this committee. 

As a State regulator, what is most disappointing to observe is 

that while this committee is aggressively moving H.R. 698, a bill 

which restricts and limits the one segment of state-chartered banking that could be identified as innovative and creative, Congress 

has not taken seriously the threat to State banking of the broad, 

Federal preemption of State laws by the Comptroller’s office. Many 

State commissioners believe that without congressional intervention, the diminishing assets under State charter will eventually 

render the State banking system irrelevant. 

In conclusion, the industrial banking industry represents 1.8 percent of total banking assets. This is not an industry which threatens the safety and soundness of banking. The regulatory model is 

not a parallel bank regulatory system in that 80 percent of Utah 

assets are subject to Federal agency oversight at the holding company level. 

Thank you for allowing me the opportunity to express my 

thoughts and for your willingness to listen to a State regulator. 

[The prepared statement of Mr. Leary can be found on page 149 

of the appendix.] 

The CHAIRMAN. I’m going to begin with that. Your suggestion 

that we don’t pay attention to State regulators is really unfounded, 

and I vigorously disagree with your assertion that we are ignoring 

the implications for federalism of the preemption decision. 

Many of us in this committee last year were quite active in opposing that. When party control changed, frankly, and some of us 

had the opportunity to do something about it, we held off because 

of the pendency of the Wachovia decision. And, frankly, contrary to 

the suggestion you made implicitly, I think it would have been irresponsible for us to have jumped in while the Wachovia decision was 

pending, because there was a real issue there. The Supreme Court 

voted 5 to 3, I think, if Justice Thomas hadn’t recused, looking at 

the past, it would have been 5 to 4. Well, a 5 to 4 decision sugVerDate 0ct 09 2002 18:13 Aug 13, 2007 Jkt 036820 PO 00000 Frm 00022 Fmt 6633 Sfmt 6633 K:\DOCS\36820.TXT HFIN PsN: TERRIE
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gested there was some real uncertainty. And, no, we couldn’t act 

until we knew that. 

Now many of us do plan to act, and the gentlewoman from New 

York and I have had several conversations about this. I don’t know 

that we—I don’t think, to be honest, that we’re in a position to 

have the votes to overturn that. We do plan to ask the Comptroller 

and the Office of Thrift Supervision, who are the ones who now 

have preempted, to tell us what they plan to do with regard to enforcement. And that includes trying to restore, in my judgment, 

some State visitation rights. So I just want to clear up what I think 

is an erroneous suggestion that we have been indifferent to that. 

And as I said, we would have started on it quicker, but we waited 

for Wachovia. We have had these conversations. 

Second, I just want to ask you, would you favor legislation that 

removed the restriction on the granting of ILC charters to only 

those six States that were grandfathered? 

Mr. LEARY. I have been asked in numerous forums, Mr. Chairman, how I address that issue that only six, I believe the exemption granted in— 

The CHAIRMAN. No, I just asked you—no, excuse me, Mr. Leary. 

Excuse me. History isn’t the fact here. I’m asking you as a matter 

of public policy if you would support our removing that restriction 

and allowing every State to do it. 

Mr. LEARY. I have no problem with that, provided that the safety 

and soundness and the— 

The CHAIRMAN. Well, I have no problem with—are you in favor—

would you support such a bill? 

Mr. LEARY. I am. 

The CHAIRMAN. What about the fundamental distinction between 

banking and commerce that’s in Gramm-Leach-Bliley? Would you 

support that? I say that because some advocates of the ILC say 

really that’s a mistake to have that, to maintain that restriction. 

Would you maintain it or abolish it? 

Mr. LEARY. I went on record last time when I was in front of the 

subcommittee saying I do not favor repeal of the Bank Holding 

Company Act, no. I’m a lifelong regulator; I believe in slow, measured steps towards this system. I believe what Utah created is a 

safe and sound system. I am articulating, I hope— 

The CHAIRMAN. So you would maintain the distinction between 

banking and commerce? 

Mr. LEARY. I would work towards a system where this could be 

more competitive than it currently is. 

The CHAIRMAN. I don’t understand that. Would you maintain the 

distinction between banking and commerce? 

Mr. LEARY. I do not believe that I would. 

The CHAIRMAN. So you would do away with the distinction—you 

would do it more slowly than some others might. But you— 

Mr. LEARY. I would do it, as I tried to say, in slow, measured 

steps. 

The CHAIRMAN. Okay, and I think that puts it fairly. I think 

that’s a defensible and actual position with which I disagree. I do 

not think it is a defensible and actual position to say that we 

should maintain the distinction between banking and commerce 

and allow six States to be exceptions from it. You haven’t mainVerDate 0ct 09 2002 18:13 Aug 13, 2007 Jkt 036820 PO 00000 Frm 00023 Fmt 6633 Sfmt 6633 K:\DOCS\36820.TXT HFIN PsN: TERRIE
20

tained that. Others have. And I do think it’s—people ought to understand the implications of what we are doing. 

Let me ask Chairwoman Bair, who has a major role in this, and 

whose administrative limbo we hope to—I notice that the Pope is 

thinking of doing away with the kind of ambiguous category. We 

should do at least the same for you. 

[Laughter] 

The CHAIRMAN. But one—look, the House is going to pass a bill 

that I believe is fairly restrictive. I also understand that the Senate 

is probably not going to pass a bill similar to ours. Indeed, there 

are days, of course, when one wonders whether the Senate will 

ever pass any bill at all on anything, but that’s a broader set of 

questions. 

If we were to go to a House-Senate conference in which something very much like the bill the gentleman from Ohio and I have 

sponsored had passed the House, and a bill had passed the Senate 

that allowed for some things. It’s no secret. The commissioner mentioned, for instance, the Daimler Chrysler and Ford situations. 

There is a GM thing, and we appreciate it, and as you know, 

when GM wanted to sell to Cerebus, we communicated that we 

thought that was a situation that could get resolved. It’s not a secret that the Senate is probably going to do, I believe something, 

not quite as restrictive as—if the Senate were to pass legislation 

that allowed for some continuation but with some restriction—or 

let’s put it this way. If you were given the authority, not that you 

asked for it, but if you were given the authority to grant sort of 

limited extensions, would you have the power now to enforce that? 

I guess that’s the question. That if there is—there will be two questions. 

Is there a hybrid of some sort? And the gentleman from Ohio and 

I want as little of that as possible. I’m not encouraging it or asking 

for it, but I recognize that it may happen. If it does, it does seem 

to me then the one critical question will be, what will be the enforcement, the capability of the FDIC to impose these restrictions 

and subsequently to enforce them? Would you address that? 

Ms. BAIR. The Fed and FDIC both agree that the current exception is quite broad. So for us to come in and say, certain categories 

of commercial owners can have ILCs and certain categories cannot, 

I don’t see how we can do that under the existing framework, 

which is again where we think legislation would be very helpful. 

We’re not taking a position about where to draw the line, but we 

think clarification would be very helpful. So, once Congress clarifies 

what those parameters are, yes, we would have—or we could use 

our existing enforcement authority regarding the ILC. And assuming we were given holding company authorities, we would be able 

to supervise them. 

The CHAIRMAN. And we would do that for all of the agencies. And 

I do want to say in closing, we appreciate the cooperation, frankly, 

that we’ve seen from all of the agencies here. And maybe you 

have—the fact that were all able to cooperate so well may to some 

extent alleviate the FSA envy that appears to have run through 

the American financial entities in which the lament the fact that 

there are so many of you and dream of having only one. 

21

Since that dream is not going to come true, we are pleased that 

you were able to show them an ability to cooperate in this situation. 

The gentleman from Alabama. 

Mr. BACHUS. Thank you, Mr. Chairman. My first question I’ll 

just ask all the regulators is, I’ll start with Chairman Bair maybe 

and work across. Have ILCs, including those owned by commercial 

firms, posed safety and soundness problems to a greater or lesser 

extent than those depository institutions owned by traditional bank 

holding companies? 

Ms. BAIR. No. The safety and soundness record to date is very 

comparable to that of other types of depository institutions. That 

was acknowledged in the GAO report. I would also add that actually the commercially-owned ILCs have the better safety and 

soundness record. Among commercially-owned ILCs, as well as 

Utah-chartered ILCs, there has never been a failure. 

Mr. BACHUS. Okay. Anybody? 

Mr. KOHN. No, sir. I don’t think that the ILCs to date have posed 

an unusual safety and soundness issue. But as all of us have pointed out in our testimony, we’re really at the cusp of a change, a 

wave of change, in how the ILC charter has been used. Some of 

those changes are very recent, and therefore the amount of deposits 

and assets in ILCs have grown extraordinarily rapidly in the last 

few years. And if something isn’t done, it’ll grow even more rapidly 

in the future. 

So, yes, this is about a potential problem. 

Mr. BACHUS. Okay. 

Mr. KOHN. And the potential problem is the inadequate supervision and regulation of the companies that own ILCs. 

Mr. BACHUS. All right. There’s a notion that if commercial companies own ILCs, the deposit insurance fund is at risk if the company encounters financial difficulties. Is that true? And I guess as 

the assets grow, it becomes— 

Mr. KOHN. I think there’s a history of problems spilling from one 

part of a holding company to another, even when—say, the insured 

entity in the holding company has been well-regulated. There are 

reputational risks. There are legal risks. Many of these ILCs and 

banks, for that matter, are managed on a very closely integrated 

basis with their affiliate companies. 

The companies that manage depository institutions and holding 

companies don’t really differentiate between the depository institution, many of them, and the other entities. The public is looking 

at the consolidated entity. Therefore, it doesn’t really differentiate, 

and many of the depository institutions rely on the affiliates for 

many of the services they use. 

So, I think there is a history of problems occurring outside the 

depository that impugn and reflect on the reputation of the depository itself. That’s why Congress itself in 1957, 1970, 1987, and 

1999 decided that consolidated regulation was the way to protect— 

Mr. BACHUS. Okay. Let me—Mr. Leary, let me ask you. Has 

there ever been a case when an ILC owned by a commercial firm 

has had financial difficulty that affected the ILC? 

Mr. LEARY. In our case, the two cases which you could cite, 

which would be Conseco and Tyco, both—one case, the ultimate 

22

parent filed bankruptcy. In the second one, the parent had difficulties in both case. The industrial bank component within that entity 

in one case was sold off. In the other case, they spun it off in an 

IPO and actually incurred a premium from that. 

So, I would not want to represent that it was not without lots 

of concerns, blood, sweat, and tears. It successfully passed the test, 

and those examples are in my testimony. 

Mr. BACHUS. Okay. 

Mr. LEARY. May I respond to your question on commercial entities? 

Mr. BACHUS. Yes. 

Mr. LEARY. Because I don’t believe the lines are as solid as some 

would like to believe. Two of our nine nonfinancial entities, one of 

which is BMW, have already been cited. The other is Volkswagen. 

