    [House Hearing, 109 Congress]
    [From the U.S. Government Publishing Office]

                          ILC's--A REVIEW OF CHARTER,

                       OWNERSHIP, AND SUPERVISION ISSUES

    =======================================================================

                                    HEARING

                                   BEFORE THE

                                SUBCOMMITTEE ON
                   FINANCIAL INSTITUTIONS AND CONSUMER CREDIT

                                     OF THE

                        COMMITTEE ON FINANCIAL SERVICES

                         U.S. HOUSE OF REPRESENTATIVES

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 JULY 12, 2006

                                   __________

           Printed for the use of the Committee on Financial Services

                               Serial No. 109-106

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                     HOUSE COMMITTEE ON FINANCIAL SERVICES

                        MICHAEL G. OXLEY, Ohio, Chairman

    JAMES A. LEACH, Iowa                 BARNEY FRANK, Massachusetts
    RICHARD H. BAKER, Louisiana          PAUL E. KANJORSKI, Pennsylvania
    DEBORAH PRYCE, Ohio                  MAXINE WATERS, California
    SPENCER BACHUS, Alabama              CAROLYN B. MALONEY, New York
    MICHAEL N. CASTLE, Delaware          LUIS V. GUTIERREZ, Illinois
    EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
    FRANK D. LUCAS, Oklahoma             MELVIN L. WATT, North Carolina
    ROBERT W. NEY, Ohio                  GARY L. ACKERMAN, New York
    SUE W. KELLY, New York, Vice Chair   DARLENE HOOLEY, Oregon
    RON PAUL, Texas                      JULIA CARSON, Indiana
    PAUL E. GILLMOR, Ohio                BRAD SHERMAN, California
    JIM RYUN, Kansas                     GREGORY W. MEEKS, New York
    STEVEN C. LaTOURETTE, Ohio           BARBARA LEE, California
    DONALD A. MANZULLO, Illinois         DENNIS MOORE, Kansas
    WALTER B. JONES, Jr., North          MICHAEL E. CAPUANO, Massachusetts
        Carolina                         HAROLD E. FORD, Jr., Tennessee
    JUDY BIGGERT, Illinois               RUBEN HINOJOSA, Texas
    CHRISTOPHER SHAYS, Connecticut       JOSEPH CROWLEY, New York
    VITO FOSSELLA, New York              WM. LACY CLAY, Missouri
    GARY G. MILLER, California           STEVE ISRAEL, New York
    PATRICK J. TIBERI, Ohio              CAROLYN McCARTHY, New York
    MARK R. KENNEDY, Minnesota           JOE BACA, California
    TOM FEENEY, Florida                  JIM MATHESON, Utah
    JEB HENSARLING, Texas                STEPHEN F. LYNCH, Massachusetts
    SCOTT GARRETT, New Jersey            BRAD MILLER, North Carolina
    GINNY BROWN-WAITE, Florida           DAVID SCOTT, Georgia
    J. GRESHAM BARRETT, South Carolina   ARTUR DAVIS, Alabama
    KATHERINE HARRIS, Florida            AL GREEN, Texas
    RICK RENZI, Arizona                  EMANUEL CLEAVER, Missouri
    JIM GERLACH, Pennsylvania            MELISSA L. BEAN, Illinois
    STEVAN PEARCE, New Mexico            DEBBIE WASSERMAN SCHULTZ, Florida
    RANDY NEUGEBAUER, Texas              GWEN MOORE, Wisconsin,
    TOM PRICE, Georgia
    MICHAEL G. FITZPATRICK,              BERNARD SANDERS, Vermont
        Pennsylvania
    GEOFF DAVIS, Kentucky
    PATRICK T. McHENRY, North Carolina
    CAMPBELL, JOHN, California

                     Robert U. Foster, III, Staff Director
           Subcommittee on Financial Institutions and Consumer Credit

                       SPENCER BACHUS, Alabama, Chairman

    WALTER B. JONES, Jr., North          BERNARD SANDERS, Vermont
        Carolina, Vice Chairman          CAROLYN B. MALONEY, New York
    RICHARD H. BAKER, Louisiana          MELVIN L. WATT, North Carolina
    MICHAEL N. CASTLE, Delaware          GARY L. ACKERMAN, New York
    EDWARD R. ROYCE, California          BRAD SHERMAN, California
    FRANK D. LUCAS, Oklahoma             GREGORY W. MEEKS, New York
    SUE W. KELLY, New York               LUIS V. GUTIERREZ, Illinois
    RON PAUL, Texas                      DENNIS MOORE, Kansas
    PAUL E. GILLMOR, Ohio                PAUL E. KANJORSKI, Pennsylvania
    JIM RYUN, Kansas                     MAXINE WATERS, California
    STEVEN C. LaTOURETTE, Ohio           DARLENE HOOLEY, Oregon
    JUDY BIGGERT, Illinois               JULIA CARSON, Indiana
    VITO FOSSELLA, New York              HAROLD E. FORD, Jr., Tennessee
    GARY G. MILLER, California           RUBEN HINOJOSA, Texas
    PATRICK J. TIBERI, Ohio              JOSEPH CROWLEY, New York
    TOM FEENEY, Florida                  STEVE ISRAEL, New York
    JEB HENSARLING, Texas                CAROLYN McCARTHY, New York
    SCOTT GARRETT, New Jersey            JOE BACA, California
    GINNY BROWN-WAITE, Florida           AL GREEN, Texas
    J. GRESHAM BARRETT, South Carolina   GWEN MOORE, Wisconsin
    RICK RENZI, Arizona                  WM. LACY CLAY, Missouri
    STEVAN PEARCE, New Mexico            JIM MATHESON, Utah
    RANDY NEUGEBAUER, Texas              BARNEY FRANK, Massachusetts
    TOM PRICE, Georgia
    PATRICK T. McHENRY, North Carolina
    MICHAEL G. OXLEY, Ohio

                                C O N T E N T S

                                  ----------
                                                                       Page
    Hearing held on:
        July 12, 2006................................................     1
    Appendix:
        July 12, 2006................................................    69

                                   WITNESSES
                            Wednesday, July 12, 2006

    Alvarez, Scott G., General Counsel, Board of Governors, Federal
      Reserve System.................................................    16
    Douglas, John L., partner, Alston & Bird, LLP, on behalf of the
      American Financial Services Association (AFSA).................    55
    Hillman, Rick, Director, Financial Markets and Community
      Investment, United States Government Accountability Office.....    22
    Johnson, Arthur C., Chairman and CEO, United Bank of Michigan, on
      behalf of the American Bankers Association (ABA)...............    57
    Jones, Douglas H., acting General Counsel, Federal Deposit
      Insurance Corporation..........................................    18
    Jorde, Terry, Chairman, President/CEO, CountryBank USA, Cando,
      ND, & Chairman, Independent Community Bankers of America (ICBA)    53
    Leary, G. Edward, Commissioner, Utah Department of Financial
      Institutions...................................................    20
    Sutton, George, former Commissioner, Utah Department of Financial
      Institutions, on behalf of the Securities Industry Association
      (SIA)..........................................................    51
    White, Lawrence J., Professor of Economics, Stern School of
      Business, New York University..................................    58
    Wilson, Michael J., Director, Legislative and Political Action
      Department, United Food and Commercial Workers International
      Union..........................................................    60

                                    APPENDIX

    Prepared statements:
        Bachus, Hon. Spencer.........................................    70
        Carson, Hon. Julia...........................................    74
        Clay, Hon. Wm. Lacy..........................................    76
        Gillmor, Hon. Paul E.........................................    77
        Matheson, Hon. Jim...........................................    78
        Alvarez, Scott G.............................................    80
        Douglas, John L..............................................    94
        Hillman, Rick................................................   106
        Johnson, Arthur C............................................   138
        Jones, Douglas H.............................................   148
        Jorde, Terry.................................................   170
        Leary, G. Edward.............................................   185
        Sutton, George...............................................   197
        White, Lawrence J............................................   211
        Wilson, Michael J............................................   223

                  Additional Material Submitted for the Record

        Letter to Hon. Spencer Bachus from Office of Thrift
          Supervision................................................   229
        Letter to Hon. Barney Frank and Hon. Paul Gillmor from
          American Bankers Association...............................   231
        Letter to Hon. Barney Frank and Hon. Paul Gillmor from
          America's Community Bankers................................   233
        Issue of Consumer Finance Law Quarterly Report...............   234
        Letter to Hon. James A. Leach from Board of Governors of the
          Federal Reserve System.....................................   240
        Statement of the National Association of Realtors............   252
        Letter to Hon. Edward R. Royce from the SEC..................   263
        Statement of Hon. Thomas J. Bliley, Jr., on behalf of the
          Sound Banking Coalition....................................   267
        Statement of the NCRC........................................   274
        Letter to Hon. Spencer Bachus from the Office of Thrift
          Supervision................................................   276
        Letter to Hon. Martin J. Gruenberg from Hon. Barney Frank,
          Hon. Paul E. Gillmor, and Members of Congress..............   278
        Letter to Hon. Martin J. Gruenberg from members of the
          Financial Services Committee...............................   286
        Responses to Questions Submitted from Hon. Paul E. Gillmor to
          Rick Hillman...............................................   288

