[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


                     H.R. 698, THE INDUSTRIAL BANK
                      HOLDING COMPANY ACT OF 2007

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

                                HEARING

                               BEFORE THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             FIRST SESSION

                               __________

                             APRIL 25, 2007

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 110-25





















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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                 BARNEY FRANK, Massachusetts, Chairman

PAUL E. KANJORSKI, Pennsylvania      SPENCER BACHUS, Alabama
MAXINE WATERS, California            RICHARD H. BAKER, Louisiana
CAROLYN B. MALONEY, New York         DEBORAH PRYCE, Ohio
LUIS V. GUTIERREZ, Illinois          MICHAEL N. CASTLE, Delaware
NYDIA M. VELAZQUEZ, New York         PETER T. KING, New York
MELVIN L. WATT, North Carolina       EDWARD R. ROYCE, California
GARY L. ACKERMAN, New York           FRANK D. LUCAS, Oklahoma
JULIA CARSON, Indiana                RON PAUL, Texas
BRAD SHERMAN, California             PAUL E. GILLMOR, Ohio
GREGORY W. MEEKS, New York           STEVEN C. LaTOURETTE, Ohio
DENNIS MOORE, Kansas                 DONALD A. MANZULLO, Illinois
MICHAEL E. CAPUANO, Massachusetts    WALTER B. JONES, Jr., North 
RUBEN HINOJOSA, Texas                    Carolina
WM. LACY CLAY, Missouri              JUDY BIGGERT, Illinois
CAROLYN McCARTHY, New York           CHRISTOPHER SHAYS, Connecticut
JOE BACA, California                 GARY G. MILLER, California
STEPHEN F. LYNCH, Massachusetts      SHELLEY MOORE CAPITO, West 
BRAD MILLER, North Carolina              Virginia
DAVID SCOTT, Georgia                 TOM FEENEY, Florida
AL GREEN, Texas                      JEB HENSARLING, Texas
EMANUEL CLEAVER, Missouri            SCOTT GARRETT, New Jersey
MELISSA L. BEAN, Illinois            GINNY BROWN-WAITE, Florida
GWEN MOORE, Wisconsin,               J. GRESHAM BARRETT, South Carolina
LINCOLN DAVIS, Tennessee             JIM GERLACH, Pennsylvania
ALBIO SIRES, New Jersey              STEVAN PEARCE, New Mexico
PAUL W. HODES, New Hampshire         RANDY NEUGEBAUER, Texas
KEITH ELLISON, Minnesota             TOM PRICE, Georgia
RON KLEIN, Florida                   GEOFF DAVIS, Kentucky
TIM MAHONEY, Florida                 PATRICK T. McHENRY, North Carolina
CHARLES WILSON, Ohio                 JOHN CAMPBELL, California
ED PERLMUTTER, Colorado              ADAM PUTNAM, Florida
CHRISTOPHER S. MURPHY, Connecticut   MICHELE BACHMANN, Minnesota
JOE DONNELLY, Indiana                PETER J. ROSKAM, Illinois
ROBERT WEXLER, Florida               KENNY MARCHANT, Texas
JIM MARSHALL, Georgia                THADDEUS G. McCOTTER, Michigan
DAN BOREN, Oklahoma

        Jeanne M. Roslanowick, Staff Director and Chief Counsel
























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    April 25, 2007...............................................     1
Appendix:
    April 25, 2007...............................................    51

                               WITNESSES
                       Wednesday, April 25, 2007

Bair, Hon. Sheila C., Chairman, Federal Deposit Insurance 
  Corporation....................................................     9
Colby, Robert, Deputy Director, Market Regulation, Securities and 
  Exchange Commission............................................    14
Connelly, Arthur R., Chairman and Chief Executive Officer, South 
  Shore Bancorp MHC, on behalf of America's Community Bankers....    37
Douglas, John L., Alston & Bird LLP, on behalf of the American 
  Financial Services Association.................................    41
Ghiglieri, James P., Jr., President, Alpha Community Bank, on 
  behalf of the Independent Community Bankers of America.........    38
Isaacs, Amy, National Director, Americans for Democratic Action..    35
Kohn, Donald L., Vice Chairman, Board of Governors of the Federal 
  Reserve System.................................................    12
Lackritz, Marc E., Chief Executive Officer, Securities Industry 
  and Financial Markets Association..............................    43
Leary, G. Edward, Commissioner, Department of Financial 
  Institutions, State of Utah....................................    17
McVicker, Earl D., Chairman and Chief Executive Officer, Central 
  Bank & Trust Company, on behalf of the American Bankers 
  Association....................................................    40
Reich, Hon. John M., Director, Office of Thrift Supervision......    13
Stevens, Thomas M., Immediate Past President of the National 
  Association of Realtors........................................    45

                                APPENDIX

Prepared statements:
    Bair, Hon. Sheila C..........................................    52
    Colby, Robert................................................    71
    Connelly, Arthur R...........................................    82
    Douglas, John L..............................................    87
    Ghiglieri, James P., Jr......................................    95
    Isaacs, Amy..................................................   113
    Kohn, Donald L...............................................   121
    Lackritz, Marc E.............................................   138
    Leary, G. Edward.............................................   149
    McVicker, Earl D.............................................   172
    Reich, Hon. John M...........................................   183
    Stevens, Thomas M............................................   200