Both of those, while they are perceived in the United States as 

being commercial entities, have very large banking operations in 

Europe. So, I believe the line is not as strict as it is. 

And if I can beg your indulgence one step further, one of the others, Transportation Alliance Bank, is the one cited, I believe by 

Chairman Bair in her testimony, which has specifically targeted 

long-haul truckers and the trucking industry, which they believe is 

underserved by existing financial services companies. And they 

have targeted that business line and tried to provide financial services to that industry. 

Mr. BACHUS. You know, you’re talking about BMW and Volkswagen, I guess, are both German companies— 

Mr. LEARY. Correct. 

Mr. BACHUS. So they have a strong banking regulator in their 

home country. But what if it were, say, they were headquartered 

in a country that didn’t have a—where they weren’t subject to consolidated supervision in their home country? Would that concern 

you? 

Mr. LEARY. We would require them to establish U.S. operations. 

And before we’d even consider the applications, it would be strictly 

reviewed. I think as we looked at, for example, UBS, we relied on 

the FDIC to look at the home country supervisor and supervision 

at that level, but we also required strong measures and prudential 

standards when we chartered UBS Bank in Utah. 

Mr. BACHUS. I know Mr. Kohn mentioned that the ILC exception, 

however, allows a foreign bank that is not subject to consolidated 

supervision in its home country to evade this requirement and acquire an FDIC-insured bank with broad deposit taking and lending 

power. This gap in current law needs to be addressed. Would the 

two of you comment on that? 

Mr. KOHN. I think my testimony speaks for itself, Mr. Bachus. 

Congress passed that requirement after BCCI, which was a case in 

which there were regulated entities in the United States but problems overseas in a vast network of unregulated entities or inadequately regulated entities, that ended up spilling over into and 

onto the U.S. entities. 

So, just having a regulated entity in the United States, in 

Congress’s view, and I agree with it, was not sufficient to protect. 

Mr. BACHUS. Does this legislation set up such a protection, or 

would it still be— 

23

Mr. KOHN. Not as currently submitted. It does not have the requirement for consolidated supervision of a foreign entity. 

Mr. BACHUS. So a foreign bank in a country where it doesn’t 

have consolidated supervision could obtain a— 

Mr. KOHN. Could establish an ILC under the law, under the act 

as proposed, bill as proposed. 

Mr. BACHUS. Okay. Thank you. 

Mrs. MALONEY. [presiding] Thank you. The Chair recognizes herself for 5 minutes, and I raised the question with—the same question with Chairman Frank earlier, and he says that they are working with language that would require the consolidated supervision. 

So that is a positive step forward coming out of this hearing. 

I heard in some of the testimony that the current regulatory 

structure of the ILCs creates an uneven playing field within the 

banking industry. Could you please explain this further and what 

we can do to level this playing field? 

Ms. BAIR. Well, I think the argument is that ILCs chartered in 

the States specified in CEBA are exempt from Bank Holding Company Act regulation. I think that is at the core of the regulatory 

playing field argument. 

It has also been argued, especially by community banks, that it 

doesn’t work both ways. The commercial entities under the ILC exception can own banks, but banks can’t do commercial activities, so 

I think those are the arguments. 

Mrs. MALONEY. You outlined in your testimony, Ms. Bair, the 

regulatory tools for ILC parents being the same as for bank holding 

companies. If that was legislated into law, would that address this 

challenge? 

Ms. BAIR. Yes. There are a variety of holding company regimes. 

The Fed obviously is the leading bank holding company regulator. 

The OTS has also long been involved in holding company supervision, and the SEC has recently crafted its own system of consolidated supervision, so you have a variety of different approaches. 

We think, as my written testimony indicates, that we would like 

powers comparable to the Fed. If you’re going to make us a holding 

company supervisor, we think all three are certainly very good supervisors, but the Fed’s authorities under the Bank Holding Company Act would be most desirable. 

Mr. KOHN. Congresswoman, may I comment? 

Mrs. MALONEY. Surely. 

Mr. KOHN. There’s another aspect of the competitive inequality, 

and that’s the mixing of banking and commerce. So even under the 

bill as proposed, the ILCs would be able to have 15 percent commerce activities, and that is not permitted to financial holding companies and bank holding companies. 

So the supervision, the consolidated supervision, is an extremely 

important point, clearing up the foreign bank issue is an extremely 

important point, but it doesn’t go all the way to leveling the playing field. And the way to level the playing field is to simply close 

the loophole and make insured ILCs subject to the same regulations every other insured bank is subject to. 

Mrs. MALONEY. Under Gramm-Leach-Bliley, doesn’t that allow a 

15 percent— 

24

Mr. KOHN. No, ma’am, it does not. In Gramm-Leach-Bliley, there 

was a transition provision such that a financial holding company 

that had commercial activities would have some time to get rid of 

those commercial activities, but it must divest itself of those commercial activities. 

There is no commercial basket in Gramm-Leach-Bliley. And the 

Federal Reserve gives banks—or financial holding companies—2 

years, which can be extended for a couple of years, up to 5 years, 

to divest themselves of all their commercial activities. There are no 

commercial activities, except as might be incidental to a financial 

activity, allowed in Gramm-Leach-Bliley. There is no 15 percent 

basket there. 

Mrs. MALONEY. Would you elaborate further on the risks of mixing banking and commerce? You seem tremendously concerned 

about this. What are the conflicts of interest that arise between the 

bank and the commercial transactions of a business? Could you 

elaborate further why you feel this so-called loophole should be 

closed? 

Mr. KOHN. I think mixing banking and commerce raises a number of very difficult issues that the Congress needs to consider thoroughly before allowing even a limited exception to this. 

There is the potential for conflicts of interest. Is the bank making 

loans on more favorable terms to its affiliates—there are restrictions here—or to customers of its affiliates, than it would to a customer of an unaffiliated institution? If a commercial firm owns a 

bank, can competitors of that commercial firm have the same access to credit on the same terms as the commercial firm itself? 

There are issues about the potential for spreading the safety net. 

Banks are special. They have deposit insurance. They have access 

to the discount window. Congress has recognized that this carries 

the risk that there will be a perception that they have specific protections. They have access to the safety net. 

I think because, as I noted before, banks and their affiliates often 

operate on a very consolidated basis, there’s a risk that when a 

commercial affiliate is connected with a bank, the perception will 

be that the authorities wouldn’t let problems in that commercial affiliate sort of cascade into the bank, that the commercial affiliate 

would have a special access to the safety net. 

And finally, as I think Mr. Marshall pointed out in his opening 

comments, I think the consolidated regulation that we’re talking 

about imposing would be much more difficult if there is a commercial component to the holding company. Working with the SEC, the 

thrift regulators, and insurance regulators, I think we have a better handle on the safety and soundness of non-bank financial affiliates of banks. 

I think this would be very, very difficult to really do effective 

consolidated regulation if there is a commercial affiliate of the regulated institution. 

Mrs. MALONEY. Well, this is—just very briefly, could we just go 

down the line and see how people feel? Do they feel that this is—

that the 15 percent commercial activity is a challenge? Ms. Bair? 

Ms. BAIR. We think the 15 percent is workable. We’re being agnostic about where you want to draw the line. I would say, again, 

in the past, there already has been some experimentation with 

25

commercial ownership with the ILC charter to date. We have a 

good safety and soundness record to date. It certainly would also 

be within the prerogative of the committee to allow some limited 

mixing using this 15 percent criterion. 

In our view, it’s the committee’s decision. It’s a policy call to 

make. 

Mrs. MALONEY. Okay. 

Mr. REICH. I would agree with Chairman Bair. It certainly is the 

committee’s policy call. I think there are other examples, particularly in the tax code, where 15 percent has been used sort of as a 

de minimis level of unrelated income. 

Mr. COLBY. This is not an area of core expertise for the Commission. We really think it’s an area for the Congress to decide. 

Mrs. MALONEY. Okay. Commissioner? 

Mr. LEARY. I would endorse it, yes. I believe what we have attempted to do in Utah is to very effectively work within this core 

threat of having a commercial parent and allowing a basket, whatever the committee establishes, I think we would be very comfortable with. 

We are currently working with General Electric, that has an 

OTS bank and a Utah Industrial Bank, and I think we are working 

very carefully at ensuring that safety net does not extend to the 

whole GE operation, that we isolate that—those insured entities 

very carefully. 

Mrs. MALONEY. Okay. My time has expired. Mr. Gillmor, the cosponsor of the legislation. 

Mr. GILLMOR. Thank you, Madam Chairwoman. A couple of questions, Commissioner Leary. You stated a number of times that the 

legislation would restrict banks and would make State banking irrelevant. 

I don’t think that’s an accurate description of the legislation. The 

legislation doesn’t do anything to affect the operation of the bank. 

Nothing. The only thing the legislation deals with—well, I’ll ask 

you. Maybe you could point out specifically what it does to restrict, 

because mainly what we’re talking about is ownership at a holding 

company. 

Mr. LEARY. I would answer it this way, sir. In our case, we’ve 

approved three charters that the FDIC, under its moratorium, has 

not been able to successfully approve. We would not have approved 

those charters if we did not believe they warrant the granting of 

the charter and warrant the granting of deposit insurance from the 

entities. 

I believe that what we have developed is a safe and sound model. 

Mr. GILLMOR. Well, I guess the other thing I’d like you to do, 

since other state-chartered banks and other banks are subject to 

these same rules, do you think those rules restrict them? I mean, 

why would it only restrict ILCs? 

Mr. LEARY. I would probably take a tack that I’ve developed in 

my own logic trail over the years. 

What I believe we’re doing with a number of these companies is 

when they’ve been identified as commercial entity, I do not see it 

much differently than the majority of my community banks that 

are primarily owned by businesspeople in the community, whether 

it’s the lumber operator, the gas station owner, or whatever. So, 

26

they bring with them a specific commercial expertise and a commercial perspective. I think that’s very similar to what we’re doing 

with some of these companies. 

Do we want to isolate that and provide safety and soundness 

mechanisms? I believe Regulation 23A and B does that, and for the 

ILCs, we religiously enforce that upon them. So, my answer is, I 

think there is conceptually, it’s not far to go from businesspeople 

owning a community bank to an entity that is large that has a 

small component which is an insured bank. 

I hope I’ve answered your question. 

Mr. GILLMOR. I think we just have a different philosophy. For example, when you said that restricting commercial ownership of 

ILCs would be anticompetitive, do you think the Bank Holding 

Company Act is anticompetitive? 

Mr. LEARY. No. But I think I’ve already gone on record as saying 

I think there are some areas that could be worked on. Do I endorse 

repealing? No. 

Mr. GILLMOR. You don’t endorse repealing that? 