                          ILC's--A REVIEW OF CHARTER,

                       OWNERSHIP, AND SUPERVISION ISSUES

                                  ----------

                            Wednesday, July 12, 2006

                 U.S. House of Representatives,
                 Subcommittee on Financial Institutions
                                   and Consumer Credit,
                               Committee on Financial Services,
                                                       Washington, D.C.
        The subcommittee met, pursuant to notice, at 10:00 a.m., in
    room 2128, Rayburn House Office Building, Hon. Spencer Bachus
    [chairman of the subcommittee] presiding.
        Present: Representatives Bachus, Royce, Lucas, Kelly,
    Gillmor, Biggert, Miller of California, Hensarling, Garrett,
    Brown-Waite, Barrett, Pearce, Neugebauer, Price, McHenry,
    Sanders, Maloney, Sherman, Meeks, Moore of Kansas, Carson,
    Ford, Crowley, McCarthy, Baca, Green, Clay, Matheson, and
    Frank.
        Chairman Bachus. Good morning. The Subcommittee on
    Financial Institutions and Consumer Credit will come to order.
        At today's hearing, which was requested by Mr. Leach, we
    will examine the charter, ownership, and supervision aspects of
    Industrial Loan Corporations, more commonly known as ILC's. The
    hearing is not about a particular piece of legislation, nor is
    it in response to legislation, nor will we be reviewing
    legislation in anticipation of a markup. It's simply about
    ILC's, their structure, and their regulation.
        Today, there are 61 ILC's in 7 States, with $155 billion in
    assets, and $110 billion in deposits. Although the insured
    deposits of ILC's has grown by over 500 percent since 1999,
    those deposits represent less than 3 percent of the FDIC's
    total insured deposits.
        Utah is home to 33 ILC's with approximately $120 billion in
    assets; Merrill Lynch Bank is the largest with $66 billion.
    California is next, with 15 ILC's and $17 billion in assets.
    Most ILC's are owned by financial service companies such as
    Citigroup, Morgan Stanley, and American Express. Others like GE
    Capital and GMAC Commercial are within the financial arm of a
    larger corporate organization. ILC's owned by BMW and
    Volkswagen support the holding companies' commercial business.
    Target Corporation, the retailer, has Target National Bank in
    Utah.
        ILC's originated in the early 1900's as small, State-
    chartered loan companies serving industrial workers who were
    unable to borrow from commercial banks. Since then, the ILC
    industry has experienced significant asset growth and has
    evolved from small, limited purpose institutions to a diverse
    industry that includes some of the Nation's largest and most
    complex financial institutions.
        In 1982, Congress made ILC's eligible for Federal Deposit
    Insurance Corporation insurance, becoming subject to FDIC
    supervision as well as State regulation. In general, ILC's may
    engage in the same activities as FDIC-insured depository
    institutions. ILC's offer a full range of loans, such as
    commercial, consumer and residential real estate, and small
    business loans.
        However, because of the restrictions in Federal and State
    laws, ILC's do not accept demand deposits or checking accounts
    but do offer NOW accounts which give the depository institution
    the right to require at least 7 days notice prior to
    withdrawal. Like other depository institutions, ILC's may
    export their home State's interest rates to customers living
    elsewhere and must comply with the Bank Secrecy Act, Community
    Reinvestment Act, and various consumer protection laws.
        In short, ILC's are subject to the same State banking
    supervision and FDIC oversight as State banks. Nonetheless,
    owners of ILC's do not have to be bank holding companies
    subject to the Federal Reserve's consolidated supervisory
    authority.
        Instead, 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.
        In addition, the Securities and Exchange Commission
    oversees financial conglomerates known as Consolidated
    Supervised Entities, several of which own one or more large
    ILC's, although their main business is in the global securities
    market. Moreover, in any instance where an ILC and a savings
    association are affiliated in a corporate structure, the
    holding company is a savings loan holding company subject to
    regulation by the OTS. In fact, I believe that 70 percent of
    the assets of ILC's are regulated by the OTS.
        Some argue that this regulatory structure for overseeing
    ILC's may not provide adequate protection against the potential
    risks that holding companies and non-bank affiliates may pose
    to an ILC.
        Another area of concern about ILC's is the extent to which
    they can mix banking and commerce through the holding company
    structure. A special 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.
        I'm sure 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 ILC's after other very similar firms
    are already engaged in the ILC structure.
        In closing, I would like to again thank Mr. Leach, and to
    thank the Ranking Member, Mr. Frank, as well as Congressman
    Gillmor, Congressman Royce, and Congressman Matheson for all of
    their efforts, and for helping us with today's hearing. They
    are strongly committed to reviewing these issues, and I look
    forward to working with them and members of this subcommittee
    as we examine ILC charters.
        The Chair now recognizes Mr. Frank, the Ranking Member of
    the Full Committee.
        Mr. Frank. Thank you, Mr. Chairman. I know that our
    colleague from Ohio had some other obligations at a markup and
    I would be prepared to defer to him if he was under the gun to
    get out.
        Chairman Bachus. Thank you. In fact, Mr. Frank had extended
    that offer, Mr. Gillmor, and I wanted him to be able to do so
    as opposed to me.
        Mr. Gillmor. Thank you.
        Let me thank the ranking member for doing that. I have a
    markup on two of my bills in another committee so I appreciate
    that. And I want to thank you, Chairman Bachus, for calling
    this important hearing today and for your interest in taking
    steps to address this important policy area.
        We could not be having this oversight hearing at a more
    critical time. Currently, the FDIC has 14 pending ILC
    applications for deposit insurance, including applications from
    some of the largest commercial companies in America. In the
    past year or so, such diverse commercial firms as Cargill,
    Daimler-Chrysler, Wal-Mart, and Home Depot have come to the
    conclusion that they should own and operate a bank. The problem
    is that they want different and more lenient rules than other
    companies that own banks.
        I think there are many important policy questions at work
    here but it's my belief that Congress is at a crossroads in
    financial services regulation. Do we choose to eliminate the
    historic separation between banking and commerce which has
    allowed us to avoid the economic pitfalls of Germany and Japan,
    for example? And if Congress chooses to make that decision,
    should we make it openly and explicitly rather than simply
    allowing a loophole in bank law to continue?
        Logically, you can't support the use of the ILC loophole
    without repealing the Bank Holding Company Act that applies to
    other banks. And hardly anyone would support that position due
    to the dangers it poses to our financial system. My friend and
    colleague, Barney Frank, and I have worked on this issue for
    several years. We know there's no silver bullet or clean fix
    but we do believe there's a sensible approach to begin to
    answer this question.
        Earlier this week, Congressman Frank and I introduced a
    comprehensive ILC reform bill. H.R. 5746 would allow the FDIC
    to act as a consolidated regulator of ILC parent companies,
    limit the business activities of certain commercially-owned
    ILC's and, most importantly, establish a cutoff date for
    commercially-owned ILC's so that Congress can evaluate whether
    or not to explicitly permit the world's largest retailers to
    operate full-service national banks.
        It's my hope that the future of this charter option will be
    closely examined by our colleagues on this committee, and I
    look forward to continuing to work with Chairman Oxley,
    Chairman Bachus, Ranking Member Frank, my colleague Mr. Leach,
    and others to make prudent decisions at this fork in the road,
    and I yield back and I appreciate you yielding.
        Chairman Bachus. Mr. Frank?
        Mr. Frank. Thank you, Mr. Chairman.
        The issue, we should be clear, is not, in my mind, and I
    think in the mind of my colleague who just spoke, whether or
    not we curtail the ILC model. It is with a limited class of the
    ILC's--those that are primarily non-financial. The legislation
    and the approach that Mr. Gillmor and I have taken borrows from
    the Gramm-Leach-Bliley approach, the 85 percent, 15 percent
    metric that says if you're 85 percent financial, you go ahead.
        What concerns me is the problem of those entities that are
    not at all banks owning a bank and the conflicts that are
    there. Now, it is true when we abolished Glass-Steagall and
    promoted or recognized, after the fact, the merger, in effect,
    of banking and securities, there were some concerns about
    leveraging and tying.
        What drove that was the increasing convergence, for a
    variety of reasons, of the various aspects of the financial
    services industry, and there were some concerns and some
    efforts were made to try and limit those problems. I don't see
    any reason to take that as a precedent for, in effect, throwing
    open the ownership of banks to entities that are entirely non-
    financial.
        In fact, if we were to go ahead and say, okay, everybody
    into the pool, you would now have an open season, I guess, for
    manufacturers, retailers, anybody else, contractors, to own
    what was in effect a bank. And at that point I'm not sure what
    value would be served by other restrictions we have.
        The other day, I was watching a rerun of, ``Are You Being
    Served'', the British comedy about the department store. And
    Mrs. Slocombe had been dispossessed from her house so she was
    being given temporary quarters in the home furnishings
    department of the department store and she felt somewhat
    exposed to the elements.
        So they found a fake door and side panels and put it up in
    front of her bed so she felt like she was in her house. And
    then when people came to visit, she would make them come
    through the door, but the door extended only so far, and on
    both sides of the door there was wide open space.
        It seems to me we're on the verge of doing that with ILC's.
    I mean, we have all these restrictions that apply if you want
    to become a bank but it will be like the door to Mrs.
    Slocombe's apartment because if you want to just own an ILC,
    you just ignore those and go in anyway.
        And here are the problems. This is not artificial. I spoke
    with the people at Home Depot, a very well-run company. Home
    Depot is in the district of one of our colleagues who speaks
    highly of it. I don't doubt their integrity for a minute. Here
    are the inherent problems.
        Home Depot says they're going to buy a bank, and I spoke
    with them. Now, they have a bank which would have an ongoing
    relationship with a contractor. If you're a contractor and you
    have this ongoing relationship, you have a leg up in getting
    loans for the work you would be doing. People want to have that
    relationship.
        Home Depot says, however, even though the contractor would
    want to have that relationship with the bank which Home Depot
    owned, that there would be no pressure whatsoever on that
    contractor to buy from Home Depot, as opposed to somebody else.
        Well, I am sure there are trusting souls who will believe
    that, and it may even be true, but it is exactly the kind of
    conflict of interest that we set up walls to prevent. The
    notion that I'm a contractor and I have an interest in Home
    Depot continuing to give me this relationship but it's not
    going to affect where I buy things is tenuous.
        You also have this: I'm a homeowner and I want to get a
    loan so I can do some substantial renovation or repair in my
    house. Now, I know that if I go to the Home Depot-affiliated
    contractor, I get a better chance of getting a loan. Not only
    that, but if I'm the bank, now owned by Home Depot, and someone
    comes to me for a loan, I have two ways in which I make a
    profit. One, on the repayment of the loan, but also I
    understand that if I lend to this individual, he or she may buy
    a large amount of things from my owner.
        And people have said, well, yes, but that's the kind of
    tie-in that we can prevent. Yes, you can theoretically prevent
    some of these things but I do not think in practice we ought to
    create all these problems for the regulators to have to deal
    with. I think trying to police those relationships on an
    ongoing basis really would require a degree of intrusive
    regulation and excessive regulation that's in no one's
    interest.
        What we are talking about is protecting the integrity of
    the decisions made by banks. They should be made based on the
    profitability of the loan, and solely on that. When you have a
    wholly unrelated entity owning the bank, and when that entity
    can make a profit because the loan is made, because the making
    of the loan will not only help the bank but will significantly
    help the owner of the bank, I think the integrity or the purity
    of that decision is somewhat impugned.
        And that's why I believe that in the future we should go
    with an 85-15 percent test. I would say in closing that if we
    don't do that, it seems to me what we will then have is the
    notion that there is something where we have some kind of
    special status for banks where they are insulated from the
    other pressures in terms of the loans they make that will
    simply disappear because if ILC's charters are freely granted,
    no matter who the owner is, retailer, contractor, manufacturer,
    racetrack owner, whatever, then I think we have a serious set
    of regulatory problems that we should not create.
        Chairman Bachus. Thank you. At this time, I'll recognize
    the senior member of the Financial Services Committee, Mr.
    Leach, for his opening statement.
        Mr. Leach. Thank you very much, Mr. Chairman.
        I want to express my personal admiration for all you've
    been doing in this Congress on banking issues. I'm deeply
    impressed and I appreciate your inviting me to come today to
    your subcommittee.
        It's self-evident that Congress must act to revamp the
    regulatory oversight of ILC's. The simplest and most
    comprehensive approach is to require that an ILC become a
    financial holding company obligated to comply with all of the
    conditions, requirements, restrictions, and limitations that
    apply to a financial holding company under the Bank Holding
    Company Act.
        This approach, which I have introduced in this Congress as
    H.R. 3882, is the exact bill I have introduced to numerous
    prior Congresses dating back to the 1990's. It was initially
    objected to because ILC's were considered small irrelevant
    footnotes in American finance. But as Chairman Bachus has just
    noted, the ILC industry has experienced significant growth over
    the past several decades.
        Now, more behemoth commercial companies are pressing the
    commerce banking envelope and this trend is likely to escalate
    and include greater numbers of foreign actors.
        As this Congress well understands, Congress has explicitly
    forbidden banks from engaging in commercial endeavors.
    Implicitly, it is irrational to think that a commercial
    company, by buying or establishing a banking-like institution
    such as an industrial loan company, should be able to do what
    Congress prohibited in reverse. What was prohibited in one
    direction should not be sanctioned in another.
        There are four broad attempts of financial modernization
    legislation known as Gramm-Leach-Bliley: one, to enhance three-
    way competition between the banking, securities, and insurance
    industries; two, to create functional regulation by category of
    activity; three, to establish a principal umbrella regulator to
    ensure that regulatory cracks are filled; and four, to curtail
    regulatory arbitrage at the Federal level.
        This fourth point is seminal to the discussion at hand. In
    developing compromises to make Gramm-Leach-Bliley possible, I
    fully understood that private sector industries had rival
    interests and that maximization of profit was a respectable
    motivation in a free market economy. But I was continually
    surprised at the intensity of bureaucratic rivalries and had
    minimal respect for the maximization of power motivation of
    public sector institutions.
        It is in this context that I'm concerned that regulatory
    power rivalry may resurface in the ILC issue. As a primary
    Federal regulator of ILC's, the FDIC has the potential to
    empower commercial companies and, in so doing, aggrandize its
    own regulatory jurisdiction. But Congress's goal in GLB was to
    protect the public interest by establishing cooperative rather
    than confrontational relationships between regulators.
        Although the FDIC is critically important in the Federal
    regulatory regime, it is not intended to be an exclusive
    authority. The Congress concluded in GLB that consensus
    institutional decision-making was vastly preferable to
    regulatory arbitrage.
        In an extensive review I requested last year, the General
    Accounting Office pointed out that when the Federal Reserve is
    deprived of a regulatory role, significant gaps in oversight
    can occur. The FDIC, after all, has limited experience in
    holding company oversight and, vastly more importantly, lacks
    the legal right to review the financial well-being of holding
    companies.
        Under a Bank Holding Company Act framework, from which
    ILC's are currently shielded, the Federal Reserve is empowered
    to establish consolidated capital requirements to ensure that
    holding companies are a source of financial strength for a
    subsidiary bank.
        Under the Bank Holding Company Act, commerce and banking
    cannot be merged. Where financial companies have holding
    companies, the Federal Reserve has broad enforcement authority.
    It can issue cease and desist orders, impose civil penalties,
    and order a holding company to vest non-bank subsidiaries if it
    determines that ownership of the subsidiary presents a risk to
    the financial safety, soundness, or stability of an affiliated
    bank and is inconsistent with sound banking principles.
        Corporate parents of ILC's are not subject to these
    requirements. In our marked economy, seldom is short-term
    viability a guarantor of long-term financial strength. Without
    the safeguard controls that exist under the Bank Holding
    Company Act, it's problematic for the government to prevent
    deficiencies and damage to the Federal safety net.
        More profoundly, it's problematic to envision the
    consolidation of ownership and other changes in the nature of
    our economy which will occur if banking and commerce are
    integrated. There is, after all, a catch-22 dilemma in allowing
    commercial companies to own federally-insured financial
    institutions such as ILC's. Commercial companies which are weak
    or become weak could easily develop conflicts that jeopardize
    the viability of a federally-insured institution. On the other
    hand, those which are strong could too easily precipitate chain
    reaction consolidations of ownership or tilt the competitive
    marketplace in anticompetitive ways.
        Finally, a note about the bizarre circumstance that ILC's
    are limited by law to only a handful of States. The effect of
    this legal situation is that the specially empowered States
    have a vested interest in approving ILC charters which may be
    foreign as well as domestic--
        Chairman Bachus. Mr. Leach, you could--
        Mr. Leach. I have just about 1 more minute if that's all
    right with the Chair.
        Chairman Bachus. You can stay on.
        Mr. Leach.--despite the fact that certain charters might
    fly in the face of Federal precedent and good government
    practices. The concentration of ILC's in a few States has the
    effect of taking jobs from the majority of States as well as
    the prospect of changing the nature of the American economy.
        In conclusion, let me stress that due to aspects of current
    economic circumstance and the obligations of Congress with
    regard to financial industry supervision, the United States
    today confronts unprecedented challenges. The twin fiscal and
    trade deficits are compounded by war on several fronts. It has
    eroded support for America and the world and by an escalation
    in petroleum prices which constrains the disposal income of the
    American family and thus GDP in general.
        This is why a straightforward, comprehensive approach of
    requiring an ILC to become a financial holding company with all
    of the obligations implicit in the Bank Holding Company Act is
    so preferable to the compromise approaches on the table.
        Thank you, Mr. Chairman.
        Chairman Bachus. Thank you, Mr. Leach. Mr. Sanders?
        Mr. Sanders. Thank you, Mr. Chairman.
        Let me concur with Mr. Leach, and praise him for the work
    that he has done on this issue. Also, Mr. Chairman, I would
    like to ask unanimous consent that the statements of the
    National Community Reinvestment Coalition and the Sound Banking
    Coalition be included in the record of this hearing.
        Chairman Bachus. Without objection.
        Mr. Sanders. Thank you.
        Mr. Chairman, this is an important hearing. Thank you very
    much for holding it. What we are examining today is an
    enormously important issue and that is whether we continue our
    country's strong tradition of separating banking from commerce
    or do we allow a loophole in current law to expand that could
    permit retailing giants like Wal-Mart and others to own banks
    all across America.
        Mr. Chairman, let me be clear that I am strongly opposed to
    allowing Wal-Mart and other non-banking conglomerates to
    receive industrial loan charters. In that regard, I have co-
    signed a letter authored by Mr. Gillmor and Ranking Member
    Frank urging the FDIC to impose a moratorium on approving any
    ILC applications owned by commercial firms. I am glad that
    Douglas Jones from the FDIC is here today and I hope that he
    will be receptive to imposing this moratorium.
        If Wal-Mart, Home Depot, and other large corporations are
    allowed to become ILC's, they will be granted similar
    privileges as regular banks without the same regulatory
    oversight. This is wrong and could have very serious
    ramifications to our economy, particularly in rural areas.
        According to a study by Iowa State University, up to 47
    percent of local retailers in some small towns are forced out
    of business within a decade after Wal-Mart opens up a store in
    their area--up to 47 percent. But that figure could skyrocket
    even higher if Wal-Mart is allowed to own banks in thousands of
    their stores all across this country.
        First, Wal-Mart would drive many small community banks in
    rural areas out of business. Then Wal-Mart may refuse to lend
    to their local competitors, forcing them to close their doors.
    This could provide Wal-Mart with monopoly control over small
    towns throughout this country. And in that regard, Mr.
    Chairman, I would like to quote from the statement of the
    National Community Reinvestment Coalition.
        This is what they say, and I quote: ``Mixing banking and
    commerce imperils safety and soundness because it eliminates a
    bank's impartiality. A bank with a commercial affiliate will
    not base its lending decisions on sound underwriting criteria.
    Instead, it will favor its affiliate and cut off credit for its
    competitors. The bank will also be tempted to finance its
    affiliates' speculative and risky ventures. With a bank the
    size of Wal-Mart or Home Depot, the end result is a significant
    reduction in credit for independent small businesses and an
    increase in financing for the bank's affiliate regardless of
    the risk it produces''.
        Mr. Chairman, small businesses and community banks are the
    backbone of our rural economy. In my opinion, we must not
    jeopardize the very survival of these businesses by expanding
    the ILC loophole.
        Mr. Chairman, on this issue I am in complete agreement with
    the Independent Community Bankers of America, the United Food
    and Commercial Workers, the National Grocers Association, the
    National Association of Convenience Stores and the National
    Community Reinvestment Coalition. We must end the ILC loophole
    once and for all.
        To that end, I want to commend Mr. Leach for his
    legislation that he has recently introduced to close the ILC
    loophole by requiring any company that owns or would like to
    own an ILC to sell off their non-financial activities. This
    legislation would also require ILC's to undergo the same
    regulation and supervision by the Federal Reserve that applies
    to all other banks. I am convinced this is the correct approach
    to take.
        However, I also understand that Mr. Gillmor and Mr. Frank
    have introduced compromise legislation that would, among other
    things, prohibit commercial firms from acquiring industrial
    banks effective June 1, 2006. I applaud Mr. Gillmor and Mr.
    Frank for introducing this legislation and look forward to
    working with them as the chairman on this extremely important
    issue.
        The separation of banking and commerce has served our
    country well. We must keep the separation intact by passing
    either the Leach bill or the Gillmor-Frank bill.
        I thank the Chair and I look forward to hearing from our
    witness.
        Chairman Bachus. Thank you, Mr. Sanders. We have nine other
    members who want to make opening statements and I'm going to
    suggest--we have two of those members who were among the
    members that actually made the written request for the hearing,
    and that's Mr. Royce and Mr. Matheson. And I would not want to
    limit their time, but if we could have an agreement--I don't
    know--Mr. Matheson, Mr. Royce, how long are your opening
    statements? How long are they?
        Mr. Royce. I'd say--would 4 minutes be fair?
        Chairman Bachus. Four or five--if it's--if the other
    members would consent to giving them their full 5 minutes,
    letting the other members have 2 or 3 minutes, try to limit
    theirs to--
        Mr. Sherman. Sounds good.
        Chairman Bachus. And if you all will agree, I would like to
    recognize them next as the requesting members, and go to Mr.
    Royce, then to Mr. Matheson and then we'll go back to the
    regular order.
        Mr. Royce. Thank you very much, Mr. Chairman. I appreciate
    that and I thank you again for holding this hearing to review
    the charter and ownership and supervision issues related to
    ILC's. And I'd also like to thank our--I think we're going to
    have a total of 10 witnesses today--for their testimony this
    morning.
        While ILC's have been in existence, I guess, for about 100
    years, it is only recently that the charter has gained a great
    deal of attention and I believe a review of that charter is a
    healthy exercise for this committee. In fact, I've called for
    such hearings many times in the past.
        Industrial Loan Companies are regulated in a similar manner
    to all other federally-insured depository institutions. For
    example, they are subject to the same minimum capital and
    prompt corrective action provision as any other bank we're
    familiar with in this committee.
        Some critics have expressed concern that an ILC might be
    used to subsidize a parent company's cost of capital. However,
    the rules for dealing with affiliates first prescribed in
    Sections 23A and 23B of the Federal Reserve Act apply to all
    FDIC-insured and depository institutions. This means that an
    Industrial Loan Company's relationship with any affiliates is
    subject to very strict rules.
        Under Section 23A, an ILC's total covered transactions with
    any affiliate cannot exceed 10 percent of the bank's capital.
    The ILC's total covered transactions with all affiliates
    combined cannot exceed 20 percent of the bank's capital. With
    few limited exceptions, covered transactions must be fully
    secured with qualifying capital and an ILC cannot purchase a
    low quality asset from an affiliate.
        Under Section 23B, an ILC must deal with an affiliate on
    market, in other words, at arms-length, in terms of arms-length
    terms. An ILC cannot, as a fiduciary, purchase securities or
    other assets from an affiliate unless otherwise permitted by
    statute or court order. The ILC cannot, as principal or
    fiduciary, purchase particular securities while an affiliate is
    a principal underwriter for those securities. And, lastly,
    neither the ILC nor its affiliate may publish any advertisement
    or make any agreement stating or suggesting that the ILC shall
    in any way be liable for the obligations of its affiliate.
        Other critics have suggested that the ILC regulatory
    structure is deficient because some ILC parents are not subject
    to supervision at the holding company level. In the past, the
    FDIC and the State banking regulators with oversight of ILC's
    have suggested that they have sufficient powers to regulate the
    parent-ILC relationship. I'm interested to hear more about this
    concern from our witnesses this morning.
        Furthermore, I'd like to introduce into the record a letter
    from SEC Chairman Cox in which he outlines the Commission's
    powers and authority under the Consolidated Supervised Entity
    regime. An overwhelming majority of total ILC assets are
    subject to the Consolidated Supervised Entity regime to
    supervision under this and from regulators such as the SEC and
    the OTS.
        Mr. Chairman, thank you again for holding this hearing and
    I look forward to hearing from our witnesses.
        I yield back.
        Chairman Bachus. Thank you, Mr. Royce. And I indicated--I
    want to correct myself. I had indicated that Mr. Matheson and
    Mr. Royce actually requested this hearing. They did not request
    this hearing. What they requested was that, if this hearing was
    held, they be allowed to participate in the suggestions for
    witnesses and the structuring of the hearing. So I wanted to
    make that qualification.
        Mr. Matheson.
        Mr. Matheson. Thank you, Mr. Chairman, for holding this
    hearing on the industrial bank charter and the framework in
    which industrial banks are regulated at the State and Federal
    level. It's my hope that this hearing is going to be a
    constructive opportunity for the subcommittee to focus on
    factual information and legitimate policy issues regarding the
    regulation of ILC's.
        And I hope members of the committee will set aside
    preconceived notions and take the time to listen and learn
    about the supervision of ILC's rather than discussing issues
    outside the direct scope of this hearing, such as bills
    introduced by ILC opponents or applications for ILC charters
    not approved or even accepted by the State banking regulator. I
    think members will come to value the competition of benefits
    these institutions provide to millions of consumers and
    business around the country.
        I hope the members will learn in this hearing what ILC's
    are and what they are not. While many critics and competitors
    of ILC's argue that these institutions are not subject to
    comprehensive regulation, they are in fact subject to not only
    regulations and supervision by their respective State banking
    regulators but also by the FDIC and, in many cases, subject to
    consolidated holding company regulation by the Office of Thrift
    Supervision and the SEC.
        Industrial banks are subject to all the Federal banking
    laws that apply to other FDIC-insured State charter banks,
    including consumer protection requirements, restrictions on
    transactions with affiliates, depository reserve requirements,
    safety and soundness requirements, and Community Reinvestment
    Act requirements.
        Some ILC competitors have argued that these banks pose a
    threat to the safety and soundness of the national banking
    system. As a group, industrial banks are better capitalized and
    better rated than other banks. Former FDIC Chairman Powell
    asserted that ILC charters, ``pose no greater safety and
    soundness risk than other charter types.'' And in fact, the
    much-mentioned report issued by the Government Accountability
    Office last year said that, ``from an operations standpoint,
    ILC's do not appear to have a greater risk of failure than
    other types of depository institutions.''
        Those who criticize ILC's also argue that these banks allow
    for the inappropriate mixing of banking and commerce. ILC's
    cannot engage in any activity not approved by their regulator,
    nor can they engage in any activity not permitted for other
    insured depository institutions. They're subject to Sections
    23A and 23B of the Federal Reserve Act which severely restricts
    transactions between a bank and its parent company.
        The fact is that it's questionable if there is a bright
    line now between banking and commerce. Gramm-Leach-Bliley Act
    actually liberalized the ILC charter and authorized commercial
    banks to engage in a number of formerly prohibited non-banking
    commercial activities.
        Finally, there are those who claim that ILC's exist only by
    virtue of a loophole. It is, in fact, the law that allowed the
    formation of ILC's almost 100 years ago, and it is the law that
    has allowed the 33 active industrial banks operating in Utah
    and holding over $120 billion in assets to do well in a
    competitive market today.
        ILC opponents claim that a loophole exempts these banks
    from bank holding company regulation by the Federal Reserve. In
    fact, Congress expressly exempted the parent companies of
    industrial banks from the Bank Holding Company Act with the
    enactment of the Competitive Quality Banking Act in 1987. The
    exemption was debated before it was enacted, and Congress
    hasn't modified the exemption since it became law almost 20
    years ago.
        So in closing, Mr. Chairman, I do want to thank you for
    holding this hearing today. I hope that the facts speak for
    themselves and I hope that when the hearing is over, members
    will have a better appreciation for the facts surrounding
    industrial banks, including their strong record of effective
    regulation by State and Federal Governments, their history of
    industry success, and their role in providing greater
    competition and efficiency to our economy.
        I yield back my time.
        Chairman Bachus. Thank you, Mr. Matheson. Mr. Pearce.
        Mr. Pearce. Thank you, Mr. Chairman.
        Just briefly, being from a rural State--a vast rural State
    with lots of dirt between voters--my greatest concern is that
    consolidation tends to argue or work against the small rural
    States. Consolidation always--and funds should always seek the
    highest rates of return. The rates of return on loans and
    investments in New Mexico will never be what they are in
    Washington, D.C. The price of one of the houses along the
    Potomac could probably buy all of the homes in some of the
    counties in my district; that does not mean that we should not
    have access to capital and consolidation leads to a limitation
    and non-availability of capital in those area of low rates of
    return.
        As we look at the world and the Nation's economy, we must
    be aware that our economy cannot thrive and survive with just
    20 or 30 large metropolitan areas. We do need to be aware of
    the areas where small rural banks will invest in their local
    economies but never get the rates of return that could be
    achieved in other areas. So I'm greatly concerned about that.
        On the other side of the fence, business, and Wal-Mart
    specifically, because they seem to be the focus of this
    discussion, deserve fairness. They deserve predictability and I
    arrive at the same conclusion that Mr. Gillmor did, that it's
    time for a very thorough look at the entire way that we are
    granting charters, the way that we're doing banking, the way
    that we're doing the ILC's in this country. It's way overdue to
    look at the way that regulators are affecting the situation.
        So I appreciate you having this hearing. Thank you, Mr.
    Chairman.
        Chairman Bachus. Thank you, Mr. Pearce. Mr. Sherman, thank
    you; we appreciate your patience.
        Mr. Sherman. Thank you, Mr. Chairman. I want to join the
    gentlemen from Ohio, Massachusetts, Iowa, and Vermont, and
    associate myself with their statements.
        As so many have stated, we cannot and should not mix
    banking with commerce. Because I strongly believe in the
    importance of maintaining that separation, I have opposed the
    Wal-Mart ILC application. Quite a number of members of this
    committee signed a letter on December 15th to the FDIC asking
    for a moratorium on new approvals for new commercially-owned
    ILC's until the FDIC board was fully constituted.
        Quite a number of us also joined in a June 8th letter to
    the FDIC asking for a moratorium on new approvals for new
    commercially-owned ILC's until Congress gets a chance to
    consider this matter. By consider this matter, I would think
    not only hold this particular subcommittee hearing, but
    actually consider the legislation put forward by Mr. Leach or
    the bill put forward by Mr. Frank and Mr. Gillmor.
        Without objection, I'd like to put those two letters into
    the record of this hearing.
        Chairman Bachus. Without objection.
        Mr. Sherman. We took a giant step when we passed Gramm-
    Leach-Bliley and said that the walls that separated banking
    from other financial activities would be swept aside. I think
    that it is best for us to see how our economy reacts to that
    dramatic change before we allow the ILC's to go from a real
    small part of our economy to a new device to break down all the
    walls between banking and commerce.
        We ought to see how Gramm-Leach-Bliley works, how this
    massive expansion of the activities that can be linked with
    banking works before we go down the road of the Japanese model
    of linking banking and finance. It is important that capital be
    allocated fairly and efficiently, especially if that capital is
    created through Federal insurance. And as Mr. Frank pointed
    out, there is certainly the risk that an ILC will favor its
    parents, suppliers, customers, or potential customers and, in
    some cases, perhaps its parent entity itself.
        So I look forward to not only these hearings but hopefully
    a markup of legislation, and I would hope that the FDIC would
    take no action until Congress has a chance to consider such
    legislation.
        I yield back.
        Chairman Bachus. Thank you. Mr. McHenry.
        Mr. McHenry. Thank you, Mr. Chairman. Thank you for holding
    this hearing. I appreciate the opportunity for us to discuss in
    this Congress the future of the Industrial Loan Corporations.
        This has been a growing interest in commercial enterprises
    entering the insured banking business and this has resulted in
    a significant increase in ILC assets over the last 20 years.
    The mounting concern that comes from this growth is certainly
    justified but while it supports the competitive spirit
    intrinsic in expansion, it's imperative that we don't allow a
    competitive advantage or disadvantage to take hold in the
    marketplace.
        And as public policymakers, it's important that we achieve
    that balance so that there is competition within the
    marketplace, that there are no public policy advantages or
    disadvantages given to different sectors. And so I think it's
    important that we have a very balanced approach when it comes
    to ILC's.
        And as someone who has not made my mind up in regards to
    how we approach this or what the proper approach is, rather, I
    think it's important that we, here in Congress, listen to what
    we can come up with from the two wonderful panels we have here
    today and through ongoing discussions about the best way to
    approach this to achieve a proper balance in the marketplace.
        So, Mr. Chairman, thank you so much for taking the time to
    have this hearing. I appreciate the panelists being here today
    as well as a small crowd.
        Mrs. Kelly. [presiding] Thank you, Mr. McHenry.
        Mr. Moore.
        Mr. Moore, you have no opening statement?
        Ms. Carson, do you have an opening statement?
        Ms. Carson. I do not have an opening statement but I would
    like to request that my statement--go into the record for--
        Mrs. Kelly. Yes. So moved. Mr. Crowley?
        Mr. Crowley. I thank the gentlelady for yielding and I
    appreciate the committee holding this important hearing today
    on Industrial Loan Corporations.
        First, let me say that while I may disagree with the
    ranking member of the Full Committee on this particular issue,
    I believe he has not tried to demagogue this issue or some of
    the corporations at play, but has a true philosophical
    opposition to the expansion of ILC's. I respect his opinion as
    much as I respect him, but on this issue we disagree.
        I support ILC's because I do not believe they present any
    risk to the safety and soundness of our Nation's banking
    system. They will provide greater competition in the
    marketplace for consumers and because I fear that an idea that
    should be debated in a rational way may be being argued by some
    opponents using a major American retailer as a sort of evil
    face of ILC's.
        With respect to the safety and soundness issue, there's
    been no evidence presented to me to date of an ineffectiveness
    or weak supervision by the FDIC or current ILC's as some claim.
    Furthermore, current ILC's operating have posted no risk,
    either individual or systematic, to the Nation's banking
    system.
        Secondly, ILC's will also provide greater competition in
    the Nation's banking system which is, I believe, a positive.
    These ILC's will provide greater competition to the banking
    industry which will also help consumers. In fact, some
    opponents of ILC's happen to be the chieftains of capitalism
    arguing essentially that they oppose ILC's for the fear of new
    competition they will bring.
        And finally, I fear that an idea that should be debated on
    its merits, whether we should expand ILC's or not, and on which
    both sides have reasonable arguments, some people are using
    this issue as a red herring of sorts to beat up on a particular
    retailer or retailers, trying to obtain FDIC permission to
    create an ILC.
        Some argue that some of these retailers are bad on other
    issues and this should be used as a stick to punish them. But I
    think, while appreciating their arguments and not necessarily
    disagreeing with some of their arguments, that their overall
    argument is flawed, and that allowing an ILC to continue will
    provide new competition and help the very people these groups
    represent.
        But again, I am pleased that we're having this hearing so
    that we may discuss the issues of ILC's and Congress's role and
    whether we should stop them or not. And before I yield back,
    I've been asked by Mr. Matheson if I would enter into the
    record a letter from the Office of Thrift Supervision,
    Department of the Treasury, into the record, Madam Chairwoman.
        Mrs. Kelly. So moved.
        Mr. Crowley. And with that, I yield back the balance of my
    time.
        Mrs. Kelly. Thank you. Actually, I'm next on the list so
    I'm going to make an opening statement.
        I want to echo my colleagues' concerns about safety and
    soundness with regard to ILC's. I've always been concerned that
    ILC's represent a dangerous exception to our banking laws by
    placing a disproportionate share of our Nation's financial
    assets into small State regulators with a financial interest in
    attracting business away from established regulatory centers
    like New York or Chicago.
        Wall Street firms are regulated by the SEC and the FDIC as
    well as State regulators and when you look at the number of
    people in--the number of ILC's in Utah, it's a small State. The
    ILC's are growing and I'm concerned that the Utah banking
    department doesn't have the resources to accomplish its
    regulatory job.
        I'm very concerned that the entire list of the staff of the
    Utah financial institution department can fit on one page, in
    large type. I'm asking the committee to place that page in the
    record so the public can know how small the Utah ILC regulatory
    force is.
        In New York State, there's 438 examiners for a level of
    $900 million assets for each examiner. In Utah, there are 36
    examiners for a level of $3.1 billion in ILC assets alone per
    examiner, and that does not include all the small banks and
    credit unions in the State that also need regulation. I wonder
    if that's going to be enough regulation and I'm very concerned
    about whether the regulation is enough to hold the safety and
    soundness issues that we are concerned with back from being a
    problem in the States that have the ILC's.
        So I will, with unanimous consent, put this in the record
    and yield back the balance of my time, and turn now to Ms.
    McCarthy.
        Mrs. McCarthy. Thank you. I don't have an opening
    statement. I'm looking forward to hearing from the witnesses.
        Mrs. Kelly. Thank you, Ms. McCarthy. Mr. Baca.
        Mr. Baca. Thank you, Madam Chairwoman. I want to thank you
    for holding this important hearing.
        While this hearing is about the ILC's in general, the
    impact of Wal-Mart pending the ILC's application will be felt
    in our districts and our communities across the Nation. For
    this reason, the application was a subject of two FDIC hearings
    in April and is a source of considerable debate across the
    country today.
        Federal Reserve Chairman Ben Bernanke, and former Federal
    Reserve Chairman Alan Greenspan, had publicly opposed the ILC's
    loopholes in underscoring the reasons for a full Congressional
    review of the issues surrounding the ILC's. I am pleased that
    the FDIC postponed pending ILC's application, giving us a
    chance to examine this issue further.
        Other commercial firms like Target, General Motors, and
    General Electric own ILC's; however, there are many questions
    that are left unanswered about the impact of these companies
    entering into the banking business.
        Does the FDIC have enough supervision or authority over the
    ILC's to uphold the safety and soundness of the banking system,
    is question number one. Will we begin to see communities' banks
    closed in the same way that local businesses have been driven
    out by the Wal-Mart superstores? What will this mean for the
    underserved communities? Will low income consumers have access
    to capital and fair lending, which is very important for a lot
    of us as we look at our diversity and growth within our
    communities. And I know in the empire we probably don't have
    the biggest wealth in that area but how it would impact us in
    that area.
        I look forward to hearing from some of the witnesses today,
    and hope that their input will help us better determine
    appropriate steps we should take in moving forward on this and
    other ILC applications.
        I thank you, and I yield back the balance of my time, Madam
    Chairwoman.
        Mrs. Kelly. Thank you, Mr. Baca. Ms. Brown-Waite.
        Ms. Brown-Waite. Thank you, Madam Chairwoman. I certainly
    appreciate the subcommittee holding this hearing.
        America has had a long history of keeping banking and
    commerce separate. This philosophy has actually protected our
    Nation from giant conglomerates controlling the financial
    markets, and enforcing the hands of the economy in their favor.
    This philosophy was strongest after the Great Depression, not
    that I was around for it, but I'm told that it was, when our
    government fought against major monopolies and won. Allowing a
    worldwide giant like Wal-Mart to provide banking services to
    millions of employees and consumers would throw us right back
    into that fight.
        Florida is not home to any ILC's. In their absence,
    community banks, farm credit organizations, and credit unions
    provide specialized services to their unique client base. In
    rural areas like my Congressional district, a farmer can get a
    loan for new tractor equipment, while a local restaurant can
    reinvest their profits to open up a new location, and a young
    family can begin a savings and investment plan to meet college
    needs.
        This diversity can only be met by local financial planners
    and advisers who know their clients. Therefore, saying that I'm
    troubled by Wal-Mart's ILC application is an understatement.
    Nervous, nauseous, and almost terrified, is more like it.
        I certainly look forward to hearing what our witnesses have
    to say today on this issue and again, Madam Chairwoman, I
    appreciate having this hearing so that we can have a public
    record about this issue.
        Thank you, and I yield back.
        Mrs. Kelly. Thank you. Mr. Ford, do you have an opening
    statement?
        Mr. Ford. I do not. I would subscribe to the notion that
    since we have panelists we ought to listen to them, so I'm
    going to wait and let them talk.
        Mrs. Kelly. In that case, we will introduce the witnesses
    and let's hear from them.
        We have first Mr. Scott G. Alvarez, General Counsel, Board
    of Governors of the Federal Reserve System. Next, Mr. Douglas
    H. Jones, Acting General Counsel, Federal Deposit Insurance
    Corporation. Next we have Mr. Edward Leary, Commissioner for
    the Utah Department of Financial Institutions and, finally, Mr.
    Rick Hillman, Director, Financial Markets and Community
    Investment, the United States Government Accountability Office.
        We welcome you, gentlemen, and look forward to your
    testimony. We will begin with you, Mr. Alvarez.