              Additional Material Submitted for the Record

Gillmor, Hon. Paul E.:
    Letter from the American Bankers Association.................   210
    Letter from America's Community Bankers......................   211
    Letter from Independent Community Bankers of America.........   212
    Letter from the National Association of Realtors.............   214
    Letter from the Sound Banking Coalition......................   215
    Statement of Thomas J. Bliley, Jr., on behalf of the Sound 
      Banking Coalition..........................................   217





















 
                     H.R. 698, THE INDUSTRIAL BANK 
                      HOLDING COMPANY ACT OF 2007

                              ----------                              


                       Wednesday, April 25, 2007

             U.S. House of Representatives,
                   Committee on Financial Services,
                                                   Washington, D.C.
    The committee met, pursuant to notice, at 10:08 a.m., in 
room 2128, Rayburn House Office Building, Hon. Barney Frank 
[chairman of the committee] presiding.
    Present: Representatives Frank, Waters, Maloney, Watt, 
Sherman, Meeks, Moore of Kansas, Baca, Scott, Green, Cleaver, 
Davis of Tennessee, Sires, Ellison, Klein, Wilson, Perlmutter, 
Donnelly, Marshall; Bachus, Castle, Royce, Gillmor, Manzullo, 
Feeney, Hensarling, Brown-Waite, Barrett, Pearce, Neugebauer, 
and Bachmann.
    Also present: Representative Matheson.
    The Chairman. The hearing will come to order. The Committee 
on Financial Services meets today to consider legislation 
dealing with the Industrial Bank Holding Company Act, which was 
filed by myself and the ranking minority member of the 
Committee on Financial Services, the gentleman from Ohio, Mr. 
Gillmor. It deals with the question of whether or not the 
entity known as the Industrial Loan Corporation ought to be 
expanded or maintained at its current level.
    I begin by saying that there's been a debate about the 
ILCs. It does seem to me that those who profess to be strong 
supporters of the Industrial Loan Corporation form ought to be 
the ones initiating legislation. That is, if you genuinely 
believe that the ILCs are an important financial institution, 
how does anyone justify limiting them so that only six States 
can charter them? I know of no other generally approved entity 
which can only be chartered by six States.
    So I understand people who think ILCs are a wonderful thing 
and would therefore like to have them freely chartered. I 
understand those of us who think that we should restrict them. 
It is hard for me to understand a rational argument for the 
status quo in which we have this entity that exists in only a 
few States. Why would anyone do that?
    Let me put it this way. It is inconceivable to me that 
anyone starting from scratch in a situation would say, ``Okay, 
here's a nice institution we ought to have; we're going to call 
it an industrial loan corporation, and let's pick six States 
that are allowed to charter it.'' I don't know how you would 
pick the six States. I assume a dartboard would be an essential 
part of that decisionmaking process. In other words we have 
what is the result of a historical accident, and it seems that 
we go one way or the other.
    There are also people who argue that we have had the ILCs 
for this considerable period and there has not been any 
problem. Well, those of us who support this legislation 
generally agree with that because we are trying to preserve the 
status quo. Nothing that is being proposed would undo the 
current situation with regard to ILCs that exist.
    Indeed, we had previously been told by the State of Utah 
where they are important, and I note the presence of our 
colleague from Utah, a former member of this committee, whose 
disagreement with us was sufficiently strong to cause him to 
return. And he has been a very able advocate of the interests 
of his State. But I do note that the last information we had 
was that over 90 percent of the ILC assets in the State of Utah 
would be unaffected by our legislation because they would meet 
the test of 85 percent financial.
    But I do return to the point that we have an anomaly. I can 
understand going forward, I can understand going backward, but 
I do not see how anyone public policy can justify staying where 
we are.
    Now what we find is--and people said, ``Why are you dealing 
with this now if they haven't caused problems?'' But what we 
are confronted with is people who have decided to significantly 
expand this entity, including major commercial organizations.
    Again, I understand the argument from those who say that 
the distinction between commercial and banking activities is an 
artificial one, that it should fall. But if you believe that, 
then where's the language to repeal the restriction? Again, why 
this halfway, to put it in a way that will meet the rules of 
propriety, approach to a situation? What again is the 
justification for maintaining the general principle of a 
separation between banking and commerce and allowing this one 
narrow exception?
    We, I hope, will go forward. We are trying again not to 
disturb the status quo. We have had some conversations with a 
kind of a border area involving securities, border in the 
sense, these are financial institutions and we will be--we have 
been working and having conversations and I want to thank--
Chairwoman Bair is here and she has, on this as in so many 
other issues, been extremely helpful.
    We are trying to work out the various regulatory approaches 