Mr. LEARY. I do not. 

Mr. GILLMOR. But you don’t want ILCs subject to comparable 

type of provisions? 

Mr. LEARY. I think they are. Everybody keeps talking about the 

one side, but the ILCs are limited. They cannot have demand deposits if they exceed $100 million. I brought up in my remarks that 

at one point, the committee passed a bill that would allow commercial NOW accounts for ILCs, somewhat leveling the offerings that 

the industrial banks can offer to their customers. 

So, I think it’s a very delicate balance, but I do not have a problem with what we’re doing here, provided it’s safe, and provided it’s 

sound. 

Mr. GILLMOR. Okay. Thank you. Let me ask the SEC, because 

there’s a possibility under this legislation that you’re going to be 

a consolidated regulator. If you were given the power to regulate 

industrial bank parents, depending on what kind of parent it is, do 

you think the SEC would have to request additional powers to provide for safety and soundness, or are you equipped now to do that? 

Mr. COLBY. I believe that the program that we’re currently operating can take into account the needs of the ILC because the possibility that what happens in the holding company could affect the 

ILC, so I don’t think you’d need more safety and soundness power. 

Mr. GILLMOR. Okay. 

Mr. COLBY. But if the Congress decides that’s something that’s 

appropriate for the bank regulators to have, we wouldn’t oppose it. 

Mr. GILLMOR. Let me ask Mr. Kohn. Mr. Leary said that it would 

be okay, in his view, to repeal the Bank Holding Company Act. 

Would you like to make the other case? 

Mr. KOHN. I think I already did, Mr. Gillmor. And I will just repeat that I think the mixing of banking and commerce would be 

a very major step. The U.S.—Mr. Bachus cited two German firms 

that operate in a country in which banking and commerce have 

been closely integrated over the years. I think the U.S. financial 

system has benefitted considerably by having these two separate. 

We have a much more resilient financial system in which commercial firms have many avenues for raising funds that are not tied 

27

to their banks. And as a consequence, I would tread very, very 

lightly on moving away from a formula that has given us, I think, 

a very safe banking system, a resilient financial system, one in 

which of course there are always difficulties and conflicts of interest, but have stayed away from some of the difficulties that could 

arise if we mixed banking and commerce. 

I don’t know that the answer is zero banking and commerce, but 

I think I would be very cautious about moving away from what 

Congress just looked at 8 years ago and made a very conscious decision that zero was the right number. 

Mr. GILLMOR. Thank you very much. I was going to throw a softball to Chairman Bair, but my time has expired, so I yield back. 

The CHAIRMAN. I thank the gentleman for his restraint. And I 

now recognize the gentleman from New York who has been very interested in this and has an issue that we’re going to pursue. I guarantee him that at some point, it’s going to get resolved; we’re just 

not sure when. The gentleman from New York. 

Mr. MEEKS. I was going to ask their opinion on that particular 

issue just to see what their interpretation would be on a hypothetical situation that I’ve been working with the chairman on. 

And that is, say there’s a company that is primarily financial in nature. It receives its approval for an ILC to finance a particular 

service industry after October 1, 2003, but before 2007. The parent 

company receives some commercial revenue of less than 10 percent. 

In the years following 2007, the commercial revenue of the parent 

company exceeds 15 percent. Are there any restrictions upon the 

ILC once that 15 percent commercial revenue threshold has been 

reached or exceeded? What’s your opinion? 

Ms. BAIR. Well, this is a question about the construction of the 

legislation. As I understand it, if it’s chartered between October 

2003 and January 2007, it is not subject to the 15 percent. However, its business plan is frozen and it is prohibited from additional 

branching. So, even though the 15 percent commercial revenue limitation would not apply, it could not undertake new activities beyond what is already in its business plan, nor could it establish 

new branches. 

Mr. MEEKS. Do you agree? 

Mr. KOHN. Yes, I agree. 

Mr. MEEKS. Okay. Let me ask Ms. Bair, do you believe that the 

FDIC currently has the authority that it needs to fully deny an ILC 

any future powers that it may request? 

Ms. BAIR. Well, in terms of the activities of the ILC, yes. That 

is subject to exactly the same activity restrictions that other depository institutions are subject to. We’re finding that most of the 

issues relate to commercial entities owning an ILC. But in terms 

of the ILC’s activities itself, those are subject to the same restrictions. 

Mr. MEEKS. And, Mr. Kohn, I know that you believe that we 

should separate—that commercial entities shouldn’t own ILCs, etc. 

But say if, in fact, they continue to own them, who do you think 

should regulate them? Should it be the FDIC which currently regulates, or the Federal Reserve Bank, which has more experience 

with consolidation regulation? 

28

Mr. KOHN. I think the most important thing is that someone 

should regulate the consolidated entity. That’s my first point. 

Mr. MEEKS. You should be up here. That’s a political answer. 

Mr. KOHN. Secondly, I think that if Congress were to give this 

authority to the FDIC, it would be creating another parallel regulatory environment. We already have both the Fed and the OTS 

regulating financial holding companies, depending on the nature of 

the subsidiary depository institution. This would create a third line 

of regulation, one that could define financial in a different way 

than the Federal Reserve defines financial. 

So I would think Congress should think very carefully before creating another line of parallel regulation for consolidated entities. 

Mr. MEEKS. Ms. Bair, do you agree? 

Ms. BAIR. We are not seeking to become a holding company supervisor. We’re happy to have the authorities should Congress decide to grant those to us. We have tremendous respect for the Fed. 

If we were given those authorities, we would consult with them 

closely. I agree. We would not want differentiations in how financial is defined. 

I would also have to say that if you let the SEC in, you’re going 

to have four. But, you know, I think the argument for allowing the 

FDIC to become holding company supervisor is that we do have the 

longest history with this industry, with these individual institutions. Also, the Fed already has two ILCs in holding companies 

subject to Fed supervision. Eight are under the OTS. And I believe 

four more would be under the SEC if you recognize them. So it 

would only be with regard to the remaining institutions where we 

would be having that role. 

Mr. MEEKS. Thank you. I yield back. 

The CHAIRMAN. The gentleman from Texas, Mr. Neugebauer. 

Mr. NEUGEBAUER. Thank you, Mr. Chairman. Ms. Bair, in your 

testimony you specified that there are four categories of ILCs, and 

the fourth one is those that directly support the parent companies’ 

or organizations’ commercial activities and that they can maintain 

those entities by funding them, the parent, through forms of deposits, borrowings, and equity and so forth. How does your regulatory 

or oversight of those ILCs differ from the other ILCs that you oversee? 

Ms. BAIR. Well, those types of applications obviously go through 

a very stringent Section 23A and 23B review. This is an area 

where we very closely consult with the Fed in terms of how to interpret and apply those provisions, and our supervisory program 

also heavily scrutinizes those relationships to make sure there is 

full compliance with 23A and 23B. 

Mr. NEUGEBAUER. And have you ever experienced any problems 

with those relationships? 

Ms. BAIR. There is one institution that comes to mind, though I 

don’t like to talk publicly about individual cases. If you’d like to 

submit a question in writing, we can have our general counsel put 

something together to respond to that. 

Mr. NEUGEBAUER. All right. Thank you. I guess this is a question 

to the panel as a whole. If we go forward with this legislation, we 

are going to, in fact, grandfather some institutions that came in 

under the previous regulation, and, therefore, if there are other orVerDate 0ct 09 2002 18:13 Aug 13, 2007 Jkt 036820 PO 00000 Frm 00032 Fmt 6633 Sfmt 6633 K:\DOCS\36820.TXT HFIN PsN: TERRIE
29

ganizations that would be, you know, competing with those organizations, in fact they are now going to maybe have a competitive advantage because they were grandfathered. 

Is that good, fair, consistent policy for this country? And I’ll just 

go down the— 

Ms. BAIR. Well, I don’t know how else to do it. You had to do it 

when you closed the non-bank bank loophole. You had to do it 

when you closed the unitary thrift loophole, and inevitably, there 

are going to be some winners and some losers. 

Mr. KOHN. I agree with Chairman Bair. I think the problem, as 

she notes, is that you can’t make everybody happy here. I think the 

most important thing is to cut things off. And there are people who 

have been operating under this charter for a while, and they 

should be allowed to continue operating under the charter. 

But it would give them at least some competitive advantage 

against others, as I think Commissioner Leary was pointing out 

about the auto companies. But I think that’s kind of the lesser of 

the evils. I’d rather have the loophole closed, people grandfathered 

in, and have no more going forward. 

Mr. REICH. It would not be a perfect solution by any means, but 

it would—it is about the only option you have if you were to move 

in that direction. 

Mr. COLBY. I have nothing to add to that. 

Mr. LEARY. From my perspective, I don’t believe the cutoff is 

needed. 

Mr. NEUGEBAUER. Mr. Leary, if this legislation—because your 

State is one of the States that still allows that kind of activity—

what do you see the impact moving forward with future ILC applications and activity in your State? 

Mr. LEARY. With the commercial activity restricted? I would hope 

it would continue. I cannot predict how it would continue. I would 

simply indicate that while Utah may be an anomaly in that our 

commercial bankers and our industrial bankers are in the same association and work well together thus far in all of these operations, 

I would hope that it would continue. 

Mr. BACHUS. Would the gentleman yield? 

Mr. NEUGEBAUER. Yes, I would. 

Mr. BACHUS. In the conversation about our automobile manufacturers, you said the only option would be to close the loophole and 

leave some in and some out. Obviously, what concerns many of us 

is that Ford and Chrysler are the two that do not have ILCs are 

our domestic producers, two of our three domestic producers. And 

our domestic automobile manufacturers, I think, are very important in a bipartisan way. 

I guess there would be another solution, and that’s as only to 

automobile manufacturers to allow a continuing or to allow a certain space of time to those that had made application. Any comment on that? 

Mr. KOHN. I think I’d be a little concerned that once you crack 

the door, people would be pushing against it, and more would want 

to come in. So I do think the— 

Mr. BACHUS. Of course if it were narrowly drawn and in that one 

regard. But I understand, it is a quandary. 

30

The CHAIRMAN. If the gentleman would yield. My sense is, and 

I know the gentleman from Ohio and I have talked about this, my 

impression is that’s an issue we will be dealing with when the bill 

comes out of the Senate. And sufficient unto the day is the evil 

thereof is, I think, the appropriate model there. 

But I do think being realistic, there will be some Senate negotiations, and I think there will be some distinction drawn ultimately—

this is a prediction—between those entities that are very limited to 

a kind of a self-financing situation in which they are processing 

some of their own paper, and entities that might seek a broader 

kind of franchise. But I do believe that’s something we will be dealing with at that time. 

Mr. BACHUS. Thank you. Because as you know, many members 

are concerned about that. 

The CHAIRMAN. The gentleman from Georgia. 

