Family members watch for subjects for the commentary part of this web site. That led me to an article from the March 2013 North Carolina Banking Institute Journal by V. Gerald Comizio. The article discusses how the Dodd-Frank law included a moratorium on Industrial Loan Company (IFC) charters after Wal-Mart tried to get one.  The focus of the article is what will happen when the moratorium expires, but I was more interested the fact Congress passed a law that included prevention of Wal-Mart or anyone else obtaining a charter to operate what is commonly called an Industrial Bank. I should give attribution that the articles published in the journal “…are written by professionals in the banking industry and Notes and Comments are written by law students at the University of North Carolina School of Law.”

Congress to the threat to commercial banks by adding the moratorium on new Industrial Bank charters to Dodd-Frank after Wal-Mart applied for an IFC charter in Utah. IFCs are state-chartered and have been around for quite some time. They have been a valuable part of the financial network because they provide loans to low and moderate income workers who are often unable to obtain credit from commercial banks. They are regulated by the Federal Deposit Insurance Corporation (FDIC) and state charter regulators. They have had a very large growth in assets in recent years.

Several large non-financial companies including Sears, Home Depot, and Target have received ILC charters. The outcry did not begin until Wal-Mart first failed to obtain a California charter but then applied for one in Utah with a request for deposit insurance from the FDIC. The FDIC imposed moratoriums and the Dodd-Frank law adopted an additional three-year moratorium. The moratorium has been extended by the FDIC under pressure from Congress.

There have been criticisms of Industrial Banks from their competitors in the commercial banking sector. Examiners often found the management of the banks unaccustomed to regulatory oversight and sometimes unwilling to provide requested information. However, a GAO report concluded that ILCs “…do not appear to have a greater risk of failure than other types of insured depository institutions…” In fact it has been argued that the ILCs have experienced fewer problems than the rest of the banking industry. My guess is that a company the size of Wal-Mart would easily have the resources to comply with the requirements of regulators, so the reaction to prevent them from obtaining a charter must have had another cause.

Wal-Mart is the largest employer in U.S. and undoubtedly is the one with the most critics. They tried to expand into financial services, which would have provided value to the economy and consumers. Congress listened to the commercial banks and regulators and passed a provision to prevent Wal-Mart from entering the banking business. My best guess is that the bankers looked at Wal-Mart’s success in the retail business and panicked. I’m also guessing that this is a prime example of how Congress listens to lobbyists instead of doing what they think is best for the economy.