WalMart May Still Get Its Bank: Street Whispers

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V. Gerard Comizio -- a partner in the corporate department of Paul Hastings, in the firm's Washington office -- says that "WalMart ran into a perfect storm. The biggest banks in the country said that if we have a company instantly one of our biggest competitors, that parent should have to suffer under the same regulator regime as we do, and we should be allowed to engage in non-financial activities."

The community banks were worried, and were being told by the community organizations that oppose WalMart's stores, that WalMart would destroy the community banking system as they have destroyed small-town merchants," Comizio says, adding that "everybody else that hates WalMart crawled out of the woodwork and turned it into a circus."

Companies that own ILCs are not subject to the Bank Holding Company Act, and are not regulated by the Federal Reserve, which does regulate large financial holding companies. According to Comizio, the FDIC is, effectively, "the regulator of the ILC and the parent company, but what they said at the time of the WalMart mess was that they don't try to actively regulate the holding company's non-financial business. They focus on protecting the bank from any abuse by its parent company or its affiliates."

The FDIC's own Advisory Committee on Banking Policy has said that the agency's "supervisory experience with ILCs suggests that ILCs charters pose no greater safety and soundness risk than do other charter types."

After the FDIC put in place a six-month moratorium on new ILC charters in August of 2006, the moratorium was extended for another year, following intense pressure from members of Congress. In its March 2008 Blueprint for a Modernized Financial Regulatory Structure, the U.S. Treasury noted that the Gramm-Leach-Bliley Act of 1999 had already "relaxed" the Glass-Steagall Act's separation of banking and commerce, and also said that "the history of commercial firms affiliating with insured depository institutions has not supported the view of greater risks present in such structures."

The ILC issue was put on hold again when the Dodd-Frank Wall Street Reform and Consumer Protection Act -- signed into law by President Obama on July 21, 2010 -- included a three-year moratorium on new industrial loan company charters.

Dodd-Frank also "created an intermediate holding company, regulated by the Federal Reserve, to isolate the banking activities from that company downward and separate from the holding company's non-financial activities, which is more of a European model," according to Comizio, who says that this "may be a viable alternative."

Why bother with another ILC application?

Once the ILC moratorium ends next July, WalMart may try again to form an ILC, and this time around, the company could face less opposition. After all, how much more risk can a WalMart bank subsidiary represent to the U.S. financial system than the largest bank holding companies that received bailout funds through the Troubled Assets Relief Program, or TARP, or the 464 banks that have failed since the beginning of 2008?