that should go forward. I do want to say that this has been one 
of the rare occasions in my memory when the Federal Reserve has 
been very flexible, and I hope that this is a pattern that we 
will see going forward.
    But I think we have a very reasonable approach in the 
legislation. Obviously we are prepared to listen. And with 
that, I will recognize the ranking member.
    Mr. Bachus. I thank Chairman Frank for holding this hearing 
on H.R. 698, which is the Industrial Bank Holding Company Act 
of 2007. This legislation would enhance regulatory supervision 
of our ILCs, grandfather existing ILCs, and at the same time, 
prohibit commercial firms in the future from acquiring ILC 
charters.
    At the outset, I want to commend the chairman and the 
gentleman from Ohio, Mr. Gillmor, who both worked tirelessly 
over the past several years to craft legislation on this 
complex issue.
    Today's hearing will hopefully help us to better understand 
ILCs and the regulatory framework that surrounds the ILC 
charter. As ILCs have grown in size, number, and complexity, 
several supervisory and policy questions have arisen, including 
whether current regulatory structure for overseeing ILCs is 
adequate.
    Insured ILCs are subject to State banking supervision and 
FDIC oversight as State, non-member banks. Nonetheless, owners 
of ILCs do not have to be bank holding companies subject to the 
Federal Reserve's consolidated supervisory authority.
    In the absence of Federal Reserve's supervision of ILC 
holding companies, 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. Some have suggested that this regulatory 
regime does not provide sufficient protection against the 
potential risk that parent companies and non-banking affiliates 
may pose to the safety and soundness of ILCs.
    Another matter of concern about ILCs is the extent to which 
they can mix banking and commerce through the holding company 
structure. An 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.
    Certainly 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 ILCs when other similarly situated 
commercial entities already own them.
    Once again, I want to thank Chairman Frank and Ranking 
Member Gillmor for their work on this important issue, and look 
forward to hearing from our witnesses today on their views on 
the legislation before us.
    The Chairman. I will now recognize for 5 minutes one of our 
members who has been most active in this, the gentleman from 
Georgia, Mr. Marshall. And I will exercise my option to go to 
15 minutes. The gentleman from Alabama may, if he wishes to, as 
well. So Mr. Marshall is recognized for 5 minutes.
    Mr. Marshall. Thank you, Mr. Chairman. I don't believe I'll 
need 5 minutes. I appreciate the Chair recognizing me, and 
giving me an opportunity to say a few words on this particular 
subject.
    It's kind of interesting. The first major problem we had in 
this country with mixing business and commerce resulted in 
legislation back in 1838 in New York and Georgia. Georgia 
actually took the lead in 1838 in forcing the separation of 
banking and commerce.
    We've had other instances during our Nation's history where 
we inadvisably mixed the two. I shudder to think what kind of 
consequences we might have had had we not had those kinds of 
rules and we saw the collapses of entities like WorldCom, 
Enron, etc.
    It just seems to me that we are in a very poor position to 
understand all of the complexities of the typical business 
operation in today's world and appreciate fully the risks 
associated with mixing those complex business operations with 
banking. It's tough enough for us just to regulate our banks 
without mixing--attempting to additionally understand all the 
complexities associated with some of our current financial 
operations.
    That said, clearly we have to grandfather, and it seems to 
me that the grandfathering provisions we should consider 
wouldn't simply stop at those ILCs that have been authorized 
thus far, but might consider those ILC applications that have 
been submitted in reliance upon the performance of the board 
with regard to granting ILCs because there are a number of 
entities that have legitimately gone out and relied upon the 
expectation that their ILC application will be approved, to 
their detriment if in fact this legislation is successful, and 
the cutoff is actually acquiring an ILC before the legislation 
is approved.
    I do think that no further ILCs should be approved pending 
our consideration of this legislation. And then I'll simply add 
that there's a parallel here, it seems to me, between this 
issue and the question of whether or not banks should own real 
estate companies and other ventures that banks are sometimes 
interested in.
    It seems to me that the banking industry, which is 
interested in not having commerce compete with banks through 
ILCs, should acknowledge that in fact banks should not be 
competing with commerce through business ventures like real 
estate, etc.
    And I think perhaps, Mr. Chairman, if the chairman will 
move in that direction, it's something that we ought to 
consider. I appreciate the opportunity to say a few words, and 
I yield back, Mr. Chairman.
    The Chairman. I now am pleased to recognize the coauthor of 
this bill, the ranking Republican on the Financial Institutions 
and Consumer Credit Subcommittee, the gentleman from Ohio, Mr. 
Gillmor, for 5 minutes.
    Mr. Gillmor. Thank you very much, Mr. Chairman, and let me 
also say that I have appreciated the opportunity over the past 