       STATEMENT OF SCOTT G. ALVAREZ, GENERAL COUNSEL, BOARD OF
                   GOVERNORS, FEDERAL RESERVE SYSTEM

        Mr. Alvarez. Thank you, Madam Chairwoman, Representative
    Frank, and members of the subcommittee. I am pleased to testify
    on behalf of the Board regarding Industrial Loan Companies or
    ILC's and I ask that my full statement be incorporated into the
    record.
        ILC's are State-chartered banks that have access to the
    Federal safety net and virtually all the powers of insured
    commercial banks. Nevertheless, a special exception in the
    Federal Bank Holding Company Act allows any type of firm,
    including a commercial firm or a foreign bank, to acquire an
    Industrial Loan Company chartered in one of a handful of States
    without Federal supervision of the parent holding company and
    without any restriction on the scope of activities conducted by
    the bank's affiliates.
        At the time the ILC exception was adopted in 1987, ILC's
    were mostly small locally-owned institutions that had only
    limited deposit taking and lending powers under State law.
    Today, however, this exception has become the means through
    which large commercial, industrial, retail, and other firms may
    acquire an insured bank and gain access to the Federal safety
    net.
        Indeed, the changes that have occurred with ILC's in recent
    years have been dramatic. For example, while the largest ILC in
    1987 had assets of less than $400 million, the largest ILC
    today has more than $60 billion in assets, and $54 billion in
    deposits, making it the twelfth largest insured bank in the
    United States in terms of deposits.
        The ILC exception is open-ended and subject to very few
    statutory restrictions. Only a limited number of States may
    charter exempt ILC's. However, there is no limit on the number
    of ILC's that these grandfathered States may charter going
    forward and Federal law allows new or existing ILC's to offer a
    wide range of insured deposit, lending, payment-related, and
    other banking products and services.
        The Board is concerned that the recent and potential future
    growth of ILC's threatens to undermine two important policies
    established by Congress; one, concerning the separation of
    banking and commerce, and the other concerning the proper
    supervisory framework for companies that own a federally-
    insured bank.
        For many years, Congress has sought to maintain the general
    separation of banking and commerce. Congress reaffirmed this
    policy several times, most recently in 1999 in the Gramm-Leach-
    Bliley Act when it closed the unitary thrift loophole which
    previously allowed commercial firms to acquire a federally
    insured savings association.
        In the GLB Act, Congress also created the concept of
    financial holding companies and allowed those companies to
    engage as a general matter only in financial activities and it
    allowed a financial holding company to affiliate with a full-
    service securities or insurance firm only so long as the
    company's subsidiary depository institutions remained well
    capitalized and well managed and maintained at least a
    satisfactory CRA record.
        The ILC exception undermines each of these policies. It
    allows commercial and financial firms to operate insured ILC's
    without complying with the activity restrictions established by
    Congress for the other corporate owners of insured banks. It
    also allows financial firms to acquire an insured bank without
    meeting the capital, managerial, and CRA requirements
    applicable to financial holding companies.
        In addition, the ILC exception allows firms to avoid the
    supervisory framework that Congress has established for the
    corporate owners of insured banks. On this point, let me be
    clear that the Board has no concerns about the adequacy of the
    supervisory framework governing ILC's themselves. However,
    unlike the parent company of an ordinary bank, the parent
    company of an ILC is not considered a bank holding company and
    is not subject to Federal supervision on a consolidated basis
    under the Bank Holding Company Act.
        This creates a supervisory gap because the supervisory
    authority over bank holding companies and their non-bank
    subsidiaries under the BHC Act is significantly broader than
    the supervisory authority that the primary Federal supervisor
    of an ILC has with respect to the holding company and non-bank
    affiliates of the ILC.
        This gap exists for foreign banks as well. In 1991,
    Congress made consolidated supervision a prerequisite for
    foreign banks seeking to acquire a bank in the United States.
    This is a trend in supervision that is growing worldwide. The
    ILC exception, however, allows a foreign bank that is not
    subject to consolidated supervision in its own country to evade
    this requirement and acquire an insured bank in the United
    States.
        The Board applauds the subcommittee for holding this
    hearing on these important issues. The Board believes that the
    Nation's policies on banking and commerce and the framework for
    supervision of federally insured banks and their affiliates are
    important. These are policies that have shaped, and will
    continue to shape, the structure and development of our
    Nation's financial system and the economy.
        The Board believes that the decisions on these important
    policies should be made by Congress acting in the public
    interest after deliberate and careful consideration and not
    through the exploitation of what was intended to be a limited
    exception.
        I'd be pleased to try to answer the committee's questions.
        [The prepared statement of Mr. Alvarez can be found on page
    80 of the appendix.]
        Mrs. Kelly. Thank you, Mr. Alvarez. Without objection, all
    of the panel's written statements will be made part of the
    record and each of you are recognized for 5 minutes.
        I didn't feel the need to describe the lights. I believe
    that you have all testified here before. You know what the
    light systems are--red, yellow, and green. So let's go on to
    the next witness.
        Mr. Jones.

    STATEMENT OF DOUGLAS H. JONES, ACTING GENERAL COUNSEL, FEDERAL
                     DEPOSIT INSURANCE CORPORATION

        Mr. Jones. Thank you, Madam Chairwoman.
        Madam Chairwoman, Representative Frank, and members of the
    subcommittee, I appreciate the opportunity to testify on behalf
    of the Federal Deposit Insurance Corporation concerning
    Industrial Loan Companies. Although I cannot comment on
    specific pending applications, my testimony this morning will
    discuss the history and characteristics, current industry
    profile, and supervision of ILC's.
        Industrial Loan Companies and industrial banks are State-
    chartered banks supervised by their chartering States and the
    FDIC, their primary Federal regulator. The ILC's have existed
    since 1910. The FDIC has been involved in the supervision of
    ILC's since it first insured banks in 1934. The modern
    evolution of ILC's began in 1982 with the passage of the Garn-
    St Germain Depository Institutions Act, which expanded ILCs'
    eligibility to apply for Federal deposit insurance.
        Shortly thereafter, in 1987, the Competitive Equality
    Banking Act clarified which institutions would be subject to
    the Bank Holding Company Act, exempting any company that
    controls one or more ILC's from the BHC Act generally if the
    ILC met certain conditions specified by statute.
        ILC's comprise a relatively small share of the banking
    industry, numbering less than 1 percent of the total 8,790
    insured depository institutions and 1.4 percent of the assets.
    As of March 31, 2006, there were 61 insured ILC's with 48 of
    the 61 operated from Utah and California. ILC's also operate in
    Colorado, Hawaii, Indiana, Minnesota, and Nevada. California,
    Nevada, and Utah are the most active in chartering ILC's.
        The powers of the ILC charter are determined by the laws of
    the chartering State. Typically, however, an ILC may engage in
    all types of consumer and commercial lending activities and all
    other activities permissible for insured State banks.
        ILC's are owned by a diverse group of financial and
    commercial firms. Of the 61 existing ILC's, 43 are either
    independently owned or affiliated with a parent company whose
    business is primarily financial in nature. These 43 ILC's
    comprise approximately 90 percent of the ILC industry's assets
    and deposits. The remaining 18 ILC's are associated with parent
    companies that can be considered non-financial. They account
    for approximately 10 percent of the ILC assets and deposits.
        The largest ILC, Merrill Lynch Bank, on its own holds
    approximately 40 percent of ILC assets and 48 percent of ILC
    deposits. Among the ILC's associated with firms that can be
    considered non-financial, GMAC Commercial Mortgage Bank is the
    largest, holding just under $4 billion in assets and accounting
    for 2.6 percent of ILC industry assets and 2.9 percent of ILC
    industry deposits.
        Today, the assets in ILC's are approximately $155 billion.
    This reflects growth from $4.2 billion in 1987. Four financial
    services firms alone accounted for over 60 percent of this
    growth.
        ILC's have a good safety and soundness record to date.
    Overall, the FDIC's examination experience with ILC's has been
    similar to the larger population of insured institutions and
    the causes and patterns displayed by problem ILC's have been
    like those of other institutions. The authorities available to
    the FDIC to supervise ILC's have proven to be adequate thus far
    for the size and types of ILC's that currently exist.
        Recognizing the dynamic nature of the ILC industry,
    however, the FDIC is examining whether additional authorities
    could prove useful in ensuring the safety and soundness of
    these institutions.
        ILC's are supervised by the FDIC in the same manner as
    other State non-member banks. They are subject to regular
    examinations, including examinations focusing on safety and
    soundness, consumer protection, community reinvestment,
    information technology, and trust activities. ILC's are subject
    to FDIC rules and regulations as well as restrictions under the
    Federal Reserve Act governing transactions with affiliates and
    tying practices.
        Just as for all other insured banks, ILC management is held
    accountable for ensuring that all bank operations and business
    functions are performed in a safe and sound manner and in
    compliance with Federal and State banking laws and regulations.
    Four of the largest and most complex ILC's are subject to near-
    continuous onsite supervision.
        The primary difference in the supervisory structures of the
    ILC's and other insured financial institutions is the type of
    authority over the parent organization. The Federal Reserve and
    the OTS have explicit supervisory authority over bank and
    thrift holding companies, including some holding companies that
    currently own ILC's.
        The FDIC has the authority to examine affiliate
    relationships with the ILC, including its parent company and
    any other third party, as may be necessary to determine the
    relationship between the ILC and the affiliate, and to
    determine the effect of such relationship on the ILC.
        The FDIC also possesses a variety of authorities to
    restrict or prohibit a supervised institution from engaging in
    activities with an affiliate or any third party that may cause
    harm to the insured institution. Actions can range from civil
    money penalties to divestiture in appropriate circumstances.
    The FDIC has the authority to enforce conditions or written
    agreements that apply to ILC's and their parent organizations.
        The FDIC generally follows the same review process for
    applications for deposit insurance and notices of changes of
    control relative to ILC's as it does for such requests from
    other applicants. Decisions whether to impose specific
    conditions are based upon the totality of the application and
    investigation, and may consider such issues as the complexity
    and perceived risk of the business plan, adequacy of capital
    management, relationships with affiliated entities, and
    sufficiency of risk management programs, among other
    considerations.
        This concludes my statement. The FDIC appreciates the
    opportunity to testify regarding the profile and supervision of
    ILC's and I will be happy to answer any questions the
    subcommittee may have.
        [The prepared statement of Mr. Jones can be found on page
    148 of the appendix.]
        Mrs. Kelly. Thank you, Mr. Jones.
        Mr. Leary.

    STATEMENT OF G. EDWARD LEARY, COMMISSIONER, UTAH DEPARTMENT OF
                         FINANCIAL INSTITUTIONS

        Mr. Leary. Good morning, Madam Chairwoman, and members of
    the subcommittee. Thank you for the opportunity to testify on
    industrial banks.
        I'm Edward Leary, the Commissioner of Financial
    Institutions for the State of Utah. I've been involved with
    banking for 32 years, first as a community banker, then 15
    years in bank examiner positions with the Utah Department, and
    for the last 14 years as its commissioner.
        The choice of charter remains a vital component of the
    checks and balances of the dual banking system. State-chartered
    institutions, in attempting to survive and meet the needs of
    their customers, have fostered creativity and experimentation.
    State-chartered institutions can innovate in a controlled
    environment that limits systemic risks.
        Dual banking is built upon the ability to freely choose the
    supervisory structure under which the insured entity operates.
    This foundation contributes to a competition and excellence
    amongst the financial institution regulators. If I was invited
    to participate in this hearing today because of Utah's history
    and experience in chartering and regulating industrial banks,
    my view and statement is that industrial banks are the
    embodiment of what is right and proper in the dual banking
    system.
        The reality is that Utah's chartering and regulating of
    industrial banks has been commensurate to the risk. Utah, in
    partnership with the FDIC, has jointly created a supervisory
    model for industrial banks that has worked for 20 years in that
    no Utah industrial bank has failed. My belief is that this
    committee should not consider rewriting banking laws because
    particular industry groups or trade associations desire to
    suppress competition. Nor should Congress change, much less
    outlaw, a proven, successful regulatory structure because some
    groups have concerns about a particular applicant.
        I urge this committee and Congress to focus on the adequacy
    of the current regulatory process. Without an example of
    regulatory failure, there is no underlying fundamental reason
    for public policy change.
        Industrial banks are subject to the same laws and
    regulations and held to the same standards, if not higher
    standards, than other banks. Supervisory emphasis is placed on
    Regulation W and Sections 23A and B, which closely regulates
    all parent and affiliate transactions. Utah takes its
    supervisory role seriously. It is an active participant with
    the FDIC in all industrial bank examinations and targeted
    reviews, wherever they are conducted.
        Utah is one of the few States performing CRA compliance
    examinations. Utah is also participating with the FDIC in the
    large bank supervision program for four industrial banks. What
    Utah is engaged in has been called bank-up supervision. The
    FDIC has more accurately described the regulatory structure as
    bank-centric. The evolving supervisory processes have fine-
    tuned the procedures that insulate a bank from potential abuses
    and conflicts of interest by a parent. Critical controls have
    been developed.
        To me, the separation of banking and commerce is a
    debatable notion, not a reality. There have always been ways
    for commercial interests to affiliate with banks and the
    ability of regulators to prevent potential abuses. Conversely,
    as the experience of the industry shows, the wall separating
    banking and commerce is elastic.
        The industrial bank experience, like the experience of
    credit card banks, non-bank banks and other institutions with
    commercial parents, shows that fears about merging banking and
    commerce are unfounded. The worst case scenario the detractors
    have postulated is of a holding company filing bankruptcy or
    getting into financial difficulty. We have experienced both.
    While no regulatory relishes stressful circumstances, we can
    say that we weathered the storm.
        In one case, Conseco filed for bankruptcy protection.
    Conseco Bank's corporate firewalls and the regulatory
    supervision proved adequate in ensuring the bank's safety and
    soundness. Thus, the case of Conseco serves as an example of
    the bank-centric approach working.
        In another case, Tyco, the parent of a Utah industrial
    bank, encountered financial difficulties and decided to spin
    the industrial bank group off in an IPO which was completed and
    approved. The Utah Industrial Bank continues operations today.
        What has received little attention in the current debate is
    that industrial bank supervision is supplemented by holding
    company oversight by other Federal regulators. The SEC and the
    OTS have oversight over many industrial bank holding companies.
    As of March 31, 2006, they have 75 percent of Utah's assets
    under their jurisdiction. If the Federal Reserve's supervision
    of the parent of two industrial banks are included, the total
    is 90 percent of Utah assets.
        I believe we need to keep in perspective that the entire
    industrial banking industry, even with the growth during the
    last 20 years, totals only approximately 1.4 percent of banking
    assets.
        Thank you.
        [The prepared statement of Mr. Leary can be found on page
    185 of the appendix.]
        Mrs. Kelly. Thank you, Mr. Leary.
        Mr. Hillman.

      STATEMENT OF RICK HILLMAN, DIRECTOR, FINANCIAL MARKETS AND
     COMMUNITY INVESTMENT, UNITED STATES GOVERNMENT ACCOUNTABILITY
                                 OFFICE

