[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.]







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                             July 12, 2006


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