three Congresses to work with you on this issue.
    We have been successful in the House; our amendment has 
passed two Congresses in a row. It didn't make it through the 
Senate, but I think that probably the third time is the charm, 
and I think we may get a different result in the Senate this 
time and get legislation to the President's desk.
    I also want to commend Chairman Bair and the rest of the 
FDIC Board for their work on this issue. I want to thank all of 
our bank regulators for recognizing that the issue of the 
future of ILCs is a question that Congress should address. It 
is good and effective regulation that's the first line of 
defense in protecting the safety and soundness of our financial 
systems.
    The principle here is real simple; it's the separation of 
banking and commerce. And financial systems which have not 
followed that principle have had a number of problems and, in 
fact, have had a number of crises because of it.
    The United States codified this principle after the 
problems in the 1920's and the Great Depression. Over the last 
several decades, loopholes and exemptions in bank law have 
gradually been closed. In 1999, during consideration of Gramm-
Leach-Bliley, Congress eliminated the unitary thrift loophole, 
and now it's time to close the ILC exception, which allows for 
full service banking by commercial firms.
    This is a kind of historical accident, and frankly it 
wasn't much of a problem when there were only a few out there 
in existence, but what has happened is that a number of 
commercial and industrial firms have discovered this loophole, 
are applying for charters, and are going to try to drive a 
train right through the loophole unless Congress acts 
responsibly to close that loophole.
    The bill that we've introduced, H.R. 698, would bolster the 
authority of the FDIC, limit the business activities of certain 
ILCs already in existence, and most importantly establish a 
cutoff date for new, commercially owned ILCs. Today we have 
approximately 120 cosponsors on the bill, and it's my hope that 
this bipartisan legislation will receive consideration in the 
committee in the near future and on the House Floor shortly 
thereafter.
    And Mr. Chairman, I would ask that the following materials 
be submitted for the record: H.R. 698 support letters written 
by the Realtors, by the ICBA, by ACB, and by the ABA. Also, 
submitted testimony by former Congressman Tom Bliley on behalf 
of the Sound Banking Coalition, and a letter of support from 
the Coalition. And I would also ask unanimous consent to enter 
into the record a March 2007 GAO report which details 
suggestions for collaboration among the consolidated 
regulators.
    [The GAO report referenced above (GAO-07-154) is available 
from the Government Accountability Office--www.gao.gov.]
    The Chairman. Without objection, it is so ordered.
    And now, on the unanimous consent--because I mentioned 
before, we've been joined here at the podium by a former 
colleague, our colleague from Utah, and he does represent a 
State where these are very important, so I would ask unanimous 
consent that the gentleman from Utah be allowed to participate 
in the hearing today.
    I thank the ranking member. It is important that we get the 
diversity of views.
    I will now recognize the chairwoman of the Financial 
Institutions and Consumer Credit Subcommittee, but I also want 
to explain. In about 5 minutes, I will be going around the 
corner to testify on the issue of fishing safety. The City of 
New Bedford, which I represent, is the leading fishing port in 
the country and we've had some safety issues. So I will be 
abstaining myself for a few minutes, but I will be back. We do 
appreciate--and I mentioned some of the regulators, Mr. Reich, 
it is very helpful to us to have had the cooperation of all the 
regulators in this as we have worked together on this 
operation, and we appreciate that, and the SEC as well.
    The gentlewoman from New York is now recognized for 5 
minutes.
    Mrs. Maloney. Thank you, Mr. Chairman. I appreciate your 
holding this hearing to discuss a bill that you and Mr. Gillmor 
have worked so hard on, and I join Mr. Gillmor in hoping that 
the third time is a charm. As he mentioned, there is a strong 
cross-section of support for this bill.
    And in the bill, this committee has struggled to balance 
the need for the financial services that ILCs can provide with 
the primary imperative to preserve the safety and soundness of 
the banking system. This bill, in my view, has largely 
succeeded in doing that.
    I am particularly sensitive to this issue since the savings 
and loan crisis, the bailout of the savings and loans crisis, 
was really the first issue that I voted on when I came to 
Congress, so I am keenly attuned to safety and soundness 
issues, and I hope we won't confront that again.
    For the past year, the debate over ILCs has been largely 
shaped by the application of big commercial concerns and major 
auto companies--their push to own ILCs. Many members felt that 
these large companies were exploiting a loophole in Federal 
banking laws to merge commerce and banking, a combination that 
traditionally has been tightly restricted in the United States.
    Last year, the Government Accountability Office issued a 
report specifically addressing these type of applications, 
saying that allowing commercial firms to own ILCs would ``pose 
unnecessary risk,'' to the Federal Government's deposit 
insurance funds. Though the FDIC does have authority over 
insured ILCs, the GAO concluded that the fact that this 