        Mr. Hillman. Madam Chairwoman, and members of the
    subcommittee, I'm pleased to be here today to discuss the
    results of our 2005 report on Industrial Loan Corporations. My
    remarks today are primarily based on our 2005 report and focus
    on the following three objectives: one, the growth and
    permissible activities of the ILC industry; two, how the FDIC
    supervisory authority over ILC holding companies and affiliates
    compares with a consolidated supervisor's authority; and three,
    the extent to which the ILC charter enables commercial holding
    companies to mix banking and commerce.
        In summary, ILC's began in the early 1900's as small,
    State-chartered loan companies that primarily served the
    borrowing needs of industrial workers unable to obtain non-
    collateralized loans from banks. Since then, the ILC industry
    has experienced significant asset growth and has evolved into a
    diverse industry that includes some of the Nation's largest and
    more complex financial institutions.
        For example, from 1987 to March 31, 2006, ILC assets have
    grown over 3,900 percent, from $3.8 billion to over $155
    billion. With limited exception, we also found that the ILC's
    in a holding company structure may generally engage in the same
    activities as other depository institutions and, as a result,
    from an operations standpoint, pose risks to the Deposit
    Insurance Fund similar to other FDIC-insured institutions in a
    holding company structure.
        However, parents of insured depository institutions that
    present similar risks to the bank insurance fund are not being
    overseen by bank supervisors that possess similar powers. Under
    the Bank Holding Company Act, the Board of Governors of the
    Federal Reserve is responsible for supervising bank holding
    companies and has established a consolidated supervisory
    framework for assessing the risks to the depository institution
    that could arise because of their affiliation with other
    entities in the holding company structure.
        The Office of Thrift Supervision has similar authority with
    respect to savings and loan companies. The board and OTS each
    take a systemic approach to supervising depository institution
    holding companies and their non-bank subsidiaries and may look
    across lines of business at operations such as risk management,
    information technology, or internal audit, in order to
    determine the risk that these operations may pose to the
    insured institution.
        Because of a provision in the Bank Holding Company Act, a
    company that owns or controls a federally insured ILC can't
    conduct banking activities through the ILC without becoming
    subject to this supervisory regime. Since these ILC's have
    federally insured deposits, they are subject to supervision by
    the FDIC as well as their respective State regulators.
        However, the FDIC lacks the explicit authority to regulate
    ILC parent companies and their activities. The FDIC has,
    however, employed what is termed a bank-centric supervisory
    approach that primarily focuses on isolating the insured
    institution for potential risk posed by holding companies and
    affiliates rather than assessing these potential risks
    systemically across a consolidated holding company structure.
        While the FDIC's cooperative working relationship with
    State supervisors and ILC holding company organizations
    combined with its other bank regulatory powers has allowed the
    FDIC, under certain circumstances, to assess and address the
    risk to the insured institution, questions remain about the
    extent to which the FDIC's supervisory approach and authority
    addresses all risks posed through an ILC from its parent
    holding company and non-bank affiliates and how well the FDIC's
    approach would fare for large, troubled ILC's during times of
    stress.
        Another area of potential concern about ILC's is the extent
    to which they can mix banking and commerce through the holding
    company structure. The Bank Holding Company Act maintains the
    historical separation of banking and commerce by generally
    restricting bank holding companies to banking-related or
    financial activities.
        However, because of the ILC exemption in the Bank Holding
    Company Act, ILC holding companies, including non-financial
    institutions such as retailers and manufacturers, are not
    subject to Federal activity restrictions. Consequently, they
    have greater latitude to mix banking and commerce than most
    other financial institutions.
        Our report includes matters for Congressional consideration
    designed to better ensure that insured institutions providing
    similar risks to the Fund are overseen by bank supervisors that
    possess similar powers. In this regard, we determined that it
    would be useful for Congress to consider several options such
    as eliminating the current Bank Holding Company Act exception
    for ILC's and their holding companies from consolidated
    supervision, or granting the FDIC similar examination and
    enforcement authority as a consolidated supervisor.
        In addition, we concluded that it would also be beneficial
    for Congress to more broadly consider the advantages and
    disadvantages of mixing banking and commerce to determine
    whether allowing ILC holding companies to engage in this
    activity more than the holding companies of other types of
    financial institutions is warranted.
        Madam Chairwoman, this concludes my prepared remarks and
    I'd be pleased to respond to any questions at the appropriate
    time.
        [The prepared statement of Mr. Hillman can be found on page
    106 of the appendix.]
        Mrs. Kelly. Thank you very much, Mr. Hillman. I'm going to
    start with the questions and I have just one.
        ILC's owned by firms under consolidated supervision by the
    SEC play an important role in our economy, particularly in
    facilitating trading and asset management that should not be
    displaced. I know the member companies of the SIA are committed
    to good regulation and are willing to work with the committee
    to ensure this.
        I would like to ask the witnesses what regulatory relief
    steps they would recommend that would allow banks wishing to
    exchange an ILC charter for a sound traditional State or
    Federal charter elsewhere to do so without suffering large tax
    and administrative costs that could harm the economy, and I'm
    going to throw this open to every member of the Board and start
    with you, Mr. Alvarez.
        Mr. Alvarez. Madam Chairwoman, certainly Congress has
    within its power the ability to confer tax benefits on any
    organization for transfers. In fact, Congress has done that
    under the Bank Holding Company Act in several instances where
    it had required that companies--for example, in 1970 when
    companies--when the Bank Holding Company Act was amended to
    allow--to require that companies that owned just one bank would
    become subject to the Bank Holding Company Act, they required
    divestiture for many companies that couldn't meet the
    activities restrictions at the time, Congress granted specific
    tax benefits to those companies that sold their banks as a
    result of that requirement. That's something that Congress
    could certainly do.
        Mrs. Kelly. Mr. Jones?
        Mr. Jones. I don't know that I could add much to that. I
    mean, I agree that it's something that if that were to occur,
    it would have to be done much as the relief that's been done in
    the past. I think it's within the Congressional prerogative,
    but I don't know if we have any further suggestions than that.
        Mrs. Kelly. Mr. Leary?
        Mr. Leary. I would defer and say that is a Federal tax
    issue. My point in stressing the OTS SEC supervision was to
    reinforce the point that there is Federal oversight of the
    holding companies. Two of the Utah industrial banks have
    oversight by the Federal Reserve. Our second largest is a
    financial holding company.
        But the fact that there is Federal oversight was my point
    in stressing that.
        Mrs. Kelly. Thank you. Mr. Hillman.
        Mr. Hillman. It's my understanding that Congress certainly
    does have the authority with which to make changes to the
    extent to which institutions would have expenses associated
    with changing their charters and in so doing, under a time when
    we are modifying potentially the ILC charter and its
    organizations, it would seem appropriate to look at the
    chartering activities of other institutions.
        Mrs. Kelly. Thank you very much, gentlemen. I'm going now
    to Mr. Ford, I guess.
        Mr. Ford. Yes, ma'am. Thank you.
        Let me start, if I can, first just by saying thank you and
    ask one or two questions.
        The first, for really anyone on the panel, concerns the GAO
    report. The GAO report noted that some industry participants
    asserted that mixing banking and commerce may offer benefits
    such as increased competition but at the same time empirical
    evidence documenting this evidence is mixed or may not always
    be available.
        It seems to some of us, or at least to me, that much of
    this debate focuses on potential issues and not any tangible or
    existing problems or benefits. I'm interested in knowing kind
    of in a tangible way what the concrete findings are supporting
    the pros or cons of allowing these charters and/or ownership,
    and if any of you feel comfortable or are able to elaborate on
    some of the empirical evidence mentioned in the GAO report, I'd
    appreciate it.
        Mr. Leary. I will speak up. From the State's perspective,
    that's why I emphasized the point that there has been no FDIC-
    insured industrial bank that has failed in Utah in 20 years of
    overseeing them. I think it is significant that the GAO report
    gave scant attention to the fact that there were other options
    besides Federal Reserve supervision and jurisdiction in that
    the OTS and the SEC has jurisdictions also over these
    institutions.
        Mr. Jones. I guess if I could--if I understood your
    question, I think your question was aimed to some extent at
    whether there has been an advantage so far from the mixing--to
    the extent there's a mixing of banking and commerce. From our
    perspective, we haven't seen an advantage at this time, for the
    institutions that we are supervising as ILC's. They are subject
    to a number of restrictions which should, if applied properly,
    limit that, through Sections 23A and 23B of the Federal Reserve
    Act, the tying restrictions, and many of the other provisions
    to try to prevent unsafe or unsound actions.
        But those, as you said, are focused on today's transactions
    that we've had.
        Mr. Ford. Has there been, to date, any of the certified
    ILC's that have been dissolved or threatened to dissolve--are
    we facing any problem with them? Because some of this--the
    legislation--I'm still trying to decide where I stand on this--
    just--where is the problem, I mean, because it seems to me that
    we're looking to fix something that isn't quite broken yet.
        So if you'd give me a little sense on what we're fixing
    here.
        Mr. Leary. From my perspective--
        Mr. Ford. Talking about acting--this group here has
    certainly done an amount of acting. We--yesterday we got on
    Internet gaming, North Korea fired missiles, so we love acting
    on things that don't really have a lot to do with what's
    happening in the world. So I'm just curious; what are we fixing
    here?
        Mr. Leary. That is my question, also.
        Mr. Alvarez. Congressman, I think I would respond that we
    are at a time when we see an exception in the law that is being
    used in an unintended way and is growing in a very dramatic
    fashion. Things are no longer the way they were in 1987 when
    this exception was initially provided.
        Now, as I mentioned in my statement, the ILC's which were
    relatively small in 1987, one of them now is the twelfth
    largest insured bank in the United States. There's been a
    dramatic change. We believe that is a reason for Congress to
    pause and take a look at this exception and make sure that the
    exception is doing what Congress intended it to do.
        It definitely has the potential to undermine the separation
    of banking and commerce. It is creating a gap in supervision.
    The holding companies, as you get larger, more complex
    organizations owning ILC's that are not supervised themselves,
    that creates a set of risks that we want to make sure Congress
    is aware of and it's something that we believe Congress should
    address.
        So we're coming to you before missiles are launched with
    the idea that now is the opportunity to take some action.
        Mr. Jones. If I could add to that, Congressman. I mean, I
    think you raised the issue--the issue is perhaps more the
    future than the current--
        Mr. Ford. Than the present.
        Mr. Jones.--we don't--ILC's, in our experience, operate no
    differently, have no greater risk operationally than any other
    insured institution. Their problem rates--their failure rates
    are no different. If we supervise them just like any other
    bank, I think as noted in the GAO report--they indicated that
    operationally there is no greater risk--they saw no greater
    risk in the current ILC's nor any other insured institution.
        Mr. Ford. So how big should they get? Because I hear--I
    tend to--counsel, I tend to--now you're getting somewhere here.
    I'm trying to figure out what threshold or what--I mean, I take
    it you all want to have a little more of a regulatory say in
    this thing. What would be your say?
        Mr. Alvarez. Well, we think that they're already expanding
    in a way that now is the time to act, that now is the time to
    impose the same supervisory regime on owners of ILC's that
    apply to all the other owners of insured banks, so we have
    reached that threshold. And we think that the issue of banking
    and commerce is one Congress needs to grapple with, and that
    this is the perfect opportunity for that.
        Mr. Leary. May I reinforce the point? If you speak in terms
    of Merrill Lynch, there is OTS/SEC supervision of the parent
    company. What you're hearing is that it is not subject to the
    Federal Reserve.
        Mrs. Kelly. Thank you very much, Mr. Ford. Mr. Gillmor.
        Mr. Gillmor. Thank you very much, Madam Chairwoman.
        Let me, if I could, go to Mr. Jones. Could you provide
    additional details regarding the current authority of the FDIC
    to impose capital requirements on the ILC parent and is that
    authority different for a new charter versus a change in
    control?
        Mr. Jones. The FDIC doesn't have the authority to impose
    capital requirements on the parent of an ILC.
        Mr. Gillmor. Okay. Let me ask Mr. Leary of Utah --you made
    a speech in which you were very laudatory about the GAO and the
    fact that they were doing a study and said wonderful things.
    Now that you've seen the results, how do you feel?
        Mr. Leary. I still think they did a very professional job.
    I disagree with a couple of their conclusions or outcomes. I
    take comfort from the fact that they said from an operational
    perspective they are regulated. That's my message.
        Mr. Gillmor. As we know it, an ILC, a non-financial holding
    company is not regulated in the same way that a holding company
    of other banks are regulated which creates I think a pretty
    serious dichotomy. Would you support--so that we have
    consistency, do you support repealing the Bank Holding Company
    Act and relieving the other financial institutions of that
    regulatory obligation?
        Mr. Leary. Let me say that you probably understood that I'm
    a lifelong regulator. Despite what is here, I'm not a risk-
    taker. I do not support removing the Bank Holding Company Act,
    but I believe the exception granted under Federal law is
    appropriate for the circumstances and we try to regulate to
    that level, yes.
        Mr. Gillmor. Would you explain to me why it's necessary to
    regulate the holding company in the other area but because of
    an ILC that they're somehow so unique that we don't--let me
    preface that by saying failure of appropriate regulation can
    have extraordinarily serious consequences. I came to this
    Congress right after the collapse of the savings and loans and
    that was a failure of regulation and it cost us about $300
    billion in taxpayer money.
        And I felt kind of like the guy who had to clean up after
    the party that I didn't attend. And, we heard the same
    statements about how well-regulated these S&Ls were, but in
    fact they weren't. I guess I'm having a little trouble getting
    the confidence from you that what you're promoting really
    works.
        Mr. Leary. Let me preface by saying, number one, I was an
    examiner at the time of that savings and loan crisis, and the
    issues. I was one of the people in the field or in a
    supervisory role dealing with the issues as they collapsed
    around me.
        I have a Naval officer background. I would tell you I would
    much rather go to sea with an experienced captain than with
    somebody who is not experienced. I think part of the regulatory
    structure that we created in Utah, the checks and balances
    we've created, ensure that those kinds of things will not
    happen again.
        I emphasize that it is an evolving process. As we learn
    lessons, we constantly add new requirements and new structures
    into it. Congress has also. They've added a lot of requirements
    on the banking; all of those requirements added by Congress
    apply to the industrial banks.
        I have a concern with doing away entirely with the bank
    holding company, which is what I was answering, but I also have
    a confidence in what we've done, both the State and the FDIC,
    in ensuring the proper supervision regulation of these
    institutions from the bank out.
        Mr. Gillmor. I appreciate your comments. I'm still having a
    little difficulty with having similar situations differently
    regulated.
        I do want to ask Mr. Hillman, in the GAO September 2005
    report on the ILC issue, GAO recommends that Congress address
    the discrepancies between the Federal Reserve and the FDIC and
    regulatory authority at the holding company level. Could you
    tell me if the approach which we're taking or proposing to take
    in H.R. 5746 is similar to the recommendations of the GAO?
        Mr. Hillman. The bill that you refer to includes provisions
    that would provide the FDIC with powers in compelling holding
    companies to provide reports, to provide powers to the FDIC to
    examine holding companies and affiliated structures, and it
    provides powers to the FDIC to enforce those actions similar to
    the authorities that a consolidated supervisor would have over
    a holding company structure.
        And from that standpoint, Congressman, it is very
    consistent with a matter for Congressional consideration made
    in our report that the Congress provide the FDIC with similar
    consolidated supervisory powers.
        Mr. Gillmor. Thank you very much. I don't know if I've used
    up my time. If I haven't, I wanted to follow up and ask if
    you're able to describe the experiences of Japan and Germany in
    the mixing of banking and commerce. Was that part of some of
    the issues you considered?
        Mr. Hillman. That wasn't a specific focus of our work but
    we have noted that within Europe and within Japan they do allow
    for a greater mixing of banking and commerce. However, within
    Europe, they do require consolidated supervision.
        Mr. Gillmor. Which we do not with ILC's.
        Mr. Hillman. Correct.
        Mr. Gillmor. And as I recall, in Japan, within about a
    decade or so ago you virtually had a collapse of the banking
    system that had to be bailed out, which I think makes a point
    about the regulation that's needed.
        Mr. Hillman. That's correct. While their regime is
    different from ours, they had encountered significant problems
    with non-performing loans which brought their industry to near-
    collapse.
        Mr. Gillmor. Thank you very much. I yield back.
        Mrs. Kelly. Thank you, Mr. Gillmor. Mr. Frank.
        Mr. Frank. Thank you, Madam Chairwoman. I apologize for the
    back and forth, but we have a bill on the Floor today for this
    committee on the credit rating agencies, and I was asked to go
    over there and speak on the rule.
        I do want to make clear that there are different levels
    here. A lot of the argument has been about ILC's. Certainly the
    approach that the gentleman from Ohio and I have taken is not
    an anti-ILC bill. In the first place, it does not disrupt any
    existing entity, and secondly it puts restrictions only on
    those that are not 85 percent financial.
        So that's why when people say, look, the history is that
    there have been no problems, if history were to remain
    unchanged this would not be a big issue, but what we have is a
    large number of new applications. We are about to enter a
    future, if we don't change things, which will be very
    different. So the history becomes almost irrelevant.
        But let me ask the commissioner from Utah there, and I
    understand that ILC's play a very constructive role in the
    State of Utah and if I didn't know that before, having met the
    gentleman from Utah, Mr. Matheson, I would know it now. It is a
    mantra of his, legitimately, because this is important to his
    State.
        What percentage of the assets held by ILC's in Utah would
    be affected by the 85/15 restriction?
        Mr. Leary. The number is difficult to compute with any
    accuracy. We have ballparked it that it would be approximately
    93 percent of the assets that would be under financial--
        Mr. Frank. So we are talking here about approximately 7
    percent of the assets. I understand there's a plus or minus
    margin of error here. But again, I want to be clear. This is no
    wholesale assault even on the ILC's in Utah; 93 percent of the
    assets would not be affected by the legislation we're talking
    about, although it could be by other legislation involving
    supervision, although that's not necessarily restrictive.
        Next question for the FDIC. Wal-Mart has told us that
    they're asking for a restricted charter. They're not looking at
    getting into banking; they say they want to maintain the
    relationships they have with branch banks in their stores and
    they're really looking for a more restricted kind of paper
    processing in their ILC.
        Does the FDIC have the legal authority to grant a
    restricted right to operate? That seems to be a very important
    question. When Wal-Mart says that this is all it wants to do,
    that it doesn't want to do these other things, does the FDIC
    have the authority to grant them only as much as they have
    asked for, or maybe less than they asked for. Or once you grant
    it, is it simply a question of what enforcement mechanism would
    hold them to whatever limitations they were to get if they were
    to get limitations?
        Mr. Jones. I can't speak specifically to the Wal-Mart
    application but in general--
        Mr. Frank. Yes, in general.
        Mr. Jones. In general, we do have--we have the authority to
    restrict an application when we approve insurance based on
    prudential considerations or based upon--
        Mr. Frank. Can you restrict it in terms of the activity? In
    other words, suppose some unknown, unnamed entity said, ``Look,
    all I want to do is process my credit card papers here; I don't
    plan to take deposits of any kind, and I don't plan to make
    loans. I just want to be an ILC so I can just do this sort of
    back office stuff.''
        Could you give them the right to do that that would in fact
    contain legally enforceable limits on their going any further?
        Mr. Jones. Let me give you a two-part answer. Yes, we
    could, to the extent that that's all someone asked for, and
    that's all we considered for deposit insurance; we could limit
    it. But it is a situation where they could ask on a future date
    to change it and we'd have to reconsider it if they asked to
    change it in the future.
        Mr. Frank. Well, what would be the basis for changing it?
    Would it be like a de novo application or would they gain some
    leverage from the fact that they already had it there?
        Mr. Jones. That would be very fact-specific in any
    circumstance, but it would--
        Mr. Frank. Okay. So in fact, if they were to ask for
    something now and get it, you could limit it to what they ask
    for now but they could come back at any period of time and ask
    for more.
        Mr. Jones. And we would have to evaluate it--
        Mr. Frank. Yes.
        Mr. Jones.--risk to the insurance fund and the activity
    itself.
        Mr. Frank. Let me ask all of our witnesses here--I
    described the situation. Home Depot is a very good company. If
    I ever renovated a home, I suppose I'd consider buying stuff
    from them, but that's not what I do, so I'm not going to ever
    do that. I mean, I wouldn't want to live in a home that I was
    in charge of renovating.
        But if Home Depot owns the bank, is it a problem if a
    contractor seeking to maintain the favorable relationship with
    that bank, which we know exists--if the contractor felt
    pressured to buy from Home Depot as opposed to its competitors,
    would that be troubling? Let me ask each of you, starting with
    the Federal Reserve.
        Mr. Alvarez. There are two statutory restrictions that your
    example brings up. One is a Federal anti-tying prohibition, so
    a bank is not allowed to tie the availability or price of its
    product--
        Mr. Frank. Right. And it would be bad policy in your
    judgment.
        Mr. Alvarez.--and it would be bad policy to do it. And then
    there's also Sections 23A and 23B which restrict--
        Mr. Frank. Okay.
        Mr. Alvarez.--transactions--
        Mr. Frank. But I want to--let me just go down the list. Do
    you think this is something we should try to prevent from
    happening?
        Mr. Jones. Well, I think--as Mr. Alvarez mentioned, I think
    that has been dealt with at least in part by statute by
    restricting--
        Mr. Frank. Okay. I understand that. A lot of things have
    been dealt with by statute but, you know, you heard about the
    statute of limitations. I'm going to give you a new concept--a
    limitation of statutes. Just because it's in the statutes
    doesn't mean that it's going to happen.
        So do you think that is something public policy should try
    to prevent?
        Mr. Jones. That's something that we--
        Mr. Frank. Yes or no? It's an opinion--is it something
    public policy should try to prevent?
        Mr. Jones. That is something that we would be concerned
    about, yes.
        Mr. Frank. Okay. Let me ask, Commissioner, do you think
    that this is a problem if that were the practice? Do you think
    we should try to prevent it?
        Mr. Leary. To me? Sorry.
        Mr. Frank. Yes.
        Mr. Leary. The fact and circumstance--I would mirror what
    the Federal Reserve said. There are two issues--two laws--
        Mr. Frank. No, I'm not asking what the law is.
        Mr. Leary. I understand. My problem in answering that is
    it's an application in front of me so I don't want to answer
    it.
        Mr. Frank. All right. Forget Home Depot. Is it a problem in
    the abstract if a seller of products owns a bank and people
    doing business with the bank would feel some pressure to then
    otherwise buy that product? Do you think that's something we
    should be--
        Mr. Leary. In the abstract, I would say that there are two
    Federal Reserve regulations in place now that would address
    that--
        Mr. Frank. Okay. Excuse me. Madam Chairwoman, can I make a
    new rule: No lawyers to testify. You ask a lawyer his opinion,
    he tells you what the law is. You're not in court. I want to
    know, as public policymakers, what you think public policy
    ought to be, not what the regulation is. What do you think
    public policy ought to be in that regard?
        Mr. Leary. I think I have a difficult time answering that
    without--
        Mr. Frank. Well, that's obvious. Okay.
        Mr. Leary.--conflict on my--
        Mr. Frank. Let me move to the GAO.
        Mr. Hillman. Congressman Frank, the policy generally
    separating banking and commerce is based primarily on limiting
    the potential risk that may result to the financial
    institution, the deposit insurance fund and--
        Mr. Frank. Okay. I thank you. Go ahead.
        Mr. Hillman.--and there's three major risks that we're
    trying to avoid. One of those three risks is what you're
    referring to, increasing the conflicts of interest associated
    with having a commercial entity own an insured institution.
        Other risks include the potential expansion, as mentioned
    by the Federal Reserve, of the Federal safety net provided to
    banks to those commercial entities, and third, an increased
    economic power potentially being exercised by large
    conglomerates.
        Mr. Frank. I appreciate that. And there's a second conflict
    of interest, and that is even more troubling. If I am the
    potential borrower from the bank owned by Home Depot, and the
    bank knows that since I've been involved with this contract, if
    I get the loan I'm going to buy Home Depot's product. It seems
    to me human nature that the decision on the loan is not going
    to be made purely on the loan.
        And I understand that these are against the law--let me go
    back to the limitation of statutes--but it is not prudent to
    give regulators very hard things to enforce. And I think that
    the practicality of enforcing the anti-tying rules is greatly
    multiplied when you allow sellers of products unrelated to the
    financial institution to be in a position where the bank that
    they own can benefit in two ways, one from the loan, and one
    from the sale of the product.
        Yes, we can make laws against tying but it seems to me
    wholly imprudent to multiply the opportunities in which
    regulators who are pretty busy have to read people's minds and
    try and enforce those laws.
        Thank you, Madam Chairwoman.
        Mrs. Kelly. Thank you, Mr. Frank.
        I'm turning now to Mr. Leach. Mr. Leach has asked for this
    hearing and has asked the courtesy to be here, so I'm going to
    call on him. Are you prepared, Mr. Leach?
        Mr. Leach. Thank you very much, Madam Chairwoman. I
    appreciate your recognizing me.
        First, I would like unanimous consent to place a letter of
    January 20, 2006, from the former Chairman of the Federal
    Reserve, Alan Greenspan, into the record if I could.
        Mrs. Kelly. So moved.
        Mr. Leach. At the end of that letter--and I'd like to turn
    to Scott for a second--a statement is made, the bill you have
    introduced, H.R. 3882, would subject the corporate owners of
    ILC's to the same prudential framework, including consolidated
    supervision requirements, bank level capital managerial and CRA
    criteria enforcement mechanism, and activities limitations,
    that apply to the financial holding companies under the BHC Act
    and other Federal banking laws. This approach would address the
    Board's concerns and ensure a fair and level competitive
    playing field for all banking organizations.
        Now, I understand that this is the Federal Reserve's
    position today. Is that correct?
        Mr. Alvarez. Chairman Bernanke has said the same thing, Mr.
    Leach.
        Mr. Leach. One of the aspects of this that has gotten
    little attention that, I would like to stress, is that there's
    an issue of commerce in banking that we all understand.
    Secondly, there's an issue of competitive equality and
    regulatory equality for financial companies abroad and at home.
        And, for example, as I understand it, Scott, under the
    current law, a foreign commercial company can apply for an ILC
    without any oversight of the foreign company's commercial
    endeavors; it might be the holding company. Is that correct?
        Mr. Alvarez. That's correct. A foreign company or a foreign
    bank could. That's correct.
        Mr. Leach. And so what we have under current law, if we
    don't change it, is an enormous advantage to foreign companies
    that we may know nothing about obtaining an ILC charter. And
    this really cries out for thinking through. Secondly, and this
    is a little bit of a difficulty for this committee to deal
    with, there are competitive equities here at home.
        And so, for example, if a financial company in the United
    States has an ILC that doesn't come under Federal Reserve
    supervision, but let's say a commercial bank under the Bank
    Holding Company Act does, the one has a less comprehensive
    supervision than another. Is that not true, Scott?
        Mr. Alvarez. That's true.
        Mr. Leach. And that presents a dilemma because we have this
    circumstance of seeking the lowest common denominator. And
    again, I think it's a reason that we ought to think this
    through.
        Let me ask the FDIC representative, does the Federal
    Deposit Insurance Corporation have a position on the issue of
    commerce in banking? Do you favor it or do you disfavor it?
        Mr. Jones. No, sir, we do not have a position. We view that
    as a prerogative of Congress.
        Mr. Leach. So you think that's appropriate for Congress to
    deal with, and you're not intervening in that. And I think
    that's a correct position of the FDIC. This is a matter for the
    Congress to deal with. The FDIC argues that it is applying
    certain standards, and that's absolutely true, to its
    supervision.
        But isn't it also true that you do not have the power of
    the Federal Reserve by law, as the GAO has pointed out, to look
    at the holding company structure of ILC's held by commercial
    companies?
        Mr. Jones. We can look at certain aspects as they relate to
    the bank but we do not have the overall authority to--
        Mr. Leach. And that's what I'm saying. That's a dilemma,
    too. Now, I have an enormous amount of respect for the FDIC. I
    am, however, perplexed that there is no sense of wanting to
    share accountability and that's one of the reasons that I
    frankly prefer a little bit our approach to that of Mr. Frank,
    although Mr. Frank's approach is a very respectable approach,
    and far better than the current playing field, as far as I'm
    concerned.
        And that is--that relates to shared accountability on how
    one goes about overall supervision. And here I would like to
    say to some of the parties, and particularly representatives
    here from the securities industry, if you take an approach that
    wants to give comparable authority to the FDIC--and that may or
    may not occur--vis-a-vis having shared accountability, one of
    the things you have to ask is what does the FDIC lend to the
    situation.
        And I have long held that one of the anomalies in America
    is that the Treasury has no treasury in an emergency. The
    Federal Reserve of the United States has unending pockets under
    current legal authority without act. And therefore, if I am an
    investment bank that gets into difficulty, I would sure want to
    be under Federal Reserve supervision and close to the Federal
    Reserve, rather than have the Federal Reserve out of the
    window. And I hope as one looks at differing approaches, the
    securities industry thinks that through.
        But my only strong suggestion here is that if we change the
    law and move in a direction that tightens up ILC oversight, and
    it's imperative for Congress to do this, that we do it in such
    a way that there is a notion of shared accountability, not
    exclusive accountability, in a way that there is competitive
    equity in the financial landscape.
        Now, the gentleman from Utah is right. There is some other
    oversight beyond the Federal Reserve that does exist, but it's
    not exactly the same. And these other oversight agencies are
    just like the Treasury; they have no treasury.
        Mr. Price. [presiding] The gentleman's time has expired.
    Would any of the members of the panel wish to respond or make
    comment? Mr. Leary?
        Mr. Leary. May I?
        Mr. Price. You may.
        Mr. Leary. Responding to the Representative's concern, I
    can think of one foreign bank that is an industrial bank, and
    that is UBS. It is a financial holding company subject to the
    Federal Reserve jurisdiction. The only other two foreign
    entities that own industrial banks directly are Volkswagen and
    BMW, both of which I understand have significant banking
    operations in Europe, and are under the consolidated regulatory
    system in Europe.
        Mr. Price. I thank the panel. The Chair would remind folks
    that we have a panel after this one, and that there is another
    committee hearing at 2:00 p.m., and so we understand
    everybody's interest in all of this, but we would appreciate it
    if members would keep their questions brief, and the panel as
    well.
        And Mr. Meeks, you're recognized for 5 minutes.
        Mr. Meeks. Thank you.
        I come at this really undecided as to where I'm at on this
    issue. And my question is somewhat--that I just heard--whether
    or not there is more of a danger--because I'm trying to figure
    out where the greatest danger--is there more of a danger in
    mixing banking and commerce than it is with the mixing of
    investment banking with financial management with travel
    services with credit card companies--you know--because we're in
    this age where we see things, everybody is trying to do--have
    the parent company with the subsidiary of that and keep it all
    in-house.
        And I'm trying to see, is there a difference, is there
    something that I'm missing here that makes a difference in the
    two?
        Mr. Alvarez. Congressman, I think that there is a
    difference between the two, and that Congress has recognized
    the difference. The motivation behind the Gramm-Leach-Bliley
    Act where Congress repealed the Glass-Steagall Act, and allowed
    the affiliation of banks and financial firms, was that there
    was a lot of substitution going on in the marketplace between
    the products offered by banks, deposits and investment
    products, and the kinds of products offered by securities firms
    and insurance firms.
        There's a synergy among those three types of financial
    institutions and the financial products that they offer.
    There's always been a conceptual difference between those kinds
    of financial investment products and manufacturing steel, or
    selling washing machines, or making cars, which is more the
    commercial side.
        And the history in the United States has been to think
    carefully before we allow banks to be affiliated with the
    commercial entities because of the potential for trouble in
    those commercial entities to bleed into the banks and cause
    contagion that might cause the failure of the bank, and the
    potential that the safety net that the bank operates under
    might benefit the commercial company so that those that own a
    bank have an advantage over those that don't own a bank, and
    also for some of the concerns that Congressman Frank was
    mentioning about the internal conflicts of interest that may
    occur when a bank is trying to consider whether to offer credit
    to a customer of its affiliate versus a customer of some other
    competitor or make a loan to a competitor as opposed to making
    a loan to the affiliate itself.
        So there's a lot of concerns like that that have kept
    banking and commerce apart so far and those are the kinds of
    things we think deserve a full debate here in Congress before
    Congress makes a decision on this. And Congress should make the
    decision rather than letting an exception in the Bank Holding
    Company Act determine the future of commerce and banking and
    take that decision out of the hands of Congress.
        Mr. Meeks. So really, what I'm trying to decipher is the
    benefits to my constituents and to my community. For example,
    currently, say GM, who has an ILC, is primarily for their
    financial company so if I go in and there's zero percent
    interest if I use their finance company, because that's a
    subsidiary of the parent company, the benefit comes to the
    consumer.
        Likewise, if there's a large chain--I don't know whether
    it's Wal-Mart or whether it's Home Depot, etc., if there is a
    way to bring down the cost to the consumers that would be to
    their benefit, without creating the dangers that I guess you're
    talking about as far as the commingling of the funds, etc.--
    what I'm trying to--why would that be a bad thing?
        Mr. Alvarez. There's certainly benefits that folks have
    argued would come about from the mixing of banking and
    commerce, and you've referenced a couple. The other side is to
    consider that the taxpayer also stands behind the Federal
    safety net that supports the bank and so we want to be able to
    balance and think through carefully what the cost to the
    taxpayer would be, as well as the potential benefits that might
    accrue to customers.
        And whether we have the right framework to go forward in
    banking and commerce is an open question, and that's really
    what this is, in part, about.
        Mr. Meeks. My last question--and I agree that, you know,
    Congress should--for example, the FDIC--do you have the power
    to regulate that now or would it be important for Congress to
    give you additional power to regulate the parent company of an
    ILC?
        Mr. Price. The gentleman's time has expired but you may
    respond.
        Mr. Jones. We do have--at this stage, at least, we believe
    we have the power to deal with the institutions that are out
    there that we've experienced to date. We believe the issue from
    our perspective is really the safety and soundness of the
    institution and to date, under the existing authority, we've
    attempted to isolate or insulate the institution from its
    affiliate or its parent.
        We do recognize that it's a very dynamic area, and it's a
    very changing area, so one of the things we are considering
    right now and evaluating is whether we need more authority or
    power. But we think whatever outcome comes out, whether the
    existing authority or the new authority, ultimately the goal
    should be to protect the institution and make sure it's
    protected from the temptations that have been discussed.
        Mr. Price. Thank you. Mr. Pearce, you're recognized for 5
    minutes.
        Mr. Pearce. Thank you. Mr. Leary, if I understand your
    testimony correctly, it's basically at the end of the day that
    we're doing it well in Utah and really there's not much cause
    for alarm. When I look at the situation of long-term capital,
    which was a hedge fund, it really was in my readings not doing
    anything against the law; they just began to do a lot of what
    they were doing and doing it recklessly and many, many
    institutions then had to pay to bail that situation out.
        So you're saying that everything is right now legal, that
    everybody is running well in the system and you don't see any
    potential case where a parallel situation, not with a hedge
    fund but with an ILC, beginning to lend to itself and beginning
    to really pull in more and more capital could create a problem?
    You just don't see that?
        Mr. Leary. I would like to say that I'm a regulator, so I
    worry day and night. I'm a paid professional regulator. But the
    regulatory structure that is in place has been commensurate to
    the risk. That is what I have identified. Will there be
    problems in the future? Undoubtedly. But there's problems
    across banking into the future. We're getting into new
    technology, new products, and new services, and each of those
    have to ferret out what's appropriate.
        But I would represent to you that we are comfortable with
    the level of supervision in place at this point in time. But I
    clearly want to say that there's always the future, and that's
    why I stress it is an evolving process; as risks are
    identified, we'll respond at the State level as rapidly as we
    can.
        Mr. Pearce. And so in Utah you're not allowing any of the
    ILC's to fund themselves or lend to themselves or lend to--to
    form a very close relationship between their customers and
    themselves?
        Mr. Leary. I would represent only semi-tongue-in-cheek I
    think we've become Sections 23A and 23B experts at the State
    level as well as the FDIC, as much as the Federal Reserve, yes.
    We are very cognizant, very aware of that. That is a
    supervisory emphasis at every examination where there is a
    parent.
        Mr. Pearce. Your written testimony indicates that you feel
    no qualms about the association of commerce and banking, yet
    when I review the Japanese banking system to where they bought
    companies, then the companies did two things, invested heavily
    in real estate, and invested heavily in their own operation;
    they were funding--loaning to themselves to operate.
        Then when the real estate market crashed, it began to put
    pressure on the banks, the banks crashed, and then the ultimate
    companies that were involved crashed. And, for me, that's a
    concern but when I read your testimony and listen to you today
    you say basically no sweat, no big deal, we've run it okay in
    Utah.
        But I--going back to the long-term capital thing, I've
    just--I'm sorry--there are events that spin out of control that
    extend beyond the ability for you to slow them down. The
    regulators, I suspect, were trying to do something about long-
    term capital but they just down there sunk the economic ship in
    the United States, and so when I look at long-term capital and
    the Japanese market, I'm not so reassured by Utah.
        Do you have something that will be the magic potion to
    reassure me at this point in the day?
        Mr. Leary. What I would give you in a short answer is, I
    think, the Federal Reserve--we have good confidence in Sections
    23A and 23B and the anti-tying provisions which have been
    identified. I don't know if we have more confidence in the
    Federal Reserve, but we have confidence in that ability.
        We have also taken some prudential--what we call prudential
    standards. We mandate that all industrial banks have a majority
    outside unaffiliated directors. We mandate that management is
    in Utah, so I believe we have a hand on the bank.
        What you're asking me, is there some threat in the future
    that may cause an issue, and I would say as a regulator, I'm a
    realist and a pragmatist--
        Mr. Pearce. Okay. Let me ask some more questions.
        Mr. Leary.--there may be.