Mr. SCOTT. Thank you very much, Mr. Chairman. Let me start 

if I may by looking at this from a concept of what is in the best 

interests of the consumer. Because in the final analysis, that’s really what we’re here for. And that begs the question as to what is 

in the best interest of the consumer is the fact that the genie is 

sort of out of the bottle, because there are some companies who are 

already doing this. 

What empirical data do we have that these companies provided 

a threat to our way of life, to the banking system? There has been 

none. You have Target; you have GE; you have Sears; and a number of others. But in fact, in some cases, the consumer has benefitted through added consumer convenience and lower costs in some 

areas. But in each of your testimonies, there has been consistent 

woe, but there has been no evidence, no empirical evidence that 

those who have the charter have been threatening to the system 

in any way. And I was wondering. And by that, Ms. Bair, I mean, 

wouldn’t the FDIC, don’t you think that they have the current 

oversight to make sure that these safeguards are there? And again, 

what evidence do we have that— 

Ms. BAIR. Well, Congressman, you’re right. To date, the commercially owned ILCs have a good safety and soundness record. They 

have been the source of product innovations and expansion of financial services to certain segments of the population. 

I think what we’re really talking about is prospectively how far 

you want to go with this. The current ILC exception is quite broad, 

and I think a lot of the concern about some of the pending applications that have gotten so much press and controversy has been not 

so much about what’s currently being proposed, but what might 

happen in the future, where do we draw the line? Do you want 

major retailers being able to provide the full panoply of financial 

services? 

We’re being agnostic. Those are the kinds of policy issues that 

Congress needs to make. But, you know, I think they are good 

questions to be asking, and I think perhaps going forward, you do 

want to consider providing some limited ability to experiment with 

a very limited mixing of banking and commerce. Those are the 

right questions to be asking, but, again, we think it’s a policy call 

for Congress to make. 

31

Mr. SCOTT. Mr. Kohn, let me get to a point that you talked about 

in terms of some issues and complexities you said, conflicts of interest. Let us take an example. In the provision, isn’t it true that the 

ILCs have what we call an anti-tying prohibition that is a safeguard? 

Under this provision, an ILC could not condition a loan on a requirement that the borrower obtain services from an affiliate, and 

the affiliate could not tie a product sale to a requirement that the 

customer obtain banking services from the ILC. So, if the Home 

Depot, for example—it’s a good example here, which I think as we 

move this process along, I think the bill will move forward. And 

when it gets to the Senate, there’s going to be some deliberation. 

I agree with your point, but I do think that we ought not to sort 

of throw the baby out with the bath water here. But maybe to look 

at some of these situations on an individual basis. 

So, for example, if the Home Depot were to operate an ILC, they 

could not require contractors to finance their supplies through the 

ILC, nor could the ILC require loan applicants to use the loan proceeds to buy supplies from the Home Depot. And I point this out 

because the anti-tying requirement for traditional banks, on the 

other hand, are applicable only to the bank itself. 

So my—the point I want to make is that in some cases, for example, we take again the Home Depot case where this is going on 

now. I mean, it’s basically a design to have a major consumer benefit. Now a consumer comes in, and they want to expand their line 

of credit. We’re talking about a very small amount here that is certainly nonthreatening, but would be a major help to the consumer, 

to be able to transact his transaction there. 

Now this same process happens, but in this case, Home Depot 

has to go and farm this out to, say, a CitiGroup or a bank like that, 

when you could have it here. And I think with the anti-tying provisions in here, there should be safeguards in and of itself. 

Mr. KOHN. I think there are regulations in place and that could 

be put in place which help protect against this sort of thing. Now, 

whether they would really protect a consumer or a contractor who 

felt somewhat dependent on Home Depot, that consumer or contractor really felt that they had a fully panoply of choice and 

weren’t being pushed into the financial offering that Home Depot 

was tying to its transaction, I think is an open question. 

We’ve talked a lot about competition here, and the consumer. 

You’ve framed our question in terms of the consumer. There is a 

lot of competition in the financial services industry. There is relatively free entry into banking and thrifts. We charter hundreds of 

new institutions a year. I think if there is a need for financial services, there are people out there willing to start institutions or expand what they’re doing— 

The CHAIRMAN. Mr. Kohn, you have to wrap this up, please. 

Mr. KOHN. Okay. That concludes my response. 

The CHAIRMAN. Thank you. The gentleman from California, then 

the gentleman from Ohio. The gentleman from California. 

Mr. SHERMAN. Thank you. I got a button yesterday, ‘‘Don’t Mix 

Banking and Commerce.’’ I got it from the Independent Community 

Bankers Association and I’d put in the record, but the pin would 

stick people. 

32

And I’ve been interested to see the development of the whole idea 

of mixing banking and commerce. Because I’ve seen many bank 

regulators, particularly the Fed, be opposed to commercial institutions entering banking, and not nearly as opposed to banking institutions entering commerce. That is to say, when Wal-Mart wants 

to enter banking, the banking world says, Oh my God, look at 

Japan. Look at what happens when you mix banking and commerce.’’ 

But when banks want to go into real estate sales, auto sales, 

whatever, the bank regulators have been helping them, and we in 

Congress have stopped the presumed train wreck described by the 

community bankers when you mix banking and commerce. So perhaps you could comment, is it as bad an idea for bankers to get 

into commerce as for commercial organizations to get into banking? 

Mr. KOHN. I think it would be a bad idea for bankers to get into 

commerce in a major way. What we allow now are commercial activities that are incidental to the basic financial activities of the 

banks. This is under the guidelines put out by Congress. 

Mr. SHERMAN. But we could call anything incidental to banking. 

I bought this tie in a tie store, but I financed it on a credit card, 

and I hope before it wears out, I will pay off that bill. So it was 

a financial institution. In fact, the bank may make a larger profit 

on this tie than the haberdasher. 

That being the case, is it your position that anytime you sell 

something that has to get financed—and I’d like to hear from your 

colleague sitting to your left as well. 

Mr. REICH. I think we regulators are a pretty conservative group 

when it comes to banks expanding into a variety of commercial activities. We are not the cheerleaders for the banking industry to expand into commercial activities. 

Mr. SHERMAN. Is there anyone on the panel who thinks that real 

estate sales is somehow incidental to real estate financing or is for 

some other reason not part of commerce? Let the record show there 

were no responses, and I yield back. 

The CHAIRMAN. I thank the gentleman. The one example he did 

give might have been covered by the anti-tying rules. 

[Laughter] 

The CHAIRMAN. The gentleman from Ohio. 

Mr. WILSON. No questions. 

The CHAIRMAN. The gentleman from Colorado. 

Mr. PERLMUTTER. Pass. 

The CHAIRMAN. The gentleman from Utah probably doesn’t want 

to pass. I would note again, the gentleman from Utah is not now 

a member of the committee, but we did get unanimous consent, 

given his interest, for him to participate. 

Mr. MATHESON. And I would be remiss if I did not open by 

thanking both Chairman Frank and Ranking Member Bachus for 

their generosity in allowing me to participate today. It is very nice 

of you to do that. 

I have all kinds of questions in 5 minutes, so we’ll see how this 

goes. Mr. Leary, if you could just briefly confirm a couple of things 

for me. Number one, there were some references made in opening 

statements about lack of CRA participation by ILCs. Could you 

clarify what’s really going on with CRA participation? 

33

Mr. LEARY. I think from the State of Utah, and even from consumer activist groups, they would tell you CRA activity of the industrial banks in Utah is outstanding. They have been noted for 

proactive work. They are out there doing it the best they can. And 

what is unusual, while my background and experience is in community banking, the CRA group has sat down and tried to 

proactively figure out ways that create micro enterprise loan funds. 

They’ve created Utah Community Reinvestment Corporation. I 

think they’ve been very aggressive. 

Mr. MATHESON. Thank you. I think it’s interesting to note that 

from the chairman’s opening remarks to just about everybody on 

the panel, I think everybody here has said that there’s no safety 

and soundness issue to date in this industry. 

And it reminds me of when we had the subcommittee hearing in 

the last Congress, and when then-subcommittee Chairman Bachus 

concluded the hearing, he said, you know, legislation is usually a 

solution to a problem, and it isn’t clear where the problem is. He 

said that at the time, I’m not sure there is a problem. And I think 

that’s the underlying question we need to be talking about today 

is where is the problem? Since we’ve all apparently stipulated 

there’s no safety and soundness issue to date in this industry. 

And yet, Mr. Leary, some people are concerned that only six 

States benefit. You’ve already said you wouldn’t care if other States 

had access to this charter. 

Mr. LEARY. I do not. 

Mr. MATHESON. Is it your understanding that the beneficiaries of 

industrial-owned company services, namely, consumers, that those 

beneficiaries are in all 50 States, and in fact people throughout this 

country benefit from the industry? 

Mr. LEARY. Yes they are. 

Mr. MATHESON. Ms. Bair, I wanted to know, is it true—would 

you verify that the FDIC does in fact vigorously enforce Sections 

23A and 23B in the anti-tying provisions applicable to the banks 

you regulate? 

Ms. BAIR. Yes, we do. 

Mr. MATHESON. You said you were agnostic about what we do. 

But you enacted a moratorium, and I don’t know that that’s agnostic. 

Ms. BAIR. Yes. 

Mr. MATHESON. And you’ve extended the moratorium, and if you 

ask Mr. Leary about what that’s meant to people who are applying 

for charters, that is not a hold-harmless provision. That is not agnostic. 

Ms. BAIR. Yes. 

Mr. MATHESON. And I’m curious what’s happened at the FDIC to 

sort of change this position? Because if you look at what your predecessor said, I quote remarks before State bank supervisors in 

2003, after describing the FDIC’s examination of industrial loan 

banks, he said, ‘‘These organizations are rigorously and sufficiently 

supervised by the state supervisors and the FDIC on an ongoing 

basis.’’ 

And then he addressed concerns about oversight of the parent 

companies. And he said, ‘‘While I understand these concerns, the 

FDIC has, and often uses, a number of tools to manage both the 

34

holding company’s involvement with the financial institution and to 

manage transactions between the two entities. We can and do visit 

the parent companies and other affiliated entities for that matter, 

to look over issues or operations that could impact the insured institution. Congress has given us the power to protect the integrity 

of those relationships. We have exercised that power, and we have 

coordinated closely with you, the State regulators, in our work. We 

have found parent companies of ILCs to be acutely conscious of 

their responsibilities with respect to their ILC subsidiaries and the 

consequences of violating applicable laws and regulations.’’ 

He has also said, ‘‘We at the FDIC must be vigilant in our supervisory role, but I will reiterate, the FDIC believes the ILC charter 

per se poses no greater safety and soundness risk than other charters.’’ 

Ms. BAIR. Yes. 