authority does not explicitly extend to ILC holding companies, 
and therefore is less extensive than the authority that the 
consolidated supervisors have over banks and thrift holding 
companies, means that from a regulatory standpoint these ILCs, 
in their opinion, pose more risk of loss to the bank insurance 
fund than other insured depository institutions operating in a 
holding company.
    In the wake of the GAO report, the Federal Reserve, 
including former Federal Reserve System Chairman Alan Greenspan 
and current Chairman Ben Bernanke, call for changes that would 
extend the regulations that apply to banks and bank holding 
companies to the ILCs and the companies that own them.
    The need for new legislation arises in large part because 
of the change in the ILC industry over the past 20 years. ILCs 
were created in 1910 as limited purpose institutions to allow 
workers for big companies to get credit when they couldn't 
otherwise get loans. But according to the GAO report, ILC 
assets grew more than 3,900 percent between 1987 and 2006 to 
more than $155 billion, up from $3.8 billion.
    ILCs also changed their character from small, community-
based entities to large, company-based ones. From 1987 to 2006, 
the number of ILCs actually declined 42 percent, dropping to 61 
from 106. As of March 2006, 9 of the country's ILCs were among 
the 271 financial institutions in the United States that hold 
more than $3 billion in assets. Six ILCs own more than 80 
percent of the assets in the ILC industry with more than $125 
billion in assets and $68 billion in FDIC-insured deposits.
    Large ILCs divide between those that are owned by financial 
companies, subject to functional regulation by the SEC, such as 
Merrill and Morgan Stanley, and those that are owned by 
commercial firms, such as Target and GE. The bill very sensibly 
treats them differently and includes limits on activities to 
non-grandfathered entities to make sure that this distinction 
is preserved. I support this distinction but only to the extent 
that it is squared off soundly with safety and soundness, which 
is first on the agenda for this committee.
    I look forward to the testimony. I see that Sheila Bair is 
back before us again; we have kept her very busy in this 
Congress. I look forward to all of the testimony. Thank you.
    Mr. Scott. [presiding] Thank you. The gentleman from 
California, Mr. Royce, is recognized for 3 minutes.
    Mr. Royce. Thank you, Mr. Chairman. Thank you very much for 
holding this hearing as well, and I want to thank our witnesses 
today for their testimony.
    It has been mentioned that ILCs have been in existence in 
this country for, oh, I guess, about a hundred years. And it's 
very, very recently, I think, that the charter has garnered a 
great deal of attention. I encourage an open and honest debate 
on this, but I believe some of the criticisms of ILCs are 
misguided.
    The amount of regulatory authority over the relationship 
between the ILC and their parent company continues to be a 
point of criticism for those who are opposed to the existence 
of ILCs, and some have expressed concern that an ILC might be 
used to subsidize a parent's cost to capital. Others have 
suggested that the ILC regulatory structure, in their view, is 
deficient because some ILC parents are not subject to 
supervision at the holding company level.
    Well, just the beginning point I'd like to lay out is that 
industrial loan companies are regulated in a similar manner to 
all other federally insured depository institutions. They are 
subject to the same minimum capital standards, and subject to 
the same prompt corrective action provisions as every other 
bank we oversee in this committee. They must adhere to sections 
23A and 23B of the Federal Reserve Act, just as all other FDIC-
insured depository institutions do.
    And as you know, these two provisions in the Federal 
Reserve Act subject all ILCs to very strict rules when it comes 
to relationships with any of their affiliates. Just to go down 
the rules very quickly: an ILC's total covered transactions 
with any affiliate cannot exceed 10 percent of the bank's 
capital; the ILC's total covered transaction with all 
affiliates combined cannot exceed 20 percent of the bank's 
capital; and with few limited exceptions, covered transactions 
must be fully secured with qualifying capital, and an ILC 
cannot purchase a low qualifying asset from an affiliate.
    In addition, an ILC must deal with an affiliate on market 
or arm's length's term. It cannot, as a fiduciary, purchase 
securities or other assets from an affiliate unless permitted 
by statute or court order and the ILC cannot purchase 
securities while an affiliate is a principal underwriter for 
those securities. Neither the ILC nor its affiliate may 
purchase any advertisement or make any agreement stating or 
suggesting that the ILC shall in any way be liable for the 
obligations of the affiliate.
    So that's the law. That's the current law. And in closing, 
the bill put forth today does nothing more than shield 
incumbent banking institutions, in my view, from competition. 
While I welcome the discussion on the fate of future industrial 
loan companies, I am concerned this bill could have some 
unintended consequences, which could have adverse impacts on 
the financial services industry and the economy as a whole. 
Industrial loan companies have proven their ability to create 
more competition in the industries, resulting in better prices 
and services for consumers in this country.
    Mr. Chairman, thank you again for holding this hearing, and 