        Mr. Pearce. My time is--have you had any--you say you've
    had no failures, no bankruptcies of ILC's. Have you had any
    small community banks just cease to operate, close down?
        Mr. Leary. Yes. I have the unenviable distinction of having
    the last bank in the county close.
        Mr. Pearce. And that's my concern, again, in my opening
    statement. Rural areas depend on some source of capital and I
    will guarantee the rates of return in Hobbs, New Mexico, where
    I live, will never be what they are in Albuquerque, New Mexico.
    If we don't have some access to capital, then the economy of
    the whole United States has to stand on the shoulders of 20 or
    30 large communities, or 20 or 30 large banks, and I just don't
    think it can do it. And at the end of the day, that becomes a
    very compelling thing.
        Thank you, Mr. Chairman, for your time.
        Mr. Price. The gentleman yields back. Mr. Baca, you're
    recognized for 5 minutes.
        Mr. Baca. Thank you, Mr. Chairman. This question is for Mr.
    Jones. The U.S. law has historically separated commerce and
    banking activities to avoid placing Federal deposit insurance
    fund, which currently amount to $49 billion, at risk if the
    banks fail.
        Without consolidation supervisory authority over the ILCs'
    corporate owners, how can FDIC ensure that the ILCs' safety and
    soundness--which is question number one--and then how can we be
    sure that a company as large as Wal-Mart won't put our banking
    systems at risk if it fails and who will it impact most?
        Mr. Jones. As I mentioned when we were discussing earlier,
    our focus is on the safety and soundness of the institution. We
    have applied the same standards to the institution we do to any
    other, insulating the institution whether it's an ILC or any
    bank from its parent and its affiliates to protect them. So we
    apply the same standards, we had the same focus.
        Indeed, with respect to the ILC's, we have a number of them
    that we--I think at this stage we have 13, because of their
    size, that we put on what we call the large institution
    depository program where we evaluate them on a daily basis and
    at least four of them right now--four at this date we have
    almost dedicated examiners in there keeping track of them. So
    we're applying the standards we can under the existing
    statutory authority we have.
        Again, our goal is to try to insulate the bank. Whether in
    fact there should be a consolidated supervisor is probably--is
    what this hearing is about and is really--ultimately will be a
    Congressional concern. We are applying the best standards we
    can under the statute we have right now.
        Mr. Baca. And if we were at risk, who will it impact mostly
    then, if it fails?
        Mr. Jones. Well, if we find--are you talking about the
    parents at this stage or the bank itself?
        Mr. Baca. The bank itself.
        Mr. Jones. The bank--the impact unfortunately is going to
    be the insurance fund, if it fails, will have the greatest
    impact. That's our goal to prevent the bank from failing to the
    extent there's been concern on the parent. That's why we try to
    insulate the bank.
        And it was mentioned there have been a couple of instances
    in the past where a parent of an ILC has gotten in trouble and
    we have, working with the States, stepped in to insulate the
    bank, prevent the bank from bailing out the parent, setting the
    bank up so ultimately it was actually disposed of and sold so
    it was not harmed by the failure of the parent. And that's our
    goal when we do the supervision.
        Mr. Baca. Okay. Mr. Alvarez, in September of 2005, the GAO
    advised Congress to consider improving the regulations of the
    ILCs' banking and holding companies. Do we need to bring
    existing ILC's and their holding companies under Federal
    Reserve supervision, which is question number one? And then
    two, do you think that the Federal Reserve is better equipped
    to handle them? And number three is, how would you recommend
    that we address the GAO's concerns?
        Mr. Alvarez. We believe strongly that you should have
    consolidated supervision since the Federal Government stands
    behind the Federal safety net. There should be the same regime
    of supervision over owners of ILC's as there are for the owners
    of other insured banks.
        And that means having a Federal supervisor that has full
    examination authority, capital authority, authority to have
    reports, and to bring enforcement actions. Those are the areas
    that we have under the Bank Holding Company Act and we have a
    full regime set up under the Federal Bank Holding Company Act
    and many years of experience in being the umbrella supervisor
    for owners of insured banks. So we think we're very well
    equipped to handle the responsibility but we think it's most
    important that Congress provide a Federal regulator with that
    authority and the responsibility.
        Mr. Baca. Mr. Jones, during its testimony to the FDIC in
    April, Wal-Mart cited its long-term lease with 1,150 store
    branches and more than 300 financial institutions as a reason
    why the company could not easily open branches in its stores.
    But there's a reason to believe that the statement was
    inaccurate and that the renewal would also be at Wal-Mart
    discretion.
        What can the FDIC do to prevent Wal-Mart from branching
    into other States?
        Mr. Jones. I have to apologize. It is a pending
    application, so I can't really discuss it. This almost is a
    two-part question, I guess, but I can't discuss the actual
    application. I mean, in the issue of branching, in general we
    have--we have to approve any branch for any of our banks if
    it's a State-supervised bank, State non-member bank, so any
    bank that is supervised by us would ultimately have to have
    FDIC permission to branch.
        Mr. Baca. Okay. Bottom line, if we allow branching into
    other communities, will the banking industry then be affected
    if we allow branching out?
        Mr. Jones. You're talking in general, not with respect to
    Wal-Mart? I mean, it's hard to judge at this stage if you had
    this--
        Mr. Baca. I have 30 banks in one place; we allow branching
    to Wal-Mart or anybody else. Will it impact banking?
        Mr. Jones. I don't know if it would impact banking any more
    than the large banks branching into the communities across the
    country today. It's going to be a question, you know--it's a
    competition issue.
        Mr. Baca. If you have access to one versus another one,
    does it impact them--
        Mr. Price. The gentleman's time has expired.
        Mr. Baca. Thank you, Mr. Chairman.
        Mr. Price. Mr. Hensarling, you're recognized for 5 minutes.
        Mr. Hensarling. Thank you, Mr. Chairman.
        I always try to come to these hearings with an open mind,
    not--just not an empty mind. And I've come to this hearing with
    a particularly open mind. Unlike some on this panel, I do not
    necessarily consider big to be bad, but I do tend to have a
    bias in thinking that more freedom is good and less freedom may
    be bad.
        And so as I listen to a lot of the testimony, and try to
    boil it down to--at least a portion of it to its lowest common
    denominator, I think I hear Mr. Jones saying that we can
    regulate these ILC's, and Mr. Alvarez saying no, you can't. So
    Mr. Jones, let me ask you the question.
        What is it that in your supervisory powers and structures
    that you have over the parent companies of ILC's that would be
    different from the powers and regulatory structure that the
    Federal Reserve or the OTS would have over parent organizations
    of insured depositories? What's the difference here?
        Mr. Jones. I guess first I'd like to break it down that I
    think you've raised two issues, whether we can supervise the
    ILC's and whether we have the same powers as the Federal
    Reserve does over the parents. I don't think anyone has raised
    any issues of whether FDIC or the States at this stage can
    supervise the ILC's. We have the same authorities for those
    that we have for every insured institution, and I believe even
    in GAO's report they indicated they found no operational
    failure on our part for the supervision of the institutions.
        The question I think you're really directing is can we
    oversee or supervise--
        Mr. Hensarling. Well, they have supervisory ability as
    opposed to authority.
        Mr. Jones. Well, supervising a bank, I think we have the
    same ability to supervise an ILC that we have for any
    institution. On the parent level, we don't have the same
    authority as the Federal Reserve. We have some authorities.
    Largely our authorities apply to insulating the bank from the
    parent so the parent doesn't pose a risk to it but as has been
    noted, we cannot apply consolidated capital to the bank. We
    don't have the same reporting requirements, although we do--we
    are able to obtain a large number of reporting requirements
    through both cooperation and in some situations by agreement.
        So we don't have the same authorities. We have attempted
    with the authorities that we do have to make sure we're
    providing that proper supervision at the bank level.
        Mr. Hensarling. Mr. Alvarez, how does this impact taxpayer
    exposure and safety and soundness?
        Mr. Alvarez. Well, Congress has decided that the most
    effective way to protect the Federal safety net and the
    taxpayer is to have a two-part supervisory scheme, one that
    focuses on the depository institution directly, and another
    that looks at the holding company and its affiliates, and the
    strength of the holding company and its affiliates.
        As Doug mentioned, the FDIC has full authority to look at
    the bank. That part of the scheme isn't what we question. For
    owners of ILC's, however, there is no comparable supervision of
    the holding company itself and its affiliates, so there's
    exposure to the taxpayer and the safety net through weaknesses
    that may occur at the holding company. Troubles at the holding
    company could bleed over into the bank and cause failure at the
    bank. Capital may be deficient at the holding company and that
    puts the bank at risk.
        So it is--having someone who has the authority to look at,
    examine, get reports from, and take enforcement actions against
    the holding company and its affiliates is the difference
    between the two.
        Mr. Hensarling. Mr. Hillman, I have not reviewed your study
    but what are we observing in the real world here? Is there
    evidence that the FDIC has been less effective in supervising
    of institutions not owned by bank holding companies?
        Mr. Hillman. Our work suggests, Congressman, that the work
    done by the FDIC as it relates to supervising the ILC or the
    insured institution is similar to the authorities and
    approaches taken by other Federal regulators in insuring the
    institution. The question today, however, is the extent to
    which the FDIC has similar authorities to oversee the holding
    company structure, the parent organization and affiliate
    organizations, and in this regard, while the FDIC provides
    substantial authorities to try to isolate and limit the risks
    associated with ownership by the parent in a holding company
    structure to an ILC, it is not equivalent to the authority
    provided by the Federal Reserve or OTS.
        Mr. Hensarling. In the limited time I have left, I want to
    replow a little bit of old ground that the ranking minority
    member brought up and that is it appears that by their
    testimony, Wal-Mart and Home Depot are looking for a very
    limited purpose in their ILC charters, and I understand a
    couple of you gentlemen cannot comment because they are
    pending.
        But I really want to hone in and make sure I understand the
    answer. Is there an ability to limit the specific purpose that
    the ILC charter would have? And without commenting, I suppose,
    on those specific cases, Mr. Jones, could you answer that
    question yet again so I have a firm understanding of the
    answer?
        Mr. Price. The gentleman's time has expired, but you may
    answer, Mr. Jones.
        Mr. Jones. We can--when we approve an application. We can
    place conditions on the application based upon either items we
    perceive as risk or items, if we have not made a thorough
    review, the limitation on what our review was so they're not
    engaging in other activities. So we can place limitations on an
    approval that you can--and again, this is in general, but you
    can place limitations that an institution cannot engage in
    certain activities either without our consent or without giving
    prior notice to us so we can take an action on it.
        If they do not live up to those conditions, they face
    severe consequences in the sense of enforcement actions that we
    can take against them, all the way up to the level of a
    million-dollar-a-day fine if they're violating a condition. But
    as I mentioned to Congressman Frank, these are conditions that
    are imposed at the time based on the facts before us. So to the
    extent at a later date if they come forward and ask us to re-
    review it, we have to consider it at that time based upon the
    facts that exist at that time as well.
        Mr. Hensarling. Thank you.
        Mr. Price. Thank you, Mr. Jones. Mr. Crowley, you're
    recognized for 5 minutes.
        Mr. Crowley. I thank the Chair for recognizing me.
        Let me say I, unfortunately, was unable to be here for your
    testimony, but I have your written testimony, and I will review
    it. As in my opening statement, I made reference to the fact
    that what has made this country great is the level of
    competition amongst members of particular industries. And I see
    the same here in the ILC debate, creating opportunities for
    competition to thrive here in the States and to--it's what's
    made our country strong.
        So I want to just really reiterate my opening statement to
    a degree, and that is I do support the ILC's in concept, and I
    don't believe in creating a separate standard for one
    particular entity to keep one out of the market.
        And with that, I will yield the balance of my time to the
    gentleman from Utah, Mr. Matheson.
        Mr. Matheson. I thank Mr. Crowley for yielding.
        I think the line of questioning that Mr. Hensarling just
    went through really helped crystallize what one of the issues
    is here that I think we need to acknowledge.
        There's nobody arguing that the FDIC and the Federal
    Reserve have the same ability to look at the holding company,
    at the parent. I don't think there's anybody who thinks that is
    the case. The operative question here ought to be under what
    does the FDIC have its jurisdiction, and the States, does this
    industry have adequate regulation?
        So I want--I think that was very helpful to clarify that,
    and a lot of people pursued this question. There is no question
    that the FDIC doesn't have all the authority the Federal
    Reserve does to look at the holding company, but is only one
    form of regulation appropriate or are there multiple forms of
    regulation that may be appropriate? And that is the purpose of
    this hearing today--to determine if the Industrial Loan
    Companies, under FDIC and State regulation, are adequately
    regulated.
        In terms of the GAO report, Mr. Hillman, there are a couple
    of conflicting statements in the report because in the GAO
    report you first say that, as a number of people mentioned,
    from an operations standpoint, ILC's do not appear to have a
    greater risk of failure than other types of depository
    institutions. But then one of the conclusions--you say ILC's
    may pose more risk of loss to the bank insurance fund than
    other insured depository institutions operating in a holding
    company.
        How do I reconcile those two statements in your report?
        Mr. Hillman. Thank you for an opportunity to clarify that.
        In our report, we did state and truly believe that from an
    operational standpoint, ILC's pose no additional risk to the
    bank insurance fund than do other depository institutions, that
    the main issues associated with risk to the depository
    insurance fund have to do with the quality of the institution's
    business plan or type of activities undertaken, strength of the
    management and the like. And with an ILC or a bank you're
    encountering those same types of issues.
        We did conclude, however, that from a regulatory
    standpoint, there were differences in powers between that of
    the Federal Reserve under a consolidated supervisory regime,
    and that of the FDIC, to oversee the holding company of the
    insured institution. So therefore, from a regulatory
    perspective, we concluded that, yes, ILC's would pose
    additional risk.
        Mr. Matheson. Did you find any empirical evidence that
    that's the case, that ILC's have created a greater risk in
    terms of to the depository insurance fund?
        Mr. Hillman. Our review focused on the extent to which the
    Federal Reserve's consolidated supervisory approach and the
    FDIC's approach to isolate the bank from a potential risk were
    different, and we found that the FDIC's approach was not
    equivalent.
        Mr. Matheson. Well, as I said when I started, we all
    acknowledge they're different, the authority of the FDIC and
    Federal Reserve. I'm not going to argue about that. And I know
    at GAO you often are restricted in the scope of your study by
    the way the request is made and the questions that are asked.
        But did you find any evidence that this industry has posed
    any greater risk in terms of what's happened, particularly in
    the last 20 years since Steagall was passed in 1987, when this
    industry has obviously had substantial amount of growth? Is
    there any evidence that this industry has posed any greater
    risk to the deposit insurance fund?
        Mr. Hillman. Certainly since the mid-1990's, I would like
    to concur with points previously made by prior FDIC Chairman
    Donald Powell that the banking industry is undergoing a golden
    age in which the industry is very strong and is thriving. One
    of our concerns is that the approach that the FDIC follows in
    its oversight over ILC's and their parents is that this
    regulatory regime has emerged during a time which has been a
    golden age in banking--
        Mr. Matheson. I understood that. Let me ask you that.
    Wouldn't that be true as well for the Federal Reserve's ability
    to supervise large financial holding companies that were first
    allowed in 1999 to engage in formally prohibited securities,
    investment banking, merchant banking, and insurance activities?
    And since all that experience has also been during these so-
    called good times, does the GAO think it would be appropriate
    to question the Federal Reserve's ability to supervise these
    new entities?
        Mr. Price. The gentleman's time has expired, but Mr.
    Hillman, you may respond.
        Mr. Hillman. Many of the organizations that the Federal
    Reserve is overseeing, or all of the organizations that the
    Federal Reserve is overseeing, are entities that operate in a
    regime that is financial in nature and their oversight over
    those financial-oriented entities provides them with the
    necessary expertise and wherewithal to assess, measure, and
    understand the risks associated with those organizations.
        When you're talking about Industrial Loan Corporations, to
    date, the vast majority of these entities have been financial
    in nature as well, but when you have an exemption which allows
    for organizations that are not financial in nature to obtain
    ownership of depository institutions, then yes, that is a risk
    that I believe needs consideration.
        Mr. Matheson. I know my time has expired, but that wasn't
    my question. You didn't answer my question.
        Mr. Price. Well, you'll be having time to come. Mr. Miller,
    you're recognized for 5 minutes.
        Mr. Miller of California. Thank you very much.
        This is something we've been talking about for quite a
    while. Some have expressed some concern, some have made
    suggestions that ILC's and holding companies are not adequately
    regulated and that ownership of ILC's by commercial entities
    pose some potential risk, you know, based on the relationship
    between the parent company and the ILC.
        And rather than just making assumptions, it would be nice
    to look at some form of history. And I believe, Mr. Hillman,
    you'd probably be the most appropriate one to answer this. Have
    ILC's owned by commercial entities posed safety and soundness
    problems to a greater or lesser extent than those depository
    institutions owned by traditional bank holding companies?
        Mr. Hillman. To date, the number of institutions that are
    commercial in nature have not been great, nor has their asset
    base necessarily been great. But for those commercial entities
    who have owned depository institutions, their default history
    is similar to those institutions that were owned by financial
    organizations.
        Mr. Miller of California. So there's not a greater or a
    lesser risk based on everything we see today from one entity to
    another entity? They're both pretty much the same, as far as
    risk or history of loss.
        Mr. Hillman. When you're looking at the past, the number of
    institutions and the amount of insured deposits are relatively
    modest. However, when you look into the future now and you look
    at the extent to which commercial entities have an increasing
    interest in acquiring an insured institution, the situation may
    not continue to be the same.
        Mr. Miller of California. Do you see, then, a problem
    with--it seems like if you have more competition, you have more
    liquidity. And coming from the real estate background I have,
    it always seems that competition has always been good for the
    marketplace. My support of GSE's has always been consistent
    because of liquidity in the marketplace.
        Would this not apply in some fashion to this expansion?
        Mr. Hillman. That clearly is a decision that the Congress
    needs to decide. The competition within the industry has
    generally been limited to entities that are financial in
    nature, except for this exemption with the ILC's.
        Mr. Miller of California. Okay. Mr. Jones, I believe, if we
    talk about a bright line separation between entities of
    commercial banking and you look at the FDIC oversight, is it
    adequate to ensure that there's a bright line separation
    between the entity and--that in some way does not compromise
    safety and soundness as far as the FDIC is concerned?
        Mr. Jones. Could I ask you to ask that question again,
    please?
        Mr. Miller of California. Do you think that current
    regulations and FDIC oversight are sufficient to ensure a
    bright line separation between an entity's commercial and
    banking activities so that there's no compromise of safety and
    soundness as far as the FDIC is--is there a complete separation
    that's very clear and identifiable between the commercial
    entity and the banking activities that they're involved in?
        Mr. Jones. As we've discussed, we have attempted to make
    sure we have an insulation between the bank--and frankly, its
    parent, whether it's a financial concern or a non-financial
    concern--to make sure that the bank is not influenced by its
    parent in a way that can be adverse to the institution.
        We have a lot of safety and soundness provisions and
    abilities to protect and to try to prevent any influence in the
    sense of--it's been discussed, 23A and 23B, Federal Reserve,
    Reg O, the tying provisions, to try to keep the separation. It
    is an area, though, that we ourselves have recognized that
    there's a change going on so we're trying to do more of an
    analysis ourselves to see if there's a change occurring that
    perhaps does require more powers than we have today.
        Mr. Miller of California. So you're taking into
    consideration that--is there a potential for abuse by a parent
    company of an ILC and based on current law, are we adequately
    protected without further regulations being implemented?
        Mr. Jones. We always have that in mind no matter who the
    parent is, whether it's a potential of abuse, and that
    temptation is always there so we have powers--the same powers
    we have for all institutions and all their affiliates. It is a
    bright line and we attempt to enforce it. It's just--it's a
    question of whether there's a change going on which we haven't
    seen, at least to date.
        Mr. Miller of California. Should Congress decide that this
    is not what they would deem appropriate to allow whether it be
    Target or Home Depot or whatever to enter into the sector that
    we're talking about restricting, how does that impact current
    companies that are out there working legally within mini
    states, you know, GMAC, many others out there? How would that
    affect--would that not literally put them out of business if we
    changed the Federal law?
        Mr. Jones. Well, I guess in part that depends on how you
    change the law, whether you have a grandfathering-type
    provision that allows those that currently exist to continue or
    whether you--
        Mr. Miller of California. And that's what raises concern.
    If there's necessity for grandfathering, why would we be
    changing it to begin with? If we're allowing something that's
    currently operating, as Mr. Hillman said, above board and in
    compliance with the bank holding companies, why would we
    implement anything that would allow a grandfathering of
    something that's obviously egregious or questionable or risky?
        Mr. Price. The gentleman's time has expired, but you may
    respond.
        Mr. Jones. I have to say that sits within the purview of
    Congress on why you would allow one and not allow the other, so
    I don't have an answer for you.
        Mr. Miller of California. I just wanted to point that out.
        Mr. Price. Thank you.
        Mr. Miller of California. For the record, may I submit
    testimony of the National Association of Realtors, testimony
    just for the record?
        Mr. Price. Without objection.
        Mr. Miller of California. Thank you, sir.
        Mr. Price. Mr. Green, you're recognized for 5 minutes.
        Mr. Green. Thank you, Mr. Chairman, and I also thank the
    ranking member, and I thank the members of the panel for being
    here today. I have greatly enjoyed listening to your comments.
        We all agree that we don't live in a perfect world. In a
    perfect world, Enron would still be around. In a perfect world,
    we wouldn't have had some of the bank failures that we had in
    the 1980's. And given that we don't live in a perfect world and
    that people don't have to meet to make decisions that can be
    adverse to the best interests of others, that things can be
    done by way of an understanding as opposed to a conspiracy,
    there is great concern about equality of competitiveness, and I
    have great concern with reference to conflicts of interest.
        Mr. Alvarez, you have indicated that there are laws that--
    as well Mr. Jones--that can help to thwart--that's my term--
    some of these concerns. But--and they may have been efficacious
    and effective with reference to how we were able to work with
    these bank holding companies, these holding companies for ILC's
    in the past but as we go into the future with just the size of
    what we're looking at now, and given the fact that we'll have
    the commercial side, does this not create a greater amount of
    concern for you in terms of our ability to make sure that the
    competitive nature of the holding company the ILC does not
    prevent good sound business practices in making loans?
        Mr. Alvarez. Congressman, that's a good question. And the
    two laws that Doug and I referred to, Sections 23A and 23B,
    which limits transactions between a bank and its affiliates and
    then the anti-tying rules are very important to address
    specific kinds of abuses. But they don't address all the
    potential concerns that could come up from the affiliation of a
    bank with another company, and that's the reason that Congress
    has imposed this dual system of supervision where there's
    supervision of the holding company as well as supervision of
    the bank.
        I think all of us have testified that ILC's are banks in
    the same way as any other insured bank. There is no real
    difference about ILC's so the risks of those organizations are
    the same. But the system we have for managing those risks is
    very different and that, I think, is the concern that we want
    to bring to your attention.
        The system of managing those concerns right now involves
    two-part supervision, and we only have one part of the
    supervision when it comes to Industrial Loan Companies and the
    owners of Industrial Loan Companies.
        I think the other thing to keep in mind is when you think
    about competitive equity, the exception is being used now in a
    way that wasn't originally intended by Congress and threatens
    to undermine the general approach that applies to all other
    owners of insured banks.
        So there is now a competitive inequality that is developing
    between the ones that are subject to full supervision at the
    holding company, all the panoply of supervision at the bank,
    and restrictions on mixing banking and commerce, and those who
    operate under the Industrial Loan Company exception which have
    a much lighter supervisory scheme and no restrictions on their
    competitive--on their mixing of banking and commerce. That
    creates an unbalanced playing field and gives advantages to
    some that may be things that Congress wants to be concerned
    about.
        Mr. Miller of California. Mr. Jones, do you concur with the
    premise that the playing field is unbalanced?
        Mr. Jones. From the bank perspective, we think if you have
    the same--it's the same for both. I mean, whether it's an ILC,
    whether it's a bank, if they're working under the same rules
    and they're under the same restrictions and prohibitions in the
    sense of protecting the bank, it's no different than how the
    bank is operating, and that's our goal to make sure there is no
    difference.
        And I know that there's concern expressed about
    affiliations with commercial concerns and--or if we're
    concerned about temptations here. Yes, we are, but we're
    concerned about temptations from any affiliate and, as you
    mentioned, we've experienced the same thing in the 1990's from
    bank holding company affiliate situations, and we hope we've
    learned lessons from the period in the 1990's, and we hope we
    learn our lessons as we go forward on issues to try to deal
    with them.
        From the viewpoint of whether it's a banking and commerce
    issue and whether that's a competitive issue, that's one that
    we believe is really a Congressional--for Congressional
    consideration and determination.
        Mr. Miller of California. Mr. Alvarez, one more question--
        Mr. Price. The gentleman's time has expired.
        Mr. Miller of California. Well, I thank you, Mr. Chairman.
        Mr. Price. Chairman Bachus, you're recognized for 5
    minutes.
        Chairman Bachus. Thank you.
        Mr. Jones, you were asked earlier whether or not you
    thought the FDIC had enough authority to regulate the ILC's and
    you said you thought that they did have adequate authority. Is
    that correct?
        Mr. Jones. No, I--we have used the authority we have today
    and we think it's succeeded based upon the institutions that we
    have today, and the operations we've seen today, but we have,
    and we mentioned in our testimony--
        Chairman Bachus. You said you were looking at it.
        Mr. Jones.--we're looking, reviewing to see whether we need
    more, to make sure that the institutions--
        Chairman Bachus. Can you--
        Mr. Jones.--are safe and sound.
        Chairman Bachus. You know, could you be a little more
    specific as opposed to just that you're looking at it? What's
    the status of the review or--can you be more specific what
    authority or powers you're looking--
        Mr. Jones. We have no specific recommendations at this
    stage. I guess I have to fall back on the fact that we do have
    a new chairman who is part of that consideration, and she's
    only been on board at the FDIC for 2 weeks. So we're working
    with her. She views this area as a very important area. She's
    been briefed a number of times in this area but--
        Chairman Bachus. How long has this review been going on?
        Mr. Jones. Within some range, it's always going on but it's
    something which I think there has been more focus on recently
    as a result of some of the changes that we see going on in the
    industry.
        Chairman Bachus. When do you think you might be in a
    position to report to Congress your findings as to whether or
    not you feel you need more--
        Mr. Jones. I can't give you a date on that. I mean, it's
    something which, once we make the evaluation, if we see the
    need either for changes within our own structure or needs from
    legislation, certainly for legislation we'd come to Congress
    and ask for it.
        Chairman Bachus. But there is an active review ongoing?
        Mr. Jones. There is a process of reviewing what's going on;
    yes.
        Chairman Bachus. Okay. Mr. Leary, some ILC's are subject to
    the jurisdiction of either the OTS or the SEC.
        Mr. Leary. That is correct.
        Chairman Bachus. What is your working relationship with
    those agencies and how does it compare with your--the shared
    supervision you have with the FDIC?
        Mr. Leary. Well, I would tell you since it is a day-to-day
    relationship with the FDIC, I have used the term repeatedly and
    continue to believe wholeheartedly it is a partnership with
    regard to the FDIC. The working relationship is very well
    developed, well-founded, and I believe we have an ability to
    communicate on all levels.
        With respect to the OTS and SEC, it is not as good simply
    because we do not work with them as much. I will add that it's
    probably more a decision on their part. The outreach is there
    from our part to try and have more of a dialogue, more of a
    cooperative discussion with those agencies.
        Chairman Bachus. So you would welcome more of the
    partnership-type relationship that you have with--
        Mr. Leary. Very much so, but I would also tell you we
    extend that kind of relationship and offer for coordination
    cooperation with the Federal Reserve. I wish we had a better
    one there than we do.
        Chairman Bachus. All right. Thank you. Mr. Hillman,
    Congress has provided, as you know, three models for regulating
    companies that control insured depository institutions. The
    Federal Reserve bank holding company model, the OTS savings and
    loan holding company model, and the FDIC affiliate model all
    focus, I think, primarily on the depository institution to see
    that it's at least adequately capitalized, that the parent is
    able to provide financial support, and that no affiliate can
    undermine or misuse the depository institution.
        And then I think that under all these models, all the
    agencies have a broad catch-all authority to supplement their
    express powers, if necessary. Would you comment on whether any
    agency under those models lacks the necessary powers to be
    effective regulators, and particularly in the context of ILC's?
        Mr. Hillman. In our review, one of the major areas that we
    looked at was the extent to which the consolidated supervisory
    authorities afforded to the Federal Reserve and the Office of
    Thrift Supervision were identical to those powers offered by
    the FDIC and its bank-centric approach to overseeing an insured
    institution.
        And we identified in our report eight authorities that we
    focused on. For two of those areas there was consistent and
    equivalent powers across all three organizations in six areas,
    importantly, dealing with the extent to which an organization
    can compel reports from the holding company, the extent to
    which an organization can examine affiliates of a holding
    company that has no transactions with an entity, and the extent
    to which an organization can enforce actions on the parent or
    affiliate transactions, we found that the FDIC's authority was
    not equivalent to that of the OTS or the Federal Reserve's
    authority.
        Mr. Price. The gentleman's time has expired. Mr. Matheson,
    you're recognized for 5 minutes.
        Mr. Matheson. Thank you, Mr. Chairman.
        Mr. Jones, as a representative of the FDIC, who regulates
    ILC's, I want to get your opinion on a statement that was just
    made in response to Mr. Green's questioning. Mr. Alvarez, you
    said that when it comes to ILC's--and I wrote this down so I
    get it right--there are no restrictions on mixing of banking
    and commerce.
        Mr. Jones, is that true? There are no restrictions on
    ILC's?
        Mr. Jones. From the bank perspective, we feel that it has
    the same protections that anyone else has, the ones we've
    discussed with respect to whatever the parent is, that there's
    restrictions on the activities it can have with the parent or,
    in the sense of tying, or in the sense of relationship with the
    parents--
        Mr. Matheson. Thank you. I wanted to make sure we got that
    on the record.
        Mr. Alvarez, you described numerous potential abuses in
    your testimony that might occur from allowing banks to be
    affiliated with commercial firms or with financial firms not
    regulated by the Board. Do you have an answer why, in your
    opinion, none of these abuses have actually occurred over the
    past 2 decades?
        Mr. Alvarez. Well, there has been very little mixing of
    banking and commerce in the last 50 or 60 years. It is
    something that is now a recent phenomenon that's happening more
    through this ILC exception. So it's not surprising that there
    hasn't been historical failures by this time. We believe that
    it's time because things have progressed so far for Congress to
    be aware that this exception is being used in a particular way
    so that you can deal with the future as it's developing and
    unfolding.
        Mr. Matheson. Let me ask you, does the Federal Reserve have
    any opposition to trade associations controlling a bank?
        Mr. Alvarez. I'm not sure I understand the question.
        Mr. Matheson. The ICBA controls a bank. Do you think that
    that's appropriate?
        Mr. Alvarez. The ICBA has a limited purpose credit card
    bank--
        Mr. Matheson. That's correct.
        Mr. Alvarez.--that is--that's right, has a limited purpose
    credit card bank, not a full-service bank, not a bank--
        Mr. Matheson. Okay. Referring to what they do--
        Mr. Alvarez.--that is an Industrial Loan Company or has the
    power--
        Mr. Matheson. Understood. I didn't say it was an ILC. Do
    you have concerns about what it does have?
        Mr. Alvarez. Well, this is another exception that Congress
    has created in the Bank Holding Company Act--Congress allows
    anyone to own a credit card bank if it limits its operations,
    and we enforce the law as best we can.
        Mr. Matheson. Sure. Let me ask you this. You have concerns
    about mixing banking and commerce when a commercial entity is
    owned by a corporation. In light of the fact that many
    independent banks are owned by business people who own other
    local businesses, does the Federal Reserve's concern about
    mixing banking and commerce extend to common individual or
    family ownership of banks and non-financial commercial
    businesses?
        Mr. Alvarez. We haven't had the same concerns about
    individuals owning both a bank and a commercial entity because
    we--
        Mr. Matheson. Someone who owns the auto dealership in the
    town and the community bank in the town, do you have a concern
    that there could be a mixing of banking and commerce there?
        Mr. Alvarez. I think there's a rational basis for making a
    decision that you don't want to restrict individuals from
    owning where you might want to restrict corporations from
    owning both banks and commerce because corporations are
    perpetual entities that have much more access to capital. They
    can be much larger and the opportunities for mixing their
    internal activities are much stronger than with individuals.
        So we have--again, that's a policy set by Congress that we
    have followed.
        Mr. Matheson. Okay. Mr. Leary, earlier, one of the members
    in their opening statement called into question the
    capabilities of the Utah Department of Financial Institutions
    to regulate this industry because of smaller staff size and
    whatnot and I thought you ought to be given an opportunity to
    respond to that.
        Mr. Leary. Thank you. Of record, we have 37 field
    examiners; we have authorization to increase that to 42 this
    year. I think of note in this regard is that the industry
    supported a fee increase because they wanted to maintain the
    quality supervision from the Department, including the ILC's,
    and in fact the largest ILC was the witness supporting the fee
    increase for the Department.
        Being conveyed from the industry, they want us as a strong,
    well-established regulator. It does them no good, does the
    State no good if we are not.
        Mr. Matheson. Do you have any--I assume you disagree with
    some of the criticisms of your supervision of ILC's. Do you
    have any specific responses to what has been put in the other
    testimony?
        Mr. Leary. Well, I would limit my comment to a
    reinforcement of the point, in 20 years there has not been a
    failure of a Utah industrial bank. I think the Federal Reserve
    even has concurred that the regulation of the bank has been
    appropriate commensurate to the risk. Will we always be able to
    say that? I don't know. I'm a regulator. I live with it day-in
    and day-out.
        My relationship with the FDIC has been such that I think we
    have performed admirably in that role as a regulator.
        Mr. Matheson. Let me ask one more because my time's about
    to expire.
        A couple of folks have tried to compare circumstances in
    Japan with what's going on with Industrial Loan Companies. I do
    not presume that you're an expert on the Japanese banking
    system, but is that really a fair apples to apples comparison
    or are we talking about different circumstances?
        Mr. Leary. I think we are talking about different
    circumstances. I think the Federal Reserve rules in place have
    provided prudential safeguards. The ones we put in at the State
    level have provided prudential safeguards that would help
    ensure the safety and soundness of the bank.
        Mr. Matheson. Thank you. I yield back, Mr. Chairman.
        Mr. Price. The gentleman yields back the balance of his
    time. The Chair recognizes Chairman Bachus.
        Chairman Bachus. Thank you, Vice Chairman Price. I
    appreciate you supervising the hearing and taking over the
    Chair.
        We have votes on the Floor at this time and I think it
    would be appropriate to dismiss the first panel. I'd ask
    unanimous consent that the GAO report, if it has not already
    gone into the record, that it go into the record and--
        Mr. Price. Without objection.
        Chairman Bachus.--the letter from OTS.
        Mr. Price. Without objection.
        Chairman Bachus.--and at this time that we recess and at
    the conclusion of the votes on the Floor we return here and
    commence the second panel.
        Mr. Price. Fine. I want to thank the Chair. I want to thank
    the panel for coming. The Chair notes that some members may
    have additional questions for this panel, which they may wish
    to submit in writing. Without objection, the hearing record
    will remain open for 30 days for members to submit written
    questions to these witnesses and to place their responses in
    the record.
        Once again, I want to thank the panel members. We have a
    couple of votes on the Floor. I would anticipate about 1:15,
    maybe a few moments before that, for folks' planning purposes.
        This hearing stands in recess.
        [Recess]
        Chairman Bachus. Good afternoon. We are going to go ahead
    and get started. We're under a time constraint. Another
    committee is scheduled to meet in this room at 2:00 p.m., so
    the good news there is that you probably won't be subjected to
    intense cross examination, but I'm going to recognize Mr.
    Matheson to introduce Mr. George Sutton.
        Mr. Matheson. I just very briefly wanted to introduce a
    constituent of mine from the State of Utah, George Sutton, who
    is here today representing the SIA group. And Mr. Sutton has a
    long history in the banking sector. He has in the past worked
    as a head of financial institutions in Utah. He has worked as a
    head of two--CEO of two industrial banks and he's currently
    with the law firm of Callister, Nebeker, and McCullough, and I
    appreciate him participating today.
        Chairman Bachus. Thank you, Mr. Matheson. I should have
    introduced the rest of the panel and then come back to you.
        Our second panelist, Ms. Terry Jorde, is chairman and
    president, CEO of the Country Bank in Cando, North Dakota. Of
    course we've heard of that as Dick Armey's hometown and you
    said his mother still lives there? Is that right? Or his
    parents or brother or someone.
        Ms. Jorde. Sibling, yes.
        Chairman Bachus. Thank you. And she is representing the--
    she is actually the chairman of the Independent Community
    Bankers of America, the ICBA. We welcome you.
        Mr. John L. Douglas, partner in Alston & Bird, on behalf of
    the American Financial Services Association.
        Mr. Arthur C. Johnson, chairman and CEO of the United Bank
    of Michigan, on behalf of the American Banking Association.
        Where is the United Bank of Michigan located?
        Mr. Johnson. In Grand Rapids, Michigan.
        Chairman Bachus. Grand Rapids, Michigan. And we welcome
    you. And Professor Lawrence J. White, professor of Economics at
    the Stern School of Business at New York University.
        Thank you.
        Mr. White. It's located in Manhattan.
        Chairman Bachus. That's fine. NYU.
        Mr. White. That's right.
        Chairman Bachus. Thank you. And a fine institution. We
    welcome your testimony.
        And Mr. Michael J. Wilson, director of legislative and
    political action department at the United Food and Commercial
    Workers International Union. Welcome to you, Mr. Wilson.
        And at this time, we'll start with Mr. Sutton for opening
    statements.