Mr. MATHESON. What has changed? 

Ms. BAIR. Well, I could read excerpts from the GAO report, from 

our own IG, from a number of members of this committee and in 

the Senate, and from a number of public commentors who would 

raise a lot of concerns about the current regulatory structure. 

I felt when I came into this situation at the end of June last year 

that we needed to take a step back and evaluate all the issues, 

given that there were a lot of credible voices saying that the supervisory regime was not adequate. 

And, Congressman, I do honestly think that this controversy 

about the ILC charter is not going to go away, because there are 

in fact no meaningful limitations on the FDIC’s ability, other than 

safety and soundness considerations, to prevent major commercial 

entities from getting into banking in a very large way. That has 

not happened to date. 

Mr. MATHESON. And you’re questioning the FDIC’s ability to adequately regulate, along with the State, those— 

Ms. BAIR. I’m questioning whether the FDIC should be the decisionmaker in allowing major commercial retail entities to get into 

banking in a major way in this country. I don’t think that’s our decision right now. 

Mr. MATHESON. Let me just ask if Congress did decide to allow 

this to happen instead of this legislation that’s being proposed, do 

you think the FDIC has the adequate capability to regulate that industry in that context? 

Ms. BAIR. We will have to evaluate each application on a caseby-case basis. But any decision we made would have to be based 

on safety and soundness considerations. It couldn’t be based on policy considerations relating to commercial ownership. 

Mr. MATHESON. Do you think that the commercial ownership 

issue has evolved in the last few years due to a particular application? 

Ms. BAIR. Our decision wasn’t driven by any individual applications, but there has been a trend and greater interest in this charter by major retailers, yes. 

Mr. MATHESON. Do you think that when you look at FDIC and 

the bank-centric model that we’ve had here, do you see areas that 

we—or capabilities that you don’t have now that would help you 

35

better regulate this industry, or are you satisfied with the tools you 

have at your disposal? 

Ms. BAIR. I think holding company authorities, particularly the 

ability to examine affiliates, would be helpful, yes, I do. 

Mr. MATHESON. And you don’t think you have that— 

Ms. BAIR. We do not have that now, no. We have— 

Mr. MATHESON. Do you take issue with what your predecessor 

said about that? 

Ms. BAIR. Well, our ability to examine affiliates is only with regard to determining what the relationship is with the ILC. So unless there’s a relationship, we could be challenged in our ability to 

examine affiliates. 

Mr. MATHESON. Okay. Mr. Chairman, I see my time has expired, 

and I do not want to abuse the privilege. Thank you so much. 

The CHAIRMAN. I thank the gentleman. And with that, we will 

thank the witnesses. Did the gentleman from Illinois wish to ask 

questions? Then we thank the witnesses very much, and we will 

ask them to leave expeditiously, and we’ll empanel the next panel. 

And everybody who wants to be polite to each other, do that in the 

hall. Just leave quickly. 

We ask people to leave quickly. Don’t black the aisles, one panel 

to the next panel. We’ll try to do as much as we can before we’re 

interrupted for votes. And let us have the next panel be seated, 

please. 

Would the members of the panel please move up here and be 

seated so we can get started? Would the people to the Chair’s left 

please leave? Thank you. 

The second panel will begin. We will ask that those doors be 

closed. And the first witness is Ms. Amy Isaacs, who is the national 

director of Americans for Democratic Action. 

Please just sit down and let us start talking, guys. Come on, 

we’re in a hurry. 

Ms. Isaacs. 

Excuse me. Members of the staff, close those doors, please. People either seated, or on the other side of the door. 

Thank you. Please continue. 

STATEMENT OF AMY ISAACS, NATIONAL DIRECTOR, 

AMERICANS FOR DEMOCRATIC ACTION 

Ms. ISAACS. Mr. Chairman, thank you. I appreciate the opportunity to testify representing our more than 65,000 members. Unlike my colleagues on this panel and the preceding one, I am not 

an expert in banking. I am, however, a consumer, as are the members of my organization. And because we are concerned about the 

impact that granting an ILC charter to any retail enterprise could 

have on individual consumers and small business, we endorse H.R. 

698, the Industrial Bank Holding Company Act of 2007. 

Although H.R. 698 is not specifically about Wal-Mart, I will focus 

on Wal-Mart as perhaps the most pernicious example of the problems which can arise when banking and commerce are intertwined. 

We believe a bright line between the two must be drawn. 

Wal-Mart’s recently withdrawn application to enter the banking 

business was fraught with risk, which would have been guaranteed 

by American taxpayers. A bank tied to one of the world’s largest 

36

retailers would face unique commercial and reputational risks. 

Regulatory agencies charged with supervising these risks lack the 

experience or the capacity to understand how to evaluate or minimize them. 

Giant retailers have been forced into Chapter 11 or have disappeared because of changes in the commercial environment. KMart, Ames, Woolworth, and Montgomery Ward are examples of 

retailers who have reorganized or have disappeared. Business models change, as do consumer preferences. The Federal Government 

is not and should not be in the business of understanding the risks 

of large-scale retailing. It should not have to worry about the safety 

and soundness of a global retail business, dependent on complex 

global supply systems. If the retail operation faces disaster, so will 

the bank. 

Wal-Mart also faces the risk of social ostracism for its routine 

antisocial behavior. Wal-Mart has an established pattern of irresponsible practices. It shorts employees on health care, it has flouted hourly wage laws, and it has been involved in multiple cases of 

alleged discrimination. The company has been accused of using undocumented workers and a senior executive said he padded his expenses to conceal anti-union expenditures. 

Such behavior carries the risk of a damaged reputation, and with 

it, a run on the bank. The government cannot be in the position 

of insuring against the risk. There are many other examples of 

antisocial behavior leading to the demise of financial institutions. 

Riggs Bank is a prime example. 

We also are deeply concerned that large scale commercial enterprises could misuse their market power. As state-chartered ILCs, 

they would not be subject to the stricter regulations of bank holding companies. They could use their position in the marketplace 

and control of prime real estate for their own advantage, instead 

of the interests of the community they purport to serve. 

Had Wal-Mart been granted an ILC charter, it would have been 

able to offer anything an ordinary bank could—savings accounts, 

checking accounts, mortgages, and a variety of loans for everything 

from home improvement to car purchases to small business loans. 

The potential for conflict of interest is obvious. 

Would retailers make loans to competitors? Should they have access to credit information about competitors? 

Retailers operate with the goal of dominating markets. They 

work to control competition. The result has been the extinction of 

long-term community small businesses. There is no reason to believe that a foray into banking would have a different outcome. 

Retailers are not offering banking services to save consumers 

money. They are not charities. They are in business to make 

money. They want to use their retail power to muscle their way 

into the financial services industry. 

Had Wal-Mart been granted a charter, it would have used its 

power to muscle past community banks and credit unions, which 

do care about their own communities. Among the factors the law 

requires be considered in accepting an application for an ILC charter is the convenience and needs of the community to be served. 

Mixing retail commerce and banking makes it impossible to meet 

that standard. The conflict of interest and the push for market 

37

dominance argue against a charter serving any need or convenience 

other than the retailers’. 

Existing institutions leasing space in retail stores serve customers. Many banks have arrangements with supermarket chains. 

These bank branches meet the needs of both consumers and the 

community. 

Wal-Mart saw the handwriting on the wall when it withdrew its 

application. But until and unless H.R. 698 is signed into law, we 

cannot guarantee that a similar problem will not recur. Americans 

for Democratic Action stands for liberal values. We see bank regulation as an area where true conservative values should prevail. By 

granting a charter and deposit insurance, the government should 

not be risking regulating a business it does not understand. It 

should not insure depositors against a corporation’s antisocial behavior and the attendant risks. 

For these reasons, Americans for Democratic Action urges passage of H.R. 698. Thank you for your consideration. 

[The prepared statement of Ms. Isaacs can be found on page 113 

of the appendix.] 

The CHAIRMAN. Thank you. 

And next, testifying on behalf of America’s Community Bankers, 

for the chairman a familiar face, not to mention accent, one of our 

leading bankers in Massachusetts, Arthur Connelly from South 

Shore Bank. 

STATEMENT OF ARTHUR R. CONNELLY, CHAIRMAN AND 

CHIEF EXECUTIVE OFFICER, SOUTH SHORE BANCORP MHC, 

ON BEHALF OF AMERICA’S COMMUNITY BANKERS 

Mr. CONNELLY. Thank you. Chairman Frank, Ranking Member 

Bachus, and members of the committee, thanks for inviting me to 

testify before you today on the Industrial Bank Holding Company 

Act of 2007. 

My name is Art Connelly, as the chairman said. I am the chairman and CEO of South Shore Bancorp, and I also serve as the first 

vice chairman of America’s Community Bankers, and I am here 

today to testify on their behalf. 

The appropriate regulatory structure for industrial loan companies is incredibly important and should be addressed by Congress. 

First, I want to say that ACB strongly supports H.R. 698. We believe that this commonsense legislation is necessary to improve the 

safety and soundness of the banking system. ACB believes that the 

withdrawal of Wal-Mart’s ILC application does not end the need for 

comprehensive ILC regulatory reform. 

The ILC charter is the only bank charter that can be obtained 

by a commercial entity. Furthermore, there is no holding company 

oversight for ILCs that are not otherwise supervised by the OTS 

or the Federal Reserve. 

These structural issues run contrary to legislation passed by 

Congress. Consistently throughout the 20th century, Congress 

made it clear that it does not want commercial ownership of banks 

in the United States and wants insured banks to have consolidated 

holding company oversight. 

There are good reasons to have concerns about commercial ownership of banks, especially with ILCs. Commercially owned banks 

38

can face conflict of interest pressures from their commercial owners. We have seen this problem in other countries, where a commercially owned bank can be pressured by its parent to make loans 

based not on sound underwriting but on the needs of its commercial parent. Concerns about the payment system integrity might 

also exist if a commercial parent improperly influences the actions 

of an ILC subsidiary that processes payments. 

Furthermore, these problems are greater for ILCs because commercially owned ILCs that are not affiliated with a bank or a savings association have no holding company regulator that can help 

oversee risks to the depository institution on a consolidated basis. 

While the FDIC has done an admirable job in regulating ILCs for 

safety and soundness so far, it does not have the statutory authority to examine the parent company. 

The recent surge in commercial ILC application brings these concerns to the forefront. Until recently, the majority of ILC asset 

growth has been in ILCs that are affiliated with banks or savings 

associations and have holding company supervision. If no regulatory supervision is passed, we could see dramatic growth in commercially owned ILCs with no holding company oversight. 

That brings me to H.R. 698. On examining the bill, it is helpful 

to look at Gramm-Leach-Bliley, where Congress prohibited any future ownership of unitary thrifts by commercial companies. However, Congress grandfathered all unitary thrifts that were commercially owned prior to 1999. This appears to be the model for the Industrial Bank Holding Company Act, and we believe it to be a fair 

one. 