I look forward to hearing from our witnesses.
    Mr. Scott. Thank you. The gentlelady from California, Ms. 
Waters.
    Ms. Waters. Thank you very much. Good morning ladies and 
gentlemen. I want to thank Chairman Frank and Ranking Member 
Bachus for holding today's hearing on H.R. 698, the Industrial 
Bank Holding Company Act of 2007.
    Industrial loan companies, that is ILCs, state-chartered, 
FDIC-insured banks, were first established early in the 20th 
century to make small loans to industrial workers. Today's 
ILCs, which are supervised to some extent by the FDIC as well 
as by the chartering State, have grown dramatically in number 
and size and scope of activity. From 1997 to 2006, the assets 
held by Utah ILCs increased nearly 500 percent, from $25 
billion to $150 billion, and the deposits held by Utah ILCs 
increased by more than 800 percent, from $11.9 billion to $107 
billion.
    A special exemption in current law, however, permits any 
type of company, including a commercial or retail firm to 
acquire an ILC in a handful of States, principally Utah, 
California, and Nevada, and to avoid the activity restrictions 
and supervisory requirements imposed on bank holding companies 
under the Federal Bank Holding Company Act.
    ILCs were mostly small, local institutions that had limited 
deposit taking and lending powers until 1997 when Utah changed 
this law to permit Utah-chartered ILCs to call themselves banks 
and exercise the same powers as state-chartered commercial 
banks, resulting in the stampede of ILCs. Thus, Utah-chartered 
ILCs now may engage in any type of lending activity. The ILC 
charter is also a way for companies to avoid the activity 
restrictions and consolidated supervisory capital, managerial, 
and community reinvestment act requirements imposed on bank 
holding companies under the Bank Holding Act.
    CRA has been an effective tool to require banks to make 
investments in low- and moderate-income communities. So should 
ILCs be subject to CRA? In 1997, the number of Utah ILCs had 
tripled and now there are more than 30 ILCs chartered in Utah, 
including a number that are owned by commercial companies such 
as General Electric, BMW, Pitney Bowes, and Sears. Home Depot 
is seeking to acquire an existing ILC.
    The largest ILC at the time of the exemption adopted in 
1987 had assets of less than $400 million. The largest ILC 
today has more than $62 billion in assets and $54 billion in 
deposits, making it the 12th largest insured bank in the United 
States by deposits.
    Importantly, the ILC exemption does not limit the 
chartering of new ILCs. Utah and other States that are 
grandfathered by the exemption may continue to grant new ILC 
charters without limit.
    Congress maintains the separation of banking and commerce 
and reaffirmed this policy in the Gramm-Leach-Bliley Act of 
1999, when it closed the unitary thrift loophole and authorized 
banks to affiliate only with companies that are generally 
engaged in financial activities.
    Congress determined in the GLB Act that with regard to 
financial affiliations, a bank holding company could only 
affiliate with a full service securities or insurance firm if 
the bank holding company held all its subsidiary depository 
institutions well-capitalized and well-managed in its 
subsidiary depository institutions, maintain at least a 
satisfactory CRA rating.
    The ILC exception disadvantages bank holding companies and 
undermines these requirements by allowing some financial firms 
to operate federally insured ILCs without meeting these 
requirements. The parent companies of exempt ILCs are not 
subject to consolidated supervision under the Bank Holding 
Company Act. For this reason, the GAO concluded that ILCs may 
pose a greater risk to the deposit insurance funds than banks 
operating within the bank holding company structure.
    Since 1956, consolidated supervision has been a fundamental 
component of bank supervision in the United States. It provides 
the board with both the ability to understand the financial 
strength and risk of the overall organization and the authority 
to address significant management, operational capital, and 
other deficiencies within the overall organization before these 
deficiencies pose a danger to a subsidiary bank in the Federal 
safety net.
    The FDIC itself has acknowledged that it does not have the 
same supervisory, capital, and enforcement authority with 
respect to the holding companies of an ILC that the Board has 
with respect to bank holding companies. The ILC exemption also 
allows foreign banks to enter the banking business in the 
United States without meeting the requirements in the Bank 
Holding Company Act that the bank be subject to comprehensive 
consolidated supervision in its home country.
    I believe this loophole must also be addressed. Therefore, 
I am pleased to hear from our witnesses today on ILCs, and I 
yield back the balance of my time.
    Mr. Scott. Thank you, Ms. Waters. We'll get right to the 
witnesses. Just one point I wanted to mention, BMW and Target 
have ILCs and I think that brings up 2 questions that might be 
significant here this morning. Number one, how do we tell the 
average American why Ford and Home Depot should not be able to 
have what these other companies have? And number two, what 
studies have been done or what evidence or information do we 
have that BMW or Target are threatening to destroy our system 
of banking?
    So with those questions, we'll get right to our witnesses. 
We'll start with Chairman Sheila Bair of the Federal Deposit 
Insurance Corporation. Thank you.

