WAL-MART AND BANKS: SHOULD THE TWAIN MEET? A PRINCIPLES-BASED APPROACH TO THE ISSUES OF THE SEPARATION OF BANKING AND COMMERCE

I. INTRODUCTION The application by Wal-Mart in July 2005 to obtain a Utah charter and federal deposit insurance for a specialized bank (an industrial loan corporation, or ILC) raised anew, in a very public manner, the question of what kinds of enterprises should be allowed to own banks. The application more broadly raised fundamental questions of what kinds of activities banks should be allowed to undertake and what kinds of activities banks' owners should be allowed to undertake. In the financial regulatory area, these issues have come to be described as those of the intermingling of "banking and commerce," and that phraseology will be used in this article. The policy backdrop for the Wal-Mart application (and the publicity that surrounded it) is the general prohibition on the ownership of commercial banks by nonfinancial companies. This policy has been firmly in place since 1970, with antecedents in 1956 (and, arguably, even earlier). Though Wal-Mart withdrew its application in March 2007, these banking and commerce issues nevertheless remain in public view: there are incumbent nonfinancial enterprises that own ILCs; other prominent firms, such as Home Depot, have applied for ILC charters; (1) and the Congress continues to consider legislation that would explicitly ban such ownership. (2) Accordingly, these issues are worthy of closer examination. This article lays out a principled policy approach that the U.S. regulatory system for banks and other depository institutions (3) should follow in considering banking and commerce issues, such as the whether non-financial companies should be allowed to own depository institutions and what kinds of activities are appropriate for banks (and banks' subsidiaries) and for banks' owners (including affiliates and other subsidiaries of the owners). This approach uses the concept of "examinable and supervisable" to delimit the activities that should be allowable for a bank. All other activities that are otherwise legal should be permitted for the owner of a bank [(including a bank holding company (BHC)], so long as the activities occur outside of the bank and the direct and indirect financial relationships and transactions between the bank and its owner are closely scrutinized. The logical implication of this approach is that any party that is otherwise qualified (e.g., is financially capable, has a sound business plan, and is of sound character) should be allowed to own a bank, so long as the bank itself is adequately capitalized and competently managed and the activities of the bank (and its relationships and transactions with its owner) adhere to the delimitations just described. The ownership of ILCs by nonfinancial companies therefore represents a sensible direction for public policy; indeed, banking charters generally, whether state or national, should be expanded so that nonfinancial companies can readily own banks subject to the limitations that are described. If it is the Congress's judgment that bank regulators do not have the authority or capabilities to conduct the monitoring of the financial relationships between the parent and the owner and the bank that is necessary then the Congress should pass legislation that would give the regulators this authority and/or the resources to develop the capabilities--rather than preventing these potentially productive ownership arrangements. The rest of this article will expand on these ideas. At the beginning, a diagrammatic visualization of the structure of a bank and its owner(s) may be useful for the development of the argument that will follow. Figure 1 provides a simplified structure of the bank and its activities, the owners (and their affiliates) and their activities, and the financial relationships between the bank and its owners. It is worth noting that limitations on the activities of banks have a long tradition, extending back to the chartering of the first banks in the United States in the late eighteenth century. …