H.R. 698 creates an FDIC regulated holding company structure 

for ILCs not regulated as a bank or a savings and loan holding 

company. Providing the FDIC with the authority to supervise the 

parent companies of these ILCs on a consolidated basis will allow 

it to ensure the safety and soundness of the institution. The legislation also utilizes a grandfathering system similar to the one in 

Gramm-Leach-Bliley. 

In conclusion, Mr. Chairman, we believe H.R. 698 is sound legislation that will fill a current gap in our financial regulatory structure. I will gladly take any questions that you might have. Thank 

you. 

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

82 of the appendix.] 

The CHAIRMAN. Thank you. Next, from the Independent Community Bankers of America, Mr. Jim Ghiglieri. Please, Mr. Ghiglieri. 

STATEMENT OF JAMES P. GHIGLIERI, JR., PRESIDENT, ALPHA 

COMMUNITY BANK, ON BEHALF OF THE INDEPENDENT 

COMMUNITY BANKERS OF AMERICA 

Mr. GHIGLIERI. Mr. Chairman, Ranking Member Bachus, and 

members of the committee, my name is Jim Ghiglieri, and I am 

president of Alpha Community Bank in Toluca, Illinois. I am also 

chairman of the Independent Community Bankers of America. 

ICBA is pleased to have this opportunity to testify. 

The ILC charter threatens our Nation’s historic separation of 

banking and commerce and undermines our system of holding company supervision. The fact that Wal-Mart has withdrawn its ILC 

39

application does not diminish the need to act. Other applications 

are pending and more could be filed. 

ICBA was pleased that the FDIC unanimously adopted the recommendations of Chairman Frank and Representative Gillmor and 

many of their colleagues to impose a 1-year moratorium on ILC applications by commercial firms. The entire FDIC Board clearly recognizes that these applications raise broad public policy issues that 

Congress must confront. Congress can do that by enacting H.R. 

698. 

Like much good legislation, H.R. 698 is a compromise. That is its 

strength. Institutions that are already in business could remain in 

place. Financial companies could continue to acquire, establish, and 

operate ILCs. The legislation addresses the key concerns without 

needlessly disrupting ongoing activity, and it gives the FDIC the 

basic tools it will need to be an effective consolidated regulator. 

Why do we ask Congress to pass this bill? First, the loophole 

threatens the safety and soundness of the financial system. Second, 

mixing banking and commerce presents serious conflicts of interest. 

Third, ILCs could destabilize local communities and harm consumers. Fourth, ILCs could jeopardize the payment system. And, 

fifth, ILC holding companies need stronger regulation. 

Let me briefly elaborate. First, safety and soundness. Allowing 

commercial firms to own federally insured ILCs adds tremendous 

new risk to the Deposit Insurance Fund. For example, Ford Motor 

Company applied for an ILC charter. Ford’s financial difficulties 

are well-documented. Banking regulators will not allow banks to 

buy Ford bonds. Ford hardly sounds like a source of strength for 

an FDIC-insured ILC. 

Home Depot and its ILC acquisition target are susceptible to 

fluctuations in real estate. According to Bloomberg News on February 21st, and I quote, ‘‘Home Depot reported its biggest drop in 

quarterly profit as the decline in U.S. home sales sapped demand 

for building supplies.’’ 

Financial services regulators, no matter how competent, do not 

have the expertise to understand each of these economic areas and 

protect the safety and soundness of an ILC from problems that 

may befall its parent. A financial regulator should not become involved in market decisions of a major commercial firm. 

Second, conflicts of interest. Home Depot could be tempted to direct its bank to offer unsound loan terms to its customers provided 

they agree to purchase products from Home Depot. Or Home Depot 

could offer discounts on its product if a customer takes out a loan 

from its bank. The idea that a bank should be an objective credit 

grantor gets thrown out the window either way. 

Third, harm to consumers and communities. An ILC owned by a 

retail firm is unlikely to make loans to its local competitors. An 

ILC with a nationwide deposit taking network could draw funds 

out of local communities, sending them to corporate headquarters. 

Major commercial firms have the size and resources to engage in 

predatory pricing for as long as it takes to drive local competitors 

out of the market, both locally owned small businesses and community banks. 

Fourth, the payment system. The Wal-Mart application highlighted potential risk to the objectivity and security of the payment 

40

system. If retailers control the payment system, they will seek competitive advantage rather than control risk. Consumers, small businesses and banks of all sizes would be the victims. 

And finally, lack of regulatory authority. The FDIC currently 

lacks clear statutory authority to consider all of the broad policy 

implications when considering ILC applications and to regulate 

ILC holding companies. 

While ICBA believes that the FDIC has ample grounds under 

current law to deny several of the pending applications, especially 

Home Depot’s, it may eventually be compelled to grant a disturbing 

number of them. Senator Garn told the FDIC that the ILC charter 

was grandfathered in 1987 and exempted from the Bank Holding 

Company Act to serve narrow purposes. But that is rapidly changing. A GAO report highlighted the need for enhanced supervision 

of ILCs, especially the need for consolidated supervision over both 

the ILCs and their holding companies. Successive Federal Reserve 

chairmen have repeatedly made similar points. 

Congress has ample precedent for closing the ILC loophole. You 

closed the non-bank bank loophole in 1987 and closed the unitary 

thrift loophole in 1999. Now it is time to close the ILC loophole. 

Thank you very much. 

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

95 of the appendix.] 

The CHAIRMAN. Thank you. 

Next, Mr. McVicker, who is the chairman and CEO of the Central Bank and Trust Company, and he is testifying on behalf of the 

ABA, the American Bankers Association. 

Mr. McVicker. 

STATEMENT OF EARL D. McVICKER, CHAIRMAN AND CHIEF 

EXECUTIVE OFFICER, CENTRAL BANK & TRUST COMPANY, 

ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION 

Mr. MCVICKER. Mr. Chairman, and members of the committee, 

my name is Earl McVicker. I am chairman and CEO of Central 

Bank and Trust Company in Hutchinson, Kansas, and chairman of 

the American Bankers Association. Thank you for the opportunity 

to present ABA’s views on the regulation of ILCs. 

Since Congress last enacted legislation concerning the ownership 

of ILCs nearly 20 years ago, the ILC industry has changed dramatically. Unfortunately, these changes now threaten to undermine the separation of banking and nonfinancial commerce that 

has long been a feature of U.S. law. In fact, over the last 50 years, 

Congress has repeatedly curtailed the ability of nonfinancial commercial firms to engage in banking activities. 

In each of these instances, the legislation was a reaction to nonfinancial firms that were taking advantage of statutory provisions 

to engage in banking. Moreover, in each instance, Congress was 

consistent in enacting legislation to maintain the separation between banking and nonfinancial commerce. 

Today, unintended use of the ILC charter has made it necessary 

for Congress to act once again to maintain this separation. When 

the term bank was redefined in 1987, ILCs were specifically excluded from the definition. At that time, most ILCs were small. 

And the few States that were able to charter ILCs were not proVerDate 0ct 09 2002 18:13 Aug 13, 2007 Jkt 036820 PO 00000 Frm 00044 Fmt 6633 Sfmt 6633 K:\DOCS\36820.TXT HFIN PsN: TERRIE
41

moting the charter. Simply put, there was no significant risk that 

problems caused by mixing banking and nonfinancial commerce 

would arise at the time the exemption was codified. 

That is not the case today. By the end of 2006, aggregate ILC assets totaled almost $213 billion, an increase of more than 5,500 

percent since 1987. The average ILC now holds close to $3.7 billion 

in assets. 

Recent ILC asset growth is no accident. When Congress cut off 

the ability of nonfinancial commercial firms to engage in banking 

through unitary thrifts in 1999, these firms were forced to look for 

other means of doing so. It is no coincidence that total aggregate 

ILC assets more than doubled from $44 billion in 1999 to over $90 

billion in 2000. Clearly, with the closure of one avenue into the 

banking world, nonfinancial commercial entities began to exploit 

another. 

It is fair to assume that Congress did not anticipate that the ILC 

exemption would be used for this purpose. There is a significant 

risk if the separation is not maintained. A nonfinancial parent, 

seeking to further its commercial pursuits, could put depositors’ 

funds, the capital of the bank and the deposit insurance fund at 

risk. 

Congress has recognized these risks and should once again act to 

preserve the separation of banking and nonfinancial commerce by 

closing this exemption. Thus the ABA supports the Frank-Gillmor 

bill, H.R. 698, which would create a general rule that commercial 

firms may not own an ILC. The bill would grandfather commercial 

firms that currently own an ILC, and we support bringing grandfathered institutions within the jurisdiction of a Federal bank regulator, and vesting that regulator with the full range of supervisory 

and enforcement tools. 

We stand ready to work with Congress to maintain the important separation between banking and commerce. Thank you. 

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

172 of the appendix.] 

The CHAIRMAN. Thank you very much, Mr. McVicker. 

Next, John Douglas from Alston and Bird, who is testifying on 

behalf of the American Financial Services Association. 

STATEMENT OF JOHN L. DOUGLAS, ALSTON & BIRD LLP, ON 

BEHALF OF THE AMERICAN FINANCIAL SERVICES ASSOCIATION 

Mr. DOUGLAS. Mr. Chairman, and members of the committee, 

thank you very much for allowing us to present testimony on this 

important bill. 

American Financial Services Association is the national trade association representing many of the Nation’s most important lenders, providing access to credit for millions of consumers and small 

businesses. AFSA strongly believes that the industrial bank option 

represents a safe and sound and appropriate means to deliver financial services to the public. 

Congress established a framework within which commercial companies can provide deposit, loan, and other banking products to 

their customers. This framework is highlighted by stringent and 

appropriate supervision, by strong enforcement powers, and by a 

42

structure of laws and regulations that mitigate the consequences of 

the hypothetical and unproven evils raised by the opponents of 

commercial ownership of industrial banks. 

I testified on this issue last year and don’t intend to repeat my 

testimony. Since that time, we’ve endured a lengthy moratorium by 

the FDIC and a long comment period where the FDIC sought guidance on how to deal with this important issue. There were thousands of comments, most in opposition. 

It is important to recognize, however, that nothing, no event, no 

failure, no fact, lends any substance to the allegation of the great 

dangers to our economy that would result from commercial ownership of industrial banks. Indeed, all we have is speculation. 

There are three main allegations. First, that there is some gap 

in our supervisory framework that poses danger to our economy 

and banking system. Second, that if commercial companies are allowed to own industrial banks, rampant tying or other unseemly 

activities would occur and the FDIC couldn’t stop them. And, third, 

there is something fundamentally un-American and dangerous 

about mixing banking and commerce. I respectfully submit that 

these allegations are not true. 