         STATEMENT OF GEORGE SUTTON, FORMER COMMISSIONER, UTAH
        DEPARTMENT OF FINANCIAL INSTITUTIONS, ON BEHALF OF THE
                 SECURITIES INDUSTRY ASSOCIATION (SIA)

        Mr. Sutton. Thank you, Mr. Chairman, and thank you,
    Congressman Matheson, for the introduction.
        Mr. Chairman and members of the subcommittee, I am George
    Sutton, and I appear today on behalf of the Securities Industry
    Association. As Congressman Matheson mentioned, I am an
    attorney practicing in Salt Lake City, Utah, with the firm of
    Callister, Nebeker, and McCullough. My firm represents many
    commercial and community banks, two local bank trade
    associations, and about half of the industrial banks based on
    Utah, including several of the banks owned by SIA members. At
    year-end 2005, Utah-based banks owned by securities firms held
    more than 75 percent of the industrial banks' $120 billion in
    assets.
        I've been involved in banking regulation for more than 23
    years, first as an attorney in the Utah Department of Financial
    Institutions, and then as the commissioner from 1987 to 1992.
    Since then, I have been primarily involved in organizing banks
    and providing other legal services to banks in Utah, which has
    grown into the ninth largest banking center in the Nation.
        I would like to use my limited time today to clarify some
    of the misinformation that has infected the debate over
    industrial banks during the past few years. First, there is no
    safety and soundness issue regarding industrial banks. And I
    realize that's repetitive but we keep hearing this, and I think
    it's worth repeating again. The industrial banks in Utah are
    one of the strongest and safest group of banks that has ever
    existed.
        Second, there is no deficiency in the regulation of the
    industry. It is equal to, and in some respects stronger than,
    the regulation of all other banks. There is extensive and
    effective regulation of the holding companies and affiliates,
    and industrial banks' regulators have the authority to examine
    holding companies and their affiliates, issue cease and desist
    orders, assess civil money penalties, remove officials, and
    force divestiture of the bank, if necessary. I have seen these
    authorities exercised firsthand and they are effective.
        In addition, the SEC comprehensively regulates many SIA
    members and the OTS also regulates Federal savings banks owned
    by many SIA members. There is no structural risk in allowing
    banks to be owned by companies that engage in activities other
    than banking. This is well established within the history of
    this industry. There is simply no evidence that affiliates
    engaging in other businesses pose any inherent risk to a bank.
        Transactions with affiliates must be carefully monitored
    for compliance with Sections 23A and 23B of the Federal Reserve
    Act, and those laws have proven to be workable and effective to
    ensure that affiliate transactions pose no risk to the bank.
        Nor is it the case that a traditional holding company
    regulation provides better protection for a bank's subsidiary.
    In reality, most traditional bank holding companies provide
    little support to their subsidiary banks. I can tell you from a
    great deal of personal experience during my regulatory days
    that a traditional holding company provides only minimal
    support to a bank and is essentially irrelevant if the bank is
    failing.
        In contrast, diversified holding companies often provide a
    high level of support to a bank. Diversified parents tend to be
    much larger than the bank and provide extensive financial
    support, including capital, if problems arise. In some
    instances, a diversified holding company could easily
    recapitalize a subsidiary bank if it suffered a total loss of
    its loan portfolio. Diversified parents also typically provide
    the bank with an established business so the bank is large and
    profitable from the outset.
        Finally, I would like to briefly discuss the separation of
    banking and commerce issue. The real public policy underlying
    that doctrine is credit availability. Separation of banking and
    commerce began when banks were the primary providers of credit
    and it was important to maintain separation so all businesses
    had equal access to credit. But the economy has fundamentally
    changed during the past 30 years and keeping banking segregated
    is no longer necessary to assure adequate access to financial
    services for everyone.
        The U.S. economy has become the most prolific and
    diversified producer of credit that ever existed. Today,
    companies of every kind increasingly offer financial services.
    Companies operating outside the traditional bank holding
    company structure have become major providers of credit and may
    now provide most of the credit in the economy.
        Many of those companies want access to a depository charter
    because it enables them to provide their financial services
    more efficiently and cost-effectively. That is what has caused
    the dramatic growth in the industrial banks over the past 20
    years. The real issue in the industrial bank debate is whether
    the large number of businesses in our Nation that offer bank-
    quality products and services will be allowed to operate in the
    most efficient and profitable manner.
        That concludes my oral presentation, Mr. Chairman. I'd be
    glad to take questions.
        [The prepared statement of Mr. Sutton can be found on page
    197 of the appendix.]
        Chairman Bachus. Thank you.
        Ms. Jorde.