 STATEMENT OF THE HONORABLE SHEILA C. BAIR, CHAIRMAN, FEDERAL 
                 DEPOSIT INSURANCE CORPORATION

    Ms. Bair. Thank you very much. Members of the committee, I 
appreciate the opportunity to testify on behalf of the Federal 
Deposit Insurance Corporation concerning Industrial Loan 
Companies. The FDIC strongly supports efforts to provide 
statutory guidance on the key issues regarding the ILC charter, 
especially the issue of commercial ownership.
    Many of the issues surrounding ILC ownership involve 
important public policy considerations that are best left to 
Congress for resolution. This hearing and congressional 
discussions regarding possible legislative solutions are 
encouraging developments that hopefully will lead to the 
resolution of key ILC-related issues by the end of the year.
    ILCs have existed for almost 100 years, and for most of 
that time they operated similar to finance companies, providing 
loans to wage earners who could not otherwise obtain credit. 
ILCs have proven to be a strong, responsible part of our 
Nation's banking system and have offered innovative approaches 
to banking. Many have contributed significantly to community 
reinvestment and development. For example, a nonprofit 
community development corporation operates an ILC designed for 
the express purpose of serving the credit needs of people in 
east Los Angeles. Other ILCs serve customers who have not 
traditionally been served by other types of financial 
institutions such as providing credit for truck drivers to buy 
fuel far from home. The record to date demonstrates that the 
overall industry has operated in a safe and sound manner and 
that the FDIC has been a vigilant, responsible supervisor of 
that industry.
    ILCs represent a very small part of the overall banking 
industry, composing less than 1 percent of the almost 8,700 
insured depository institutions in this country, and only 1.8 
percent of the assets. Of the 58 existing ILCs, 43 are either 
widely held or controlled by a parent company whose business is 
primarily financial in nature. These ILCs represent 
approximately 85 percent of ILC assets and 89 percent of ILC 
deposits. The remaining 15 ILCs are associated with parent 
companies that may be considered non-financial.
    There has been significant growth in the ILC industry since 
the passage of CEBA in 1987 when the industry had $4.2 billion 
in assets. Over the years, total ILC industry assets have grown 
to $212.9 billion. Most of the growth has occurred since 1996 
and has been concentrated in a small number of financial 
services firms.
    In addition to the growth in the ILC industry, the 
character of ILCs has been changing. In the current business 
environment, many ILCs tend to be more complex and differ 
substantially from their original consumer lending focus. In 
many instances these ILCs serve a particular lending, funding, 
or processing function within a larger organization or directly 
support one or more affiliate's commercial activities.
    Under this kind of ownership model, consolidated 
supervision may not be present and the current supervisory 
infrastructure may not provide sufficient safeguards to address 
safety and soundness issues and risks to the Deposit Insurance 
Fund.
    To address these developing concerns, the FDIC has taken a 
number of actions regarding ILCs since this committee's last 
hearing on the topic. In July 2006, the FDIC Board of Directors 
adopted a 6-month moratorium on all applications for deposit 
insurance and change in control notices for ILCs.
    During this pause in processing ILC applications, the FDIC 
sought public comment on 12 specific questions that focused on 
developments in the industry, the supervisory framework, and 
the issues surrounding commercial ownership. In response, the 
FDIC received more than 12,600 comment letters.
    The 6-month moratorium allowed the FDIC to evaluate public 
and industry comments, assess developments in the industry, and 
consider how to best supply the Corporation's statutory powers 
for oversight of these charters. It is clear that the most 
significant concern regarding ILCs is their ownership by 
companies engaged in non-financial activities.
    Based on the FDIC's analysis, the FDIC Board recently voted 
to extend the moratorium for an additional year. Under the 
extended moratorium, the FDIC will not take any action on any 
application for deposit insurance or any change in control 
notice for any ILC that would be controlled by a company 
primarily engaged in commercial activities.
    Although commercially owned ILCs have not resulted in 
serious problems to date, the FDIC will continue to closely 
monitor existing ILCs that currently are controlled by 
commercial companies in light of the concerns that have been 
expressed.
    The moratorium extension does not apply to ILCs that would 
be controlled by a company engaged only in financial activities 
or that would not be part of a holding company structure.
    In addition to providing the FDIC with time to examine the 
appropriate supervisory structure for the changing ILC 
industry, extending the moratorium provides additional time for 
Congress to consider legislation. Although the FDIC is not 
endorsing any particular legislative approach, H.R. 698 does 
provide a workable framework for the supervision of ILC holding 
companies.
    In closing, ILCs have a good safety and soundness record to 
date and have proven to be a strong, responsible part of our 
Nation's banking system. Yet the types and number of ILC 
applications have evolved in recent years and these changes do 
pose potential risks that deserve further study and raise 
important public policy issues.
    The FDIC has a responsibility to consider applications 
under existing statutory criteria and make decisions. While it 
is appropriate to proceed cautiously, the FDIC cannot defer 
action on these matters indefinitely.
    The current statutory exemption providing for the ILC 
charter is quite broad. By providing clear parameters to the 
scope of the charter, Congress can eliminate much of the 
uncertainty and controversy surrounding it. Resolving these 
issues will enhance the value of the ILC charter going forward.
    The FDIC looks forward to working with Congress in the 
coming months as you work to bring these matters to closure. 
This concludes my statements, and I will be happy to answer any 
questions the committee might have.
    Thank you, Mr. Chairman.
    [The prepared statement of Chairman Bair can be found on 
page 52 of the appendix.]
    Mr. Scott. Thank you. Thank you very much. Now we'll hear 
from Mr. Donald Kohn, Vice Chairman of the Board of Governors 
of the Federal Reserve System.