First, industrial banks are subject to the same comprehensive 

framework of supervision and examination as normal commercial 

banks. They have no special powers, no special authorities, and are 

exempt from no statute or regulation. They comply with 23A and 

B, regulation O, capital requirements, prompt corrective action, 

anti-tying provisions, and the Community Reinvestment Act. 

Second, the FDIC has been given full and ample authority to supervise and regulate these institutions and can exercise the full 

range of enforcement powers. I was a participant in the political 

process that led to a rewrite of these provisions in 1989 as part of 

FIRREA and it was our intention to give the FDIC and the other 

regulators all the enforcement powers they needed, which they exercised. 

Third, I can attest from experience that the FDIC does exercise 

these powers. It requires an independent board, adequate capital, 

safe and sound operations, and effective internal audit. It examines, it scrutinizes, and it exercises its powers to protect our system. 

And finally, the FDIC’s experienced with industrial banks, similar to the experience of the OTS with respect to diversified owners 

of savings associations, belies any fundamental concerns to threats 

to our banking system. This is a well-capitalized, well-managed 

segment of the industry, making important contributions to consumers and small businesses. The FDIC’s experience has been 

good. 

Finally, I want to address once more this myth of separation in 

banking and commerce. The Gramm-Leach-Bliley Act, to say that 

it was designed to make permanent that separation, is to ignore 

important provisions of that Act. There have always been affiliations and relationships between banking and commercial firms. 

These relationships have been carefully reviewed by Congress. 

If we were serious about eliminating it, we would preclude our 

banks from being affiliated with any entity. We wouldn’t let Bank 

of America be affiliated with Bank of America securities, lest it 

43

favor its customers over those of Merrill Lynch. We would more 

closely scrutinize the propriety of a small business owner, a real estate developer, a car dealer owning a commercial bank in a small 

community, where sources of credit are lax. 

If we were really concerned, we would repeal the merchant banking powers in Gramm-Leach-Bliley and repeal the FDIC’s power to 

grant commercial activity—permit commercial banks to engage in 

commercial activities in FDICIA. It is anomalous at best to be asserting that there is something wrong with a commercial entity engaging in banking when we have opened the door broadly and 

widely for banks to engage in and invest in commercial activities. 

I want to emphasize this last point. It is permissible under current law for any one of a number of banking organizations to use 

their powers granted under Gramm-Leach-Bliley to acquire any 

commercial entity. This bill would preclude any commercial entity 

from establishing a bank to facilitate the needs of meeting its customers, regardless of the size of the bank, the needs of its customers, or any other factor that might benefit our economy or our 

communities. 

I would submit that the breadth of our markets and the strength 

of competition in our financial services industry has served us well 

and submit that it would be unwise to roll back the clock by taking 

steps to limit competition in this area. Thank you very much. 

[The prepared statement of Mr. Douglas can be found on page 87 

of the appendix.] 

The CHAIRMAN. Thank you, Mr. Douglas. 

And next, Mr. Marc Lackritz, who is the chief executive officer 

of SIFMA. 

STATEMENT OF MARC E. LACKRITZ, CHIEF EXECUTIVE OFFICER, SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION 

Mr. LACKRITZ. Thank you, Mr. Chairman. I appreciate the opportunity to testify today before the committee, because the SIFMA 

members own a vast majority of the industrial bank assets in the 

United States. And as you know, Mr. Chairman, Congress passed 

Gramm-Leach-Bliley back in 1999 to allow affiliations between and 

among securities firms, banks, and insurance companies, combined 

with functional regulation. 

This ability to structure their operations optimally within existing law has really been critical to the success of industrial banks 

and their owners. Many of these companies are among the most advanced, sophisticated, and competent providers of financial services 

anywhere. And we support the ability of regulated securities firms 

to continue to own industrial banks the way they do under existing 

law. 

Federally insured industrial banks are subject to State banking 

supervision, FDIC oversight, and all the banking laws that govern 

relevant banking activities. Most importantly, the FDIC has the 

authority to examine the affairs of any affiliate of any depository 

institution, including its parent company. 

The FDIC’s regulation of industrial banks has proven safe and 

effective. Industrial banks do not pose any greater safety and 

soundness risks than any other charter types and should not be 

44

subject to additional constraints beyond those imposed on other 

FDIC insured institutions. 

H.R. 698 would create a new holding company regime for the 

owners of industrial banks by expanding the existing authority of 

the FDIC over the owners of these institutions. Bank and thrift 

holding companies that own industrial banks would be exempted 

from this regime, presumably because they are already subject to 

holding company oversight by the Fed or the Office of Thrift Supervision. However, the bill fails to provide an exemption for industrial bank owners who are regulated as consolidated, supervised 

entities by the SEC. 

We believe it is critical that H.R. 698 be amended to recognize 

the SEC’s CSE regime. The Commission established its CSE framework in 2004 in part to allow major securities firms doing business 

in the European Union to comply with its financial conglomerates 

directive. That directive requires that non-European firms doing 

business in Europe demonstrate that they are subject to a form of 

consolidated supervision by their home regulator that is equivalent 

to that required of their European counterparts. 

The GAO found in its recently released report on CSEs that the 

Federal Reserve, OTS, and the SEC were generally meeting criteria for comprehensive consolidated supervision. We agree that 

the CSE regime is both robust and comprehensive. Importantly, 

the Commission’s CSE oversight, just like the Federal Reserve’s 

oversight of bank holding companies, meets the EU’s equivalency 

standard. In addition, the SEC’s consolidated regulation standards 

closely parallel the Fed’s standards to assess whether a foreign regulatory regime qualifies as consolidated regulation for a foreign 

bank operating in the United States. 

We therefore strongly urge the committee, Mr. Chairman, to recognize the SEC as a consolidated regulator along with the Federal 

Reserve and the OTS in H.R. 698. The SEC is recognized worldwide as a consolidated regulator and its regulatory requirements 

and procedures were very carefully designed to comply with all 

standards for effective consolidated regulation in the United States 

and abroad. That stature should be reflected in this bill, in order 

to ensure that global securities firms are not damaged inadvertently. 

Over the last 2 decades, capital markets and the financial services industry have become truly global, integrated, and interconnected. As capital markets and financial products continue to 

evolve, so too must our Nation’s regulatory structure. We need a 

regulatory regime that is capable of keeping pace with rapid 

globalization, technological transformations, and dynamic market 

changes. That is why our new board of directors unanimously 

agreed that we will develop a long term strategy of seeking to modernize financial services regulation and deal with inconsistencies in 

the current regulatory system. 

We look forward to working with financial market participants, 

regulators, and legislators, and you, Mr. Chairman, to ensure that 

our financial services industry retains its preeminent status in the 

world. Thank you very much, Mr. Chairman. 

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

138 of the appendix.] 

45

The CHAIRMAN. Thank you. And next is Mr. Thomas Stevens, 

who is the immediate past president of the National Association of 

Realtors. 

STATEMENT OF THOMAS M. STEVENS, IMMEDIATE PAST 

PRESIDENT OF THE NATIONAL ASSOCIATION OF REALTORS 

Mr. STEVENS. Thank you, Mr. Chairman, and committee members. Thanks for allowing us to do the soft shoe there. 

My name is Tom Stevens. As the 2007 immediate past president 

of the National Association of Realtors, and former president of 

Coldwell Banker Stevens, I am here today on behalf of the more 

than 1.3 million Realtors who work in all fields of commercial and 

residential real estate. 

The National Association of Realtors wholeheartedly supports 

H.R. 698 as it closes a loophole that allows commercial companies 

such as Home Depot to own state-chartered, federally insured 

banks. Perhaps more importantly, the Industrial Bank Holding 

Company Act of 2007 would restore one of our Nation’s most fundamental economic principles, the separation of banking and commerce. 

I also thank Representative Gillmor for his dedication to pursuing a legislative solution to this important issue, which was 

raised more than 4 years ago. 

Let me be clear. Realtors have long supported the national policy 

against the mixing of banking and commerce. We oppose any efforts to weaken this policy, either by allowing commercial firms to 

engage in banking, or by permitting large national banks to engage 

in commercial activities, such as real estate brokerage and management. 

Realtors believe banking and commerce should remain separate 

for three key reasons. First, we strongly believe that allowing commercial firms to engage in banking would create inherent and irreconcilable conflicts of interest. 

Second, Realtors believe that giving large commercial firms the 

benefits associated with owning a federally insured bank would stifle competition in the marketplace. For example, if an ILC owned 

by a commercial firm provided loans on more favorable terms to 

suppliers or customers of its parent, it could put other commercial 

firms at a disadvantage. Likewise, allowing national banks to engage in commercial activities such as real estate would stifle competition from nonbank firms that do not share such benefits. 

Third, we believe that mixing banking and commerce poses substantial risks to the financial system. Over the last few years, regulators at the Federal Reserve, the OCC, and the FDIC have considered giving banks the green light to engage in commercial activities. We believe such activities markedly increase the risk exposure 

of national banks and could threaten the safety and soundness of 

the entire banking system. 

Banks should be in the business of banking, not selling cars, 

home improvement supplies, or real estate brokerage. When banking activities and commercial activities and commercial activities 

mix, it can be a recipe for disaster, bad for the economy, bad for 

businesses, and bad for consumers. 

46

Realtors applaud Representative Gillmor and Chairman Frank 

for taking the lead in this important issue. And we urge the House 

Financial Services Committee to pass H.R. 698, the Industrial 

Bank Holding Company Act of 2007. 

We also encourage Congress to pass H.R. 111, the Community 

Choice in Real Estate Act, which would similarly prevent large 

banks from entering the real estate business. 

And I want to thank you for your time and would be more than 

happy to answer any questions. 

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

200 of the appendix.] 

The CHAIRMAN. Thank you, Mr. Stevens. 

I am not, myself, going to ask questions. I want to assure the 

panel it is not for lack of interest in what they say. Some of us 

have been working on this for some time. There are newer members who have concerns. I think we have had some serious conversations. 

So with that, I am going to turn to the gentleman from Illinois, 

Mr. Manzullo. 

Mr. MANZULLO. Thank you. I—maybe the arguments here should 

be centered not on safety and soundness which, Mr. Douglas, you 

were talking about and Mr. Ghiglieri, among others. The issue here 

is how big are you going to get before you smash the little guys? 

Mr. Ghiglieri, do you want to take a stab at that question? Isn’t 

that the issue? 

Mr. GHIGLIERI. This is not an issue of competition. We are not 

and never have been afraid of competition. We compete with every 

financial services provider out there, from the big banks to the 

ILCs to credit unions to payday lenders. 

This is really about two issues, and that is maintaining the separation of banking and commerce, and providing a consolidated regulator at the holding company level for ILCs. But it is not about 

competition; we are not afraid of competition. 