    STATEMENT OF TERRY JORDE, CHAIRMAN, PRESIDENT/CEO, COUNTRYBANK
     USA, CANDO, ND, & CHAIRMAN, INDEPENDENT COMMUNITY BANKERS OF
                             AMERICA (ICBA)

        Ms. Jorde. Thank you, Mr. Chairman.
        Mr. Chairman and members of the subcommittee, my name is
    Terry Jorde. I'm president and CEO of CountryBank USA in Cando,
    North Dakota, and I'm also chairman of the Independent
    Community Bankers of America.
        Mr. Chairman, thank you for holding this hearing on a
    matter of critical importance to our Nation.
        The ILC specter looms over our financial system as an ever-
    increasing number of commercial companies seek to exploit the
    ILC loophole as a back door entry into banking. This flood of
    new applications for ILC charters threatens to eliminate the
    historic separation of banking and commerce and undermine the
    system of holding company supervision, harming consumers and
    threatening financial stability.
        Both Federal Reserve Chairman Ben Bernanke and former
    Chairman Alan Greenspan agree that Congress must address this
    issue. Chairman Bernanke recently wrote, ``The question of
    whether or to what extent the mixing of banking and commerce
    should be permitted is an important issue and one that we
    believe should be made by Congress.''
        In one of his final letters as Chairman, Greenspan wrote,
    ``These are crucial decisions that should be made in the public
    interest after full deliberation by the Congress. They should
    not be made through the expansion and exploitation of a
    loophole that is available to only one type of institution
    chartered in a handful of States.''
        Former Senator Garn recently told the FDIC that the ILC
    charter was grandfathered in 1987 and exempted from the Bank
    Holding Company Act to serve narrow purposes. Until recently,
    that is how most ILC holding companies operated. But that is
    rapidly changing as the Wal-Mart and other applications
    demonstrate. The narrowly-intended ILC exception could
    eventually swallow the general rule and a charter based in one
    State could irreversibly change our financial landscape and our
    national financial policy without Congress having any say in
    the matter.
        My written statement details the harms that will flow from
    the exploitation of the ILC loophole and the breach of the
    separation of banking and commerce. It puts the safety and
    soundness of the financial system at risk. Problems in a
    holding company's commercial sector could bleed over into the
    bank. Just imagine if Enron or WorldCom had owned ILC's.
        Wal-Mart's plan to process its payments through its own
    bank could undermine the integrity of the Nation's payment
    system and impose great risks. Its stated plan is to process
    hundreds of billions in payments and is backed by a purely
    nominal amount of capital.
        The Home Depot application presents a clear conflict of
    interest. The Home Depot Bank will make loans to customers so
    they can buy products at Home Depot stores. This violates the
    clear strength of our financial system, the impartial
    allocation of credit.
        The nationwide expansion of ILC's threatens local
    communities and small businesses. It is unlikely that a bank
    owned by a major retail company will lend money to its
    competitors. Deposits would instead be gathered locally but
    deployed for larger corporate purposes.
        Unfortunately, the FDIC currently lacks clear statutory
    authority to take all these broad policy implications into
    account as it considers the pending ILC applications.
    Representative Jim Leach's bill, the Financial Safety and
    Equity Act of 2005, H.R. 3882, provides the ideal solution. It
    would require that any company that owns an ILC conform to the
    Bank Holding Company Act and divest non-financial activities.
        ICBA commends Mr. Leach for his leadership. His work was
    critical in earlier efforts to close the non-bank bank and the
    unitary thrift holding company loopholes. Without his
    pioneering work, the separation of banking and commerce would
    have been long lost and we would likely be dealing with severe
    problems.
        If Congress cannot enact the Leach bill, there is a strong
    alternative plan drafted by Representatives Paul Gillmor and
    Barney Frank. Like Mr. Leach, Representatives Gillmor and Frank
    have worked tirelessly to address the ILC challenge. The new
    Gillmor/Frank bill, the Industrial Bank Holding Company Act of
    2006, would address both elements of the ILC loophole, the
    separation of banking and commerce, and the need for
    consolidated supervision of ILC holding companies.
        Like much good legislation, the Gillmor/Frank bill includes
    realistic compromises. It would grandfather existing firms with
    some restriction, however, it would prevent the FDIC from
    approving any applications by commercial firms for new ILC's or
    for acquisitions of existing institutions. The ICBA strongly
    endorses this bill.
        This issue has gone well beyond the interests of a few
    companies in a handful of States. What Congress grandfathered
    nearly 20 years ago as a narrow exception threatens to quickly
    become a way for the Nation's retail and industrial firms to
    skirt our Nation's financial laws, breach the separation of
    banking and commerce, and enter into full service banking.
        There are 14 applications for ILC charters or acquisitions
    pending today; more will almost certainly be filed. The
    financial system's safety and soundness, integrity, and ability
    to serve local communities and small businesses are all at
    great risk. Fortunately, Congress has before it strong
    legislative proposals that will effectively address these
    risks. ICBA urges Congress to take prompt and positive action
    before it is too late.
        Thank you.
        [The prepared statement of Ms. Jorde can be found on page
    170 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Douglas.

     STATEMENT OF JOHN L. DOUGLAS, PARTNER, ALSTON & BIRD, LLP, ON
      BEHALF OF THE AMERICAN FINANCIAL SERVICES ASSOCIATION (AFSA)

        Mr. Douglas. Thank you, Mr. Chairman.
        My name is John Douglas. I'm a partner in the law firm of
    Alston & Bird and I am pleased to represent the American
    Financial Services Association before this panel today. AFSA's
    members include finance companies, credit card issuers,
    mortgage lenders, industrial loan banks, and other providers of
    commercial and consumer credit.
        AFSA strongly believes that the industrial bank represents
    a safe and appropriate means to deliver financial services to
    the public. They do so in a framework of stringent supervision,
    strong enforcement, and a structure of laws and regulations
    that provide the FDIC with all of the tools it may need to
    address any hypothetical and unproven evils raised by opponents
    of the charter.
        I also come with some personal experience on this issue. I
    was general counsel of the FDIC during the late 1980's and have
    a real appreciation for the need for a safe and sound banking
    system, for strong supervision and clear enforcement powers.
        We've heard much of the evils of mixing banking and
    commerce and the dangers inherent in this unintended loophole
    being exploited by commercial firms. As I point out in my
    written remarks, these two propositions are simply historically
    inaccurate and we should be clear on this point. Affiliations
    between banking and commercial firms have always existed in
    this country, and on numerous occasions Congress has addressed
    and blessed and regulated those affiliations.
        But I want to focus my oral remarks on something else we've
    heard, that the unregulated owners of industrial banks would
    somehow wreak havoc on our financial system, given the lack of
    comprehensive supervision. This proposition ignores the
    existing legal framework governing all financial institutions,
    including industrial loan banks, and likewise ignores the
    substantial power and indeed belittles the capacity of the FDIC
    to supervise, examine, and enforce any laws and regulations
    designed to assure safety and soundness and prevent abuses.
        In testimony before the House Capital Markets Subcommittee,
    former Federal Reserve Chairman Greenspan once observed, ``The
    case is weak in our judgment for umbrella supervision of a
    holding company in which the bank is not the dominant unit and
    is not large enough to induce systemic problems should it
    fail.'' There is no question he was right and I would go even
    further.
        Our comprehensive system of laws and regulations provide
    ample protection against any risk associated with commercial
    ownership of industrial banks. I make four points.
        First, industrial banks are subject to the same
    comprehensive framework of laws and regulations that govern
    normal banks. They have no special power or authority and
    they're exempt from no statute or regulation.
        Second, the FDIC has been given ample authority to
    supervise and regulate these institutions and can exercise the
    full range of enforcement powers. I was a participant in the
    process that led to FIRREA and worked closely with members of
    this committee and others in Congress with the intention of
    giving the FDIC all the powers it needed to protect our banking
    system.
        There is no question of its power over industrial banks,
    over the owners or their affiliates. It has all of the normal
    cease and desist, removal, and civil money penalty powers, and
    may take any action it deems appropriate to remedy a violation
    of law, regulation, rule, or commitment, or an unsafe practice,
    including even forcing the divestiture of the industrial bank
    by its owner.
        Third, I can attest from experience that the FDIC regularly
    and vigorously exercises these powers.
        Fourth, the experience of the FDIC with respect to
    industrial loan banks belies any fundamental concern over
    threats to our banking system. The two failures of industrial
    banks--FDIC-insured industrial banks owned by holding
    companies, neither of which, by the way, were commercial
    enterprises, and neither of which failed as a result of self-
    dealing or conflicts of interest, stand in sharp contrast to
    the hundreds of bank failures and holding company structures,
    many of which cost the FDIC billions of dollars; Continental
    Illinois, First Republic, First City, MCorp, Bank of New
    England, and so on, all of which were subject to this much-
    vaunted comprehensive supervision or consolidated supervision
    by the Federal Reserve as the holding company regulator that is
    now offered as a cure for something that hasn't proven to be a
    problem.
        Critics assert that the industrial bank would somehow favor
    its affiliates, discriminate against competitors, or create
    other unfair advantages. I'd like to point out, however, that
    if potential discrimination were the issue, banks should not be
    affiliated with any type of business. Indeed, Bank of America
    should not be affiliated with Banc of America Securities lest
    it somehow favor the customers of its securities affiliate to
    the exclusion of customers of Merrill Lynch.
        And if we were really concerned about the potential for
    abuses and adverse effects, we might more closely evaluate the
    propriety of small business owners owning controlling interests
    in banks in small communities where alternative sources of
    credit are much more limited. Congress has never acted to
    preclude these affiliations, nor should it, as our existing
    framework of laws and regulations is more than adequate to
    prevent abuse.
        Finally, if we were really concerned about the potential
    dangers of mixing banking and commerce, we should roll back the
    merchant banking powers granted under Gramm-Leach-Bliley,
    eliminate the FDIC's power to permit commercial activities for
    banks granted by FDICIA, and maybe even strip commercial
    lending powers for the few relationships giving a bank a
    greater interest in or more power over a commercial enterprise
    than the primary source of its credit.
        Our financial system is blessed with competition,
    innovation, strength, and breadth that is the envy of the world
    and we should be clear about one aspect of those markets.
    Throughout our history, there has always been, and Federal law
    has always blessed, some form of affiliation between banking
    and commerce.
        In our modern era, these relationships have been carefully
    considered and accompanied by a statutory and regulatory
    framework designed to prevent abuse and make sure our
    authorities have substantial power. I think Congress should
    carefully consider the full implication of any change that
    could choke off these affiliations, denying our system the
    flexibility and innovation that's been its hallmark under the
    guise of advancing concepts with an attractive rhetorical
    resonance.
        Thank you very much.
        [The prepared statement of Mr. Douglas can be found on page
    94 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Johnson.

     STATEMENT OF ARTHUR C. JOHNSON, CHAIRMAN AND CEO, UNITED BANK
      OF MICHIGAN, ON BEHALF OF THE AMERICAN BANKERS ASSOCIATION
                                 (ABA)

        Mr. Johnson. Mr. Chairman, I'm going to attempt to
    abbreviate my remarks in the interest of time. I'd like to
    point out that in addition to my responsibilities as chairman
    of United Bank in Grand Rapids, Michigan, I'm also the chairman
    of the American Bankers Association Government Relations
    Council, and today I'm testifying on behalf of the ABA.
        Today I would like to make three points. First, the ILC
    industry of today bears little resemblance to the ILC industry
    of 1987 when the current ILC law was enacted. I'll not
    elaborate on this point too much because much has been said
    about the history of ILC's, other than to reiterate the point
    that from 1987 to 2004, the aggregate growth in ILC assets has
    increased by almost 4,000 percent. A big change.
        The second point is that the existing statutory approach is
    inconsistent with the policy of separating banking from non-
    financial commerce. The current regulatory approach is
    inconsistent with the policy of separating banking from non-
    financial commerce. Congress consistently has acted to close
    avenues through which non-financial commercial entities could
    own depository institutions while giving due consideration to
    the equity of those holding existing investments in such
    companies.
        The ABA consistently has supported and continues to support
    this policy. We believe Congress should act consistent with its
    prior efforts to close the ILC loophole. To do otherwise would
    be to leave open an outdated provision of law that could
    undermine the legislative steps that you have taken to keep
    banking and non-financial commerce separate.
        And my third point, Congress should act or prohibit future
    ownership of ILC's by commercial firms. The current statutory
    landscape, by continuing to permit more non-financial
    commercial companies to enter the banking field, compounds
    concerns that conflicts of interest could develop in a more
    broad-based systemwide way. These policy concerns may have been
    tolerable when the current ILC exemption was passed and the ILC
    marketplace was very small. Now, however, with the potential
    entry of the world's largest retailer, they are not.
        The most effective way to ensure that the ILC charter is
    not misused is to limit ownership of ILC's to companies that
    are financial in nature. Thus, the ABA recommends that Congress
    require any company that seeks to establish or acquire an ILC
    to be a financial firm.
        ABA recognizes the legislation affecting ILC's, like
    previous legislation addressing the banking and commerce issue,
    will almost certainly grandfather existing owners of ILC's in
    an effort to strike a balance going forward. However, we urge
    Congress to bring any grandfathered institution within the
    jurisdiction of a Federal bank regulator.
        I should note that since my written testimony was
    submitted, Congressmen Paul Gillmor and Barney Frank have
    introduced H.R. 5746 which prohibits future acquisitions of
    ILC's by commercial firms, and strengthens the existing
    regulatory structure. ABA supports H.R. 5746 and will work with
    the authors and this committee moving forward.
        In closing, we believe the time is right for Congress to
    act on this important issue. I thank you for the opportunity to
    share the ABA's views and would be happy to answer any
    questions that you may have either here today or in written
    form that we could respond to at a later date.
        [The prepared statement of Mr. Johnson can be found on page
    138 of the appendix.]
        Chairman Bachus. Mr. Johnson, when I introduced you, did I
    mention that you were representing the ABA? I'm not sure that I
    did.
        Mr. Johnson. I'm not sure.
        Chairman Bachus. Okay. I hope that I did. If I didn't, I
    apologize, but you are representing the American Banking
    Association.
        Mr. Johnson. Indeed, I am. Thank you.
        Chairman Bachus. Thank you. Professor White.

