Banking groups seek ILC restrictions.

Two banking groups, the American Bankers Association and the Independent Community Bankers of America, called on Congress last week to quickly pass legislation to preserve the wall that separates banking and commerce.

The ABA seeks passage of legislation to restrict commercial firms' ownership of industrial loan companies, something the ICBA said poses tremendous risk to the nation's financial system and to the deposit insurance fund.

In testimony before the House Financial Services Committee, ABA chairman Earl D. McVicker said passage of the Frank-Gillmor bill (H.R. 698) would help prevent potential problems, such as conflicts of interest and misallocation of credit. McVicker, chairman and CEO of Central Bank & Trust Co. of Hutchinson, Kan., said a non-financial commercial firm could pressure its bank subsidiary to grant loans with favorable terms to customers of the firm or refuse loans to the firm's competitors or their customers. "Credit decisions based on factors other than the credit worthiness of the borrower--and other customary banking considerations--have the potential to threaten the safety and soundness of the bank," he said. "This runs counter to the general purposes of a bank charter and its obligations to customers, and could be particularly aggravating in smaller communities," he said.

"Now is the time to close the ILC loophole," said James P. Ghiglieri Jr., ICBA chairman and president of Alpha Community Bank of Toluca, Ill.

While Wal-Mart has withdrawn its application to establish a federally-insured ILC, these actions do not diminish the need to close the loophole, he said. "Other applications are pending; more could be filed in the future and Wal-Mart could re-file its application at any time. Only Congress can close the ILC loophole and address both the separation of banking and commerce and the need for consolidated supervision of ILC holding companies," Ghiglieri said.

To strike a balance going forward, McVicker said the bill contains a grandfather provision for ILCs that are currently owned by commercial firms. "We support bringing any grandfathered institution within the jurisdiction of a federal bank regulator and vesting that regulator with the full range of supervisory and enforcement tools necessary to protect the insured depository institution or its holding company," said McVicker.