Mr. MANZULLO. Okay. Some have called this the bank of WalMart. And some of the bankers that I have talked to have expressed a concern that when you get commerce on that level, that 

indeed will hurt competition, or if not competition, the ability to 

discern on the type of loan that should be given. Anybody want to 

take a stab at that? 

Mr. MCVICKER. It is really not about competition; it is about the 

issue that has been addressed from numerous panelists and the 

concern there is some safety and soundness risk, we believe, to the 

industry and to the FDIC fund. 

What Wal-Mart would be doing if they were approved remains 

to be seen. But our position was the same before Wal-Mart filed 

their application and remains the same after it has been withdrawn. And that is the concerns, the safety and soundness both of 

the regulatory system and the deposit insurance fund. 

Mr. MANZULLO. Mr. Douglas? 

Mr. DOUGLAS. I would say that if we’re concerned about threats 

to the deposit insurance fund, there is certainly no evidence that 

industrial banks pose that threat. And if we look historically back 

the same 20-year period we’ve been looking at for commercial 

banks, one would say that consolidated supervision might pose a 

47

greater threat to our safety and soundness than an industrial 

bank. 

Virtually every financial institution that has failed in the last 20 

years has been subject to consolidated supervision. The point is not 

that the Fed is a bad regulator or that the FDIC is a better regulator. The point here with industrial banks is that the FDIC and 

the States with their bank centric level of supervision has proven 

to be a pretty effective way of protecting our financial system. 

Mr. MANZULLO. Do you agree with that Mr. Ghiglieri? 

Mr. GHIGLIERI. Yes. I just think that it is a mistake to look backwards at the ILC industry and say that the system is necessarily 

sound because there have been no failures. I think we can all shudder to think what would have happened if WorldCom or Enron 

would have had an ILC. Or, going forward, if the ILC industry continues to expand like I think all of us think would happen. And I 

think that is where the threat to the deposit insurance comes in. 

Mr. MANZULLO. Give us the worst possible scenario, if ILCs were 

allowed. I mean, it is obvious that you oppose them. Obviously, you 

oppose them. 

Mr. GHIGLIERI. Well, I think you can look at the Japanese or the 

German model. In Japan, I remember as a young banker back in 

the 1970’s listening to expert after expert and report after report 

talking about this wonderful Japanese economic model in this, you 

know, incredible Japanese banking model that was really built on 

commercial firms owning banks. It was projected to be the greatest 

economy the world would ever know and they were going to come 

to the United States and buy New York City brick-by-brick. 

And as we reflect back on that model, I think we can all agree 

that it has been a complete disaster. They’ve been stuck in a 20-

year recession and really have no hope of getting out of it. The 

banking system is, in effect, insolvent. And I just—I can’t imagine 

that is the system that we want for this industry that I love and 

am so passionate about. 

Mr. MANZULLO. What is the difference between an independent 

bank having a presence in a Wal-Mart store and, for example, the 

Wal-Mart store owning the bank itself? 

Mr. GHIGLIERI. In a concept like that, it is—you know, a lot of 

us have members that lease out space in Wal-Mart—it doesn’t have 

to be Wal-Mart, it is a grocery store. There are all kinds of those 

operations. But those are just strictly bank branches. They lease 

out space and they sell their products and services. So it is much 

different than those commercial firms owning those branches. 

Mr. MANZULLO. Mr. Douglas? I am trying to get a fight going 

here, but you guys won’t put the gloves on. 

Mr. DOUGLAS. Well, the truth of the matter is, Wal-Mart is attempting to meet the needs of its customers, were Wal-Mart to do 

this, the same way a commercial bank is trying to meet the needs 

of its customers, by finding locations where people can access products and services in a way that is convenient to them. 

One might say that one is better or worse than the other, but 

they are both subject to the same framework of laws and regulations. I find no fundamental unfairness or difference associated 

with one over the other. 

Mr. MANZULLO. Mr. Lackritz? 

48

Mr. LACKRITZ. I would just say that I think the challenge you 

have is, and I think someone said it earlier on the earlier panel, 

that this thing, it is getting big and business is getting larger daily 

and moving at a faster pace. And I think the challenge you have 

is when you have a Wal-Mart that now owns a bank and you have 

conflicting interests, everything is great when things are going 

along well. You know, so was the real estate industry last year 

when things were going along well, and now there are challenges. 

And then the little things, subprime lending, those kinds of things 

start to crop up. 

But when you start to have that major corporation have some 

challenges and conflict, then there is a conflict with its subsidiary 

company or the bank that it owns, and you could have diverse decisions being made or decisions being made that aren’t in the best 

interests of the bank or the bank’s customers, versus the consumer 

of the goods out there. 

So I think it is an inherent conflict that you face. 

Mr. MANZULLO. Thank you. 

The CHAIRMAN. I am going to recognize Mr. Matheson. I would 

just say that, in response to what Mr. Douglas said, the difference 

to me is in the incentives to which the economic entity responds, 

and that is the question, whether or not the incentive is that you 

make money off the loan and also off the product that is going to 

be bought with the loan and the extent to which that is going to 

alter that decision. That is the difference. And obviously, people 

keep talking about Wal-Mart, and it is true that Wal-Mart has 

withdrawn its application, but that does not change our view. 

I would note, however, in legal terms, Wal-Mart has withdrawn 

its application without prejudice. I think it is very clear that the 

reason Wal-Mart withdrew its application is that friends of the ILC 

industry said to Wal-Mart, will you please stop screwing up our industry because you are making everybody mad and would you go 

away. And they have withdrawn but they have not disappeared. 

And if we were, in fact, I think, finally to announce that there 

would be no such legislation and no moratorium, Wal-Mart would 

have every right in the world to come back in again. 

Mr. Matheson. 

Mr. MATHESON. Thank you, Mr. Chairman. 

I just wanted to clear up one issue that came up in the subcommittee hearing last year as well, and that was comparing the 

Japanese model to ILC regulation. And I asked the panel of regulators in the subcommittee hearing last year if it’s comparable and 

they said, no. So it is not exactly the same type of regulation. 

Would you agree with that, Mr. Ghiglieri? 

Mr. GHIGLIERI. That may be the case. I mean, I am not a regulator. 

One thing that I do take issue with is this concept that ILCs and 

all of the rest of us are regulated the same way. We are regulated 

the same way at the bank level. But we have tremendous regulation at the holding company level and for a bank our size, it is a 

tremendous cost. 

Mr. MATHESON. I think everyone stipulates to that, that there is 

a different model of regulation. It is called bottom-up for ILCs; it 

is top-down for other banks. And again, I don’t think anybody on 

49

this committee disagrees with that. The question is, is one right 

and one wrong, or is there more than one right way to do something? And I think you know where I am coming from on that. 

But I think it is just important that we note the ILC model and 

the way we regulate in this country, I would not say that is the 

Japanese model. I just think we ought to have that for the record. 

You mentioned in your written testimony and your verbal comments, Mr. Ghiglieri, imagine if WorldCom and Enron had banks. 

And I would submit that instead of coming up with imaginary scenarios that sound pretty bad, let us look at the real scenario of 

when Tyco and Conseco had banks, as Mr. Leary mentioned in the 

previous panel. Are you familiar with that experience, where the 

parent companies had financial difficulties, one went into bankruptcy, and in both cases the ILC was separated from all those financial troubles? Actually, one sold as a premium after the fact? 

Mr. GHIGLIERI. Yes. 

Mr. MATHESON. Okay, so that’s a real world example, compared 

to imagining scenarios. And I think that’s important to point out, 

that the bottom-up regulation worked in those circumstances. 

Are you familiar with regulations 23A and 23B? 

Mr. GHIGLIERI. Yes, I am. 

Mr. MATHESON. Because in your testimony where you talk about 

how Home Depot may pressure people and that, do you recognize 

that would be a violation of existing law? 

Mr. GHIGLIERI. Correct. 

Mr. MATHESON. Okay. I just wanted to confirm that. 

Mr. GHIGLIERI. And if I could just add to that? I think it is one 

thing to have a corporate decision that there would be no violation 

of 23A. But, you know, I think when you get down to the store 

level, when you get an entity that has thousands of stores, and you 

have people within those stores who are paid on the volume of 

transactions that are processed, I think it is natural, and I am very 

dubious about the fact that they would comply with that. And there 

has to be someone who complains in order to have the issue raised. 

Mr. MATHESON. I understand your concern. 

Mr. GHIGLIERI. But you do acknowledge that the way you describe it would be in violation of law, what is in your testimony? 

Mr. MATHESON. I want to make sure of that. 

Just one quick observation for Mr. Connelly and Mr. Ghiglieri. 

I have been in this job now for 6 years and 4 months and I have 

had Utah community bankers come and meet with me on a periodic basis. Not one has ever mentioned the ILC issue. They live in 

the State where ILCs are based, we have all heard that. And they 

have never expressed concern to me. 

I am sure you can probably find somebody in your membership 

who has written me a letter. That may be. I am just saying, in my 

face-to-face meetings, they are far more concerned about issues—

and I am not getting into this issue, Mr. Chairman—they are far 

more concerned about credit unions and whatnot than they are— 

The CHAIRMAN. If the gentleman would yield, we are very glad 

to accommodate the gentleman. But to have left the committee and 

then introduce the credit union issue is certainly a violation of the 

norm of— 

50

Mr. MATHESON. That is the benefit of leaving the committee, Mr. 

Chairman. 

The CHAIRMAN. The gentleman, I assume, would like to be welcomed back? 

Mr. MATHESON. I am done. And I just again want to reiterate, 

thank you for your generosity in letting me participate today, Mr. 

Frank. 

The CHAIRMAN. I am just going to recognize myself for 1 minute, 

just to make a comment on the point we talked about, and it has 

to do with conflict of interest laws. And this is, in effect, the distinction between banking and commerce is a variant of a conflict 

of interest law. 

You do not pass conflict of interest laws to prohibit bad things. 

You pass substantive laws to prohibit bad things. The reason for 

laws prohibiting conflict of interest is that you want to reduce the 

number of occasions in which the temptation to do those things 

arises, in which incentives to violate the substantive laws are magnified, and in which the difficulty of enforcing the substantive law 

becomes more—greater. In other words, conflict of interest laws are 

to prevent you from—they are anti-temptation laws; they are not 

anti-act laws. 

Now that may or may not be right in this case, but that is the 

framework. So the fact that there are substantive laws that prevent things doesn’t, in a number of other areas, tell us not to pass 

laws that diminish the incentive and opportunity for those things 

to happen. 

I thank the panel, I thank the members, and the hearing is concluded. 

[Whereupon, at 12:46 p.m., the hearing was adjourned.] 

(51)

A P P E N D I X

April 25, 2007

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