        STATEMENT OF PROFESSOR LAWRENCE J. WHITE, PROFESSOR OF
        ECONOMICS, STERN SCHOOL OF BUSINESS, NEW YORK UNIVERSITY

        Mr. White. Thank you, Mr. Chairman. Thank you for the
    opportunity to be here today to testify on this important
    topic.
        My name is Lawrence J. White, and I'm a professor of
    economics at the NYU Stern School of Business. I'm a former
    board member of the Federal Home Loan Bank Board, but I'm here
    testifying today on my own. I have not been asked by any
    organization to testify on its behalf.
        In my written testimony, I lay out a principles-based
    approach for the regulation of banks, really all depository
    institutions, and of their owners. I'll summarize this
    statement quickly today. I'm going to have to speak quickly but
    since I'm a New Yorker, that comes naturally.
        My approach basically relies on five principles. First,
    banks are special. That's why we're here today. Second, because
    banks are special, they require special regulation--safety and
    soundness regulation. At the heart of safety and soundness
    regulation are capital requirements, activities limitations,
    and management competency requirements, and all of this is
    backed up and enforced by a field force of examiners and
    supervisors.
        Third, the restricted activities of a bank should be only
    those that are examinable and supervisable. By that I mean the
    activities for which bank regulators can knowledgeably assess
    risks and set capital requirements and judge managerial
    competence.
        Activities that are not examinable and supervisable should
    not be allowed for banks, but they should be allowed for the
    bank's owners, whether that owner is the local car dealer or a
    large industrial or commercial enterprise, so long as the
    activity is otherwise legitimate.
        Fourth, any person or organization should be allowed to own
    a bank so long as that entity is financially capable, has a
    sound business plan for the bank, and is of sound character.
    Again, this covers the local car dealer as well as large
    industrial and commercial companies.
        Fifth, and perhaps the most important, regardless of who
    owns the bank, the relationships and transactions between the
    bank and its owners must be monitored tightly by bank
    regulators because banks are special, because it is too easy to
    drain the bank so as to benefit the owners at the expense of
    the depositors or at the expense of who is backing up the
    depositors, the deposit's insurer. This is the logic that
    underlies Sections 23A and 23B of the Federal Reserve Act, and
    it's a very sensible position.
        The application of these principles shows that ILC's are a
    wholly sensible and worthwhile model for public policy with
    respect to banks and with respect to who may own them. Indeed,
    it is a model that should be applied far more widely in the
    banking sector.
        Also, and the topic came up earlier today, there's been
    lobbying testimony on behalf of the National Association of
    Realtors on this particular topic. They point out that the
    logic of the ILC and its owners and the logic of whether banks
    should be allowed to enter real estate activities such as real
    estate brokerage are the same. They are correct. It is the same
    logic, and it should have the same answer.
        Banks, depository institutions, should be allowed to be
    owned by a wide range of organizations along the principles
    that I've just laid out, and banks should be permitted to enter
    real estate brokerage.
        Thank you for the opportunity to testify, and I'd be happy
    to answer any questions.
        [The prepared statement of Professor White can be found on
    page 211 of the appendix.]
        Chairman Bachus. Thank you.
        Mr. Wilson.
        I'm not thanking you for getting into the real estate
    banking issue.
        Mr. White. I couldn't not say it, Mr. Chairman.
        Chairman Bachus. I'm just kidding.
        Mr. Wilson.

       STATEMENT OF MICHAEL J. WILSON, DIRECTOR, LEGISLATIVE AND
    POLITICAL ACTION DEPARTMENT, UNITED FOOD AND COMMERCIAL WORKERS
                          INTERNATIONAL UNION

        Mr. Wilson. Thank you, Chairman Bachus, and members of the
    subcommittee, for holding this hearing and for the opportunity
    to testify. I am here today representing the United Food and
    Commercial Workers International Union. With 1.4 million
    members in the United States and Canada, the UFCW represents
    workers in every State in the United States.
        You have my written statement which I submitted earlier
    this week. I will summarize that, as the last speaker, in order
    to allow time for questions.
        The topic of ILC's and their regulation has been of great
    concern to the UFCW for several years. The potential mixing of
    commerce and banking is very troubling. The trend we are seeing
    today is somewhat reminiscent of an earlier era in American
    history, an era in which the company town was prevalent.
        These company towns were places where workers were
    dependent on a single company, not just for their jobs but for
    their housing, for their healthcare, and for their retail
    needs. Many of the companies that ran these towns developed a
    track record of unsafe working conditions and abusive dealings
    with employees on everything from the wages they paid to the
    amounts they charged for basic staples, to unbelievably high
    interest rates.
        These abuses included practices such as underpaying workers
    by falsely reporting the amounts those workers produced. What
    our country learned was that if a company is too powerful and
    people have to rely on it for too many things, the imbalance of
    power almost inevitably leads to abuses.
        The record push of commercial companies looking to get into
    the banking industry through ILC exception should remind us all
    of this lesson. The policy of the United States has long been
    to explicitly keep banking and commerce separate. That has
    proven to be sound economic policy and has benefitted consumers
    who might otherwise find themselves at the mercy of a single
    large firm for too many of the goods and services they need.
        It has also provided for a vibrant and competitive
    financial services industry that offers many products and
    services to customers. Our history has included advocacy on the
    Federal level, on the State level, and internationally, as
    well. We supported efforts on the Gramm-Leach-Bliley
    legislation to specifically prohibit the purchase of a thrift
    in Broken Arrow, Oklahoma, by a large retail concern. Just 2
    years later, our Canadian locals joined with us to stop the
    purchase of Toronto Dominion Bank, which was eventually denied
    by the Office of Thrift Supervision. And in California, the
    State Legislature and the Governor enacted legislation closing
    the ILC loophole in that State.
        In 2003, we joined with several other associations to form
    the Sound Banking Coalition. Wal-Mart, of course, looms large
    over the present ILC debate. Given its size as the largest
    corporation in the country, that may be quite appropriate. We
    are seeing that Wal-Mart is forging a path that many other
    commercial firms are intending to follow.
        There are now a record number of non-financial firms
    applying to get ILC's, from Blue Cross Blue Shield to Home
    Depot. This is not, however, a debate about a single company
    but about Federal policy regarding ILC's and how regulators and
    Members of Congress can provide security and sound policymaking
    to our Nation.
        We believe that Congress should act. Governors and State
    legislatures have recognized this and five States--Iowa,
    Maryland, Vermont, Virginia, and Wisconsin--have already
    enacted new laws in the last year to restrict ILC's from
    branching into their States. In fact, just yesterday, Governor
    Matt Blount of Missouri signed legislation to restrict ILC's
    from branching into that State.
        More States are poised to act and we are engaged in active
    discussions encouraging States, in the absence of Federal
    legislative activity, to take appropriate steps. But States
    should not be forced to take a piecemeal approach to deal with
    an issue that can be and should be appropriately dealt with at
    the Federal level.
        Representatives Gillmor and Frank have introduced H.R.
    5746, the Industrial Bank Holding Company of 2006, to address
    this problem. We believe that it is a good step in the right
    direction and that legislation would help address the problems
    we've discussed regarding ILC's.
        In closing, I would say that members of the United Food and
    Commercial Workers do not want to live in a company town. We
    seek to live in a Nation of laws and opportunity, and we thank
    you for your time and for the opportunity to testify.
        [The prepared statement of Mr. Wilson can be found on page
    223 of the appendix.]
        Chairman Bachus. Thank you, Mr. Wilson. At this time, I'm
    going to recognize Mr. Gillmor for questions.
        Mr. Gillmor. Thank you very much, Mr. Chairman.
        First I'd like to ask unanimous consent--
        Chairman Bachus. One thing. Mr. Gillmor has another hearing
    so--
        Mr. Gillmor. I just want to thank the gentleman from Iowa
    and the chairman.
        I'd first like to ask unanimous consent to introduce two
    letters into the record from the American Bankers Association
    and the American Community Bankers.
        Chairman Bachus. Without objection.
        Mr. Gillmor. First, Mr. Sutton, a question for you. You
    wrote an article in the Consumer Finance Law Quarterly in which
    you list some of the primary advantages of an industrial bank
    such as the ability to avoid penalties when receiving a less
    than satisfactory CRA rating and the ability to operate under
    generally less intrusive laws and regulations.
        It seems to me kind of a strange argument that you're
    making in the public interest that we ought to be favoring
    institutions who don't provide consumer protection and comply
    with CRA, and those are your words.
        Mr. Sutton. Representative, I do not remember writing those
    words and, if I did--
        Mr. Gillmor. It was spring of 2002.
        Mr. Sutton.--I completely--
        Mr. Gillmor. Consumer Finance Law Quarterly report. But in
    any event, that would be an accurate statement, though,
    wouldn't it, that ILC's could avoid penalties for a less than
    satisfactory rating more so than banks could who are under the
    Federal Reserve?
        Mr. Sutton. Well, that's not the case. In fact, all of the
    industrial banks operating in Utah have either an outstanding
    or a satisfactory CRA rating and if one of them were to receive
    a bad rating, they would be subject to all the penalties that
    would be applicable to any other bank.
        And in the industry itself--I mean, I'm confident the
    industry itself would condemn that.
        Mr. Gillmor. I just quoted you so you probably want to
    write an addendum or something.
        Mr. Sutton. It was my evil twin.
        Mr. Gillmor. It must have been. Let me go to Mr. Douglas of
    AFSA. You say you think having strong loaners of depository
    institutions would diversify sources of income and might be
    more beneficial to the system. Let me ask you your view on the
    counter of that.
        If you don't have regulation of the holding company, under
    current law, if they had thought of it at the time, I'm sure
    that Enron, WorldCom, and Tyco all would have bought an ILC
    because they would not be subject to regulation at the holding
    company level.
        In view of that, how do you justify not having regulation
    at the holding company level because the FDIC score in that
    area is tenuous at best.
        Mr. Douglas. Well, a couple of items in response. First, of
    course, Tyco had an ILC and, notwithstanding the problems of
    the parent, the regulation--the bank-centric regulation that
    was present certainly protected that institution.
        Second, it wasn't that long ago that we went through the
    thrift crisis and, frankly, the diversified sources of capital
    that came into the industry in the 1980's were a blessing and
    not a curse to that industry. The experience of the FDIC with
    respect to diversified owners of industrial banks, similar to
    the experience of the OTS with respect to diversified owners of
    savings associations would indicate that this is not a problem
    but in fact a benefit.
        Mr. Gillmor. Let me go to Mr. Johnson at ABA and--well, let
    me ask you this, before we leave. On the theory that everybody
    ought to be treated the same, do you feel we should repeal the
    Bank Holding Company Act so that the same would apply to
    commercial banks?
        Mr. Douglas. I think the bank-centric model of regulation
    has served us well and obviously it's up to Congress to decide
    what to do with respect to holding companies and holding
    company regulations. It's clear that there's an anomaly in the
    regulatory environment. It is not clear to me that the evidence
    would support that consolidated supervision is necessarily
    better for our system.
        Mr. Gillmor. Well, would you explain to me the
    justification, whether it's better or worse, from your point of
    view--why you would have one set of financial institutions with
    a different type and consolidated regulation while you would
    leave another set of institutions without regulation since, as
    has been pointed out, there's less consumer protection for
    those institutions.
        Mr. Douglas. Well, I would disagree with the assertion that
    there's less consumer protection, but one of the benefits of
    our system is that we've provided a variety of charters and
    methods for people to deliver financial services in the
    innovation that's been demonstrated through the industrial
    bank, similar to the innovation demonstrated through other
    charters. I think it's been helpful to our economy and not
    harmful.
        Mr. Gillmor. Let me go to Mr. Johnson of the ABA for one
    question. There are critics who believe that our bank laws are
    outdated and perhaps Mr. Douglas is one of them. I'm not sure.
    When it comes to separating banking and commerce, could you
    describe for the committee whether you feel it's still relevant
    to have that separation?
        Mr. Johnson. Yes. We believe it is still relevant to have
    that separation. Reference was made earlier in the hearing to
    the Japanese model, the German model and I am--as a small
    banker from Grand Rapids, Michigan, am certainly not an expert
    on that. But what I do know is that the model that we have
    where the Congress has consistently acted to close exemptions
    to the division between banking and commerce as those
    exemptions have caused increased concern, that's a model that
    has served us very well. And I think that with the strength of
    our economy that we've had, while operating under that model,
    has been such that we believe it would be a very dangerous
    experiment to tinker with it.
        Mr. Gillmor. Thank you very much. And Mr. Chairman, I
    appreciate the courtesy in recognizing me and Mr. Leach in
    letting me crowd in line, and I yield back.
        Chairman Bachus. Thank you. Mr. Matheson.
        Mr. Matheson. Thank you, Mr. Chairman. I know you're trying
    to wrap up this hearing and I'd just ask unanimous consent--
        Chairman Bachus. You have your full 5 minutes.
        Mr. Matheson. If I could just say, could we submit written
    questions to the witnesses--
        Chairman Bachus. Absolutely.
        Mr. Matheson. Okay. I just wanted to--we've heard reference
    from one of the--testimony and previous question mentions of
    Enron and WorldCom and what would have happened if they had an
    Industrial Loan Company. There are cases in--two situations in
    Utah, Conseco and Tyco, where the parent company did have
    financial difficulties.
        Mr. Sutton, could you tell everyone what happened with the
    ILC in those circumstances?
        Mr. Sutton. Well, in the case of Conseco, the regulators
    were closely monitoring the situation at the holding company.
    They made sure that the bank was completely isolated from those
    problems. Eventually when Conseco became bankrupt, the
    consequence was that the subsidiary bank had to close and be
    liquidated. But it only held high quality bankable assets. It
    was able to sell that portfolio at a premium. With those funds,
    it paid all of its deposit obligations, it paid all of its
    other debts, and it paid a substantial liquidating dividend up
    to the parent company that was then distributed out to the
    bankruptcy creditors.
        Mr. Matheson. So in that case there was no claim on FDIC
    insurance and the taxpayers are not left to help pay this
    because the parent company had financial problems.
        Mr. Sutton. Exactly. Now, it might be worth adding that
    this is a very legitimate concern and it was a concern from the
    beginning of this industry. I remember when I was regulating I
    had a discussion with the regional director of the FDIC who
    said, let's call it the Drexel Burnham test. He said, ``I'm not
    going to grant insurance to any bank that could be owned by
    Drexel Burnham unless I am convinced that it's safe and it's
    not going to be a risk to the fund.''
        And there were some added features to the industrial bank
    regulatory model created at that time to ensure its
    independence, to ensure the competence of its management, and
    to ensure that it was protected from anything like that before
    this model was ever really allowed to develop.
        Mr. Matheson. So while I guess we can never play the,
    ``what if'', game too much, but if those companies had
    industrial loan banks, at least based on our past history over
    the last 20 years, when you've had parent companies that have
    gone into bankruptcy, or at least faced significant financial
    distress, the bank-centric regulation model has protected that
    bank asset in a way where there was no claim on FDIC insurance.
        Mr. Sutton. That's the record thus far, yes.
        Mr. Matheson. Okay. I want to make sure that's the case
    because as I said, Mr. Chairman, in my opening comments, the
    focus of this hearing is whether or not this industry is
    adequately regulated. And while we have established that the
    FDIC has a different role with a bank-centric model compared to
    the Federal Reserve that does the comprehensive regulation,
    that doesn't mean one is good and one is bad. And I think that
    the track record here is one that the ILC industry should be
    proud of, and the regulatory entities that regulate at both the
    States and the FDIC should be proud of, because of that track
    record.
        One other reference I want to make. My former senator,
    Senator Garn, was referenced in one of the testimonies saying
    that it was a narrow exemption. I would also point out Senator
    Garn has testified on behalf of the industrial loan industry.
        If I could just read four sentences from his participation
    in the FDIC hearing, and he said, ``Congress expressly intended
    to exempt the parent companies of industrial banks from the
    Bank Company Holding Act when it enacted CEBA in 1987. That is
    the law, not a loophole, as some have characterized it. This
    exemption was debated for several years before it was enacted
    and Congress has not modified the exemption in any way in the
    nearly 20 years since it became law. Enacting that exemption
    has resulted in the development of a major financial services
    industry whose member banks today are among the safest,
    strongest and most successful banks in America.''
        Last question for Mr. Sutton. We've heard some comment--
    what's that?
        Chairman Bachus. You have a full 5 minutes.
        Mr. Matheson. Okay. Well, he's going to take it--this is a
    good question, so--one issue I haven't heard a lot of talk
    about today in the discussion, but we've heard a lot about, is
    some comments about industrial banks threatening the payment
    system.
        Can you comment on that issue and the role of industrial
    banks in that issue?
        Mr. Sutton. You know, we've heard this concern raised and
    we really struggle to make any sense out of it. The payment
    system, of course, is the settlement of checks and credit card
    charges and debit charges and things like that at the end of
    the day where the banks get together and settle their accounts.
        Industrial banks play very little role in this system.
    There are no industrial banks offering checking accounts. The
    ones that offer NOW accounts, you know, in total amount to
    roughly one medium-sized community bank. There are some major
    credit card issuers but to the largest extent, the other banks
    do not get into credit card issuance. The ones that do, play by
    the same rules that everyone else does.
        So they really aren't involved in the payment system and we
    haven't been able to understand how, with that minimal
    involvement, they can be a threat to it.
        Mr. Matheson. Okay. I'm going to do one more then, Mr.
    Chairman, since you gave me the full 5 minutes.
        Mr. Sutton, we've heard about this massive explosion of
    this industry over the last 20 years. Is it not true that
    industrial banks' assets represent between 2 and 3 percent of
    all bank assets in this country?
        Mr. Sutton. That's my understanding.
        Mr. Matheson. That's right. And how would you describe this
    growth since 1987? Is this the result of new opportunities in
    the marketplace or why has this growth happened, even though
    it's just 2 or 3 percent of the asset base in this country?
        Mr. Sutton. Well, you know, the separation of banking and
    commerce really is an expression of a more primary policy which
    is ensuring that everybody has accessibility to credit and that
    was fashioned when banks were the primary providers of credit.
        What has happened in the last 30 years is that financial
    services have spread through the entire economy. You find
    businesses of every kind now in the financial services
    business. And as they get into it, and many of these are as
    competent as any provider you'll ever find, they know the
    business well. Many of them invented these businesses to begin
    with. They're very good at what they do and they figure out
    after a while that the most efficient way to run the business
    is to run it through a bank.
        And it's these businesses that come to Congress, that come
    to the regulators and say we're looking for a bank charter and
    we're willing to run it in a way where we can give good
    assurance that it's done safely and soundly and that's the
    record of this industry thus far.
        Mr. Matheson. Okay. Thank you for your patience, Mr.
    Chairman.
        Chairman Bachus. Thank you, Mr. Matheson.
        Ms. Jorde. Mr. Chairman, could I just follow up on that
    question briefly?
        The concern that we have, and it's already been brought out
    before, is not so much the history. It's that the world is
    changing very, very rapidly right now and, in fact, that's why
    we're all here today. The number of applications that we have
    in place and particularly the Wal-Mart one brought it to
    everybody's attention.
        I mean, Wal-Mart is proposing to capitalize a bank with
    $125 million in capital and process $170 billion in payments
    each year. That's enormous risk and it's not the type of credit
    risk that the banking system is used to covering with capital,
    but it's the ability to be able to settle those payments. $125
    million in capital is very, very little to be able to cover the
    potential problems that $170 billion of payments would have
    going through that system.
        Chairman Bachus. Thank you. Let me conclude this hearing by
    saying, you know, at the start of this hearing I said that it
    was not about legislation. It was to look at the Industrial
    Loan Companies, their structure, their charter, and their
    regulation.
        One reason--and this is a personal opinion of mine, and
    this is a committee made up of 40-something members, so this is
    my own personal opinion. There's a lot of unease out there
    about Industrial Loan Companies, but I'm still not sure that
    we've defined what the problem is. And legislation is a
    solution to a problem, but there can't be a solution to the
    fact that we're concerned about the future.
        Is the problem a safety and soundness issue? Mr. Sutton
    said that the Industrial Loan Companies in Utah--and I've
    really not seen any evidence to the contrary--I'm not sitting
    here as a judge, but that they're not among our strongest
    financial institutions, so I don't know if it's a safety and
    soundness problem.
        I know that people have said, well, the Federal Reserve
    doesn't regulate the holding companies but in probably 80 or 90
    percent of the assets of these Industrial Loan Companies, or
    the companies themselves, it's my understanding from testimony
    here today and what I've read before, that the SEC and the OTS
    have supervisory power over the holding companies. I think Mr.
    Leary mentioned that in his testimony.
        In fact, he said what has received no coverage in the
    current debate is the fact that industrial bank oversight by
    the States and the FDIC is supplemented by holding company
    oversight by financial regulators other than the Federal
    Reserve. The Securities and Exchange Commission and the Office
    of Thrift Supervision have regulatory oversight over many
    holding companies with Utah industrial banks and subsidiaries.
        And I think I've heard testimony somewhere that between 75
    and 90 percent of the assets and deposits fall into that
    category. So if we're talking about large security companies
    owning industrial loan banks, which seems to be the case with
    80 or 90 percent of these, then what I'm hearing from the panel
    that is concerned it's about the commercial firms. It's not 90
    percent or 80 percent or 85 percent.
        And with the commercial firms, obviously, you know, that is
    a philosophical--I mean, it's probably economic--philosophical.
    And I suppose that those who are opposed to that is--what I'm
    hearing from this panel is at least your concern is focused on
    those companies.
        But then if we get into a grandfather situation, where do
    you stop? I mean, then, you know--is Congress--is it fair to
    say that Target can have one, Wal-Mart can't, and GMAC is right
    in the middle? So how does Congress--Congress is not very adept
    at determining fairness in sorting out winners and losers and
    if any of you would like to comment, we've got about a minute
    left.
        Ms. Jorde. I would comment on that briefly. I have a good
    friend who made the comment recently that, you know, if the
    barn door is open and half of the horses run out, what would
    you do? You'd probably close the barn door and try to keep the
    rest of them in and then the ones that had gotten loose, try to
    gain some control over those.
        I think we are at a point right now where the barn door has
    been open and there are a number of horses that are out, but
    more are right there at the door waiting to get out, and I
    think the Gillmor/Frank legislation that's been introduced very
    effectively looks at that issue of grandfathering those
    institutions that have effectively worked very well as ILC's
    and it also addresses the commercial companies that are looking
    to go through that exception and to really mix banking and
    commerce, which for many, many years this Congress has closed
    over and over and over again.
        So I think the real issue here is the mixing of banking and
    commerce, the systemic risk created from that, the impartial
    allocation of credit, and the extension of the Federal safety
    net to commercial companies. That's the real issue and I think
    that's why we're here today.
        Chairman Bachus. I'll either let Mr. Douglas or Mr. Sutton
    have a minute and then we'll conclude the hearing.
        Mr. Douglas. In some senses, we're talking--we've spent a
    lot of time talking about--sorry about that; she didn't want me
    to talk.
        Chairman Bachus. No, she was helping you; she was moving it
    towards you.
        Mr. Douglas. We've been talking about hypothetical problems
    that simply don't exist today. Our system really has been
    blessed by diversified sources of credit, and credit comes
    through a number of sources, a number of avenues, and in a
    number of ways. One of those ways recently has been the
    industrial bank charter.
        The fact that the barn door is open is sort of an
    interesting analogy but it's not relevant to the issue at hand.
    What we have is a financial system that provides for
    competition and innovation. There have been no problems with
    allocation of credit or conflicts of interest or abuses. We
    have a framework of laws that protects us as a society and our
    banking system as a system. This is something that we ought to
    let evolve and proceed and grow and reap the benefits of it.
        We have billions of dollars of credit that have been
    extended to consumers and small businesses by these industrial
    banks. This is a good thing and not a bad thing.
        Chairman Bachus. Thank you. This will conclude our hearing.
    I appreciate the testimony of the witnesses today. The Chair
    notes that some members may have additional questions for the
    panel which they may wish to submit in writing. Without
    objection, the hearing record will remain open for 30 days for
    members to submit written questions to these witnesses and to
    place their responses on the record.
        This hearing is adjourned.
        [Whereupon, at 2:23 p.m., the subcommittee was adjourned.]

                                A P P E N D I X

                                 July 12, 2006

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