STATEMENT OF DONALD L. KOHN, VICE CHAIRMAN, BOARD OF GOVERNORS 
                 OF THE FEDERAL RESERVE SYSTEM

    Mr. Kohn. Thank you. I am pleased to be here today to 
provide the Federal Reserve Board's views on Industrial Loan 
Companies and H.R. 698. The Board commends the committee for 
considering the important public policy issues raised by the 
special exemption for ILCs.
    ILCs are state-chartered and federally insured banks that 
have virtually all the powers and privileges of other insured 
banks. They operate under a special exception to the Federal 
Bank Holding Company Act that allows any type of company to 
acquire an ILC and avoid the restrictions Congress has 
established to separate banking and commerce. The exception 
also creates a special safety and soundness risk by allowing a 
company or foreign bank that is not subject to supervision on a 
consolidated or group-wide basis to acquire an insured bank.
    By its nature, the exception creates an unlevel playing 
field that gives a growing number of firms a competitive edge 
over other community-based, regional, or diversified 
organizations that own an insured bank. When the special 
exception was adopted in 1987, most ILCs were small, locally 
owned institutions with limited powers. The size and activities 
of ILCs, however, have expanded significantly in recent years. 
Today many are controlled by large, internationally active 
firms.
    Importantly, there is no limit on the number of ILCs that a 
handful of grandfathered States may charter or on the size that 
these institutions may attain. If left unchecked, the growth of 
ILCs threatens to undermine the policies that Congress has 
established governing the separation of banking and commerce 
and the proper supervisory framework for companies that own a 
federally insured bank.
    That is why we believe congressional action is needed. Only 
Congress can address the full range of issues created by the 
ILC exception in a comprehensive and equitable manner. H.R. 698 
takes an important step by granting the FDIC new consolidated 
supervisory authority for the corporate owners of ILCs that are 
not already supervised by a Federal agency.
    H.R. 698, however, would not fully address the other 
important regulatory and competitive issues raised by the 
exception. For example, the bill would allow additional firms 
to acquire an ILC and derive up to 15 percent of their revenues 
from commercial activities.
    This commercial basket is sizeable and at odds with the 
decisions made by Congress in the Gramm-Leach-Bliley Act to 
maintain the separation of banking and commerce. The Board 
believes that Congress should consider carefully the costs and 
benefits of changing the Nation's policies concerning the 
mixing of banking and commerce in a comprehensive way rather 
than to allow this policy to be eroded through the exploitation 
of a loophole.
    H.R. 698, as introduced, also would allow the owners of 
ILCs to avoid the CRA, capital, and managerial requirements 
that apply to financial holding companies, and it would allow 
foreign banks that are not subject to consolidated supervision 
in their home country to acquire an FDIC-insured ILC.
    These advantages granted, ILC owners would perpetuate 
competitive imbalances, provide incentives for firms to 
continue to exploit the exception, and undermine the prudential 
framework established for all other domestic and foreign firms 
that own an insured bank. The Board believes the best way to 
address these issues is to close the ILC loophole going 
forward. This approach recognizes the simple fact that ILCs are 
insured banks. It would prohibit additional firms engaged in 
commercial activities from acquiring ILCs, and would require 
that any new financial owner of an ILC operate under the same 
activity restrictions and regulatory framework that apply to 
bank holding companies.
    For reasons of fairness, the Board also supports 
grandfathering those firms that currently own an ILC, subject 
to appropriate restrictions. This mirrors the approach that 
Congress took in 1970, 1987, and 1999, when earlier banking 
loopholes were used in unintended and potentially damaging 
ways.
    Thank you for the opportunity to testify on behalf of the 
Board. We would be pleased to continue to work with the 
committee in developing and improving legislation that 
addresses the very important public policy issues raised by the 
ILC exception.
    [The prepared statement of Mr. Kohn can be found on page 
121 of the appendix.]
    Mr. Scott. Thank you very much, Mr. Kohn. Now we will hear 
from the Hon. John Reich, who is the Director of the Office of 
Thrift Supervision.

 STATEMENT OF THE HONORABLE JOHN M. REICH, DIRECTOR, OFFICE OF 
                       THRIFT SUPERVISION

    Mr. Reich. Thank you. Good morning, Mr. Chairman, Ranking 
Member Bachus, and members of the committee. I appreciate the 
opportunity to testify on H.R. 698, introduced by Chairman 
Frank and Mr. Gillmor to address the activities, ownership, and 
control of Industrial Loan Companies. I applaud your leadership 
and the work of other members of the committee who cosponsored 
this legislation.
    H.R. 698 addresses several pending policy issues with 
respect to the key areas of the permissible activities and 
oversight of companies that own or control or seek to acquire 
or control an ILC. For our part, at the Office of Thrift 
Supervision, we appreciate the recognition in H.R. 698 of the 
important and continuing role that the OTS has in our oversight 
and supervision of several of the largest companies that 
currently own and control ILCs.
    OTS has statutory authority for the consolidated 
supervision of General Electric, Merrill Lynch, Morgan Stanley, 
Lehman Brothers, American Express, USAA, Bell Financial, and 
General Motors. The eight ILCs within these OTS-regulated 
savings and loan holding company structures control about two-
thirds of the ILC assets in the country as of December 31, 
2006.
    Functional regulation and consolidated regulatory oversight 
have been important considerations by the committee. H.R. 698 
maintains a clear focus on the enterprise-wide safety and 
soundness of holding companies that own or control institutions 
with access to the Federal safety net.
    The bill also is sensitive to the potential exposure of the 
Federal safety net by a company that owns or controls an ILC by 
focusing on the interrelationships within an ILC holding 
company and how the ILC is integrated within the structure. 
Effective oversight of holding companies requires adequate 
regulatory controls to monitor and intervene when necessary 
without unduly interfering with the ongoing business operation 
and activities of an enterprise. It's a balance, requiring 
judgement based on expertise in a wide range of areas.
    As detailed in my written statement, the OTS focuses and 
tailors its holding company supervision based on the complexity 
of the structure and the level of risk inherent in the holding 
company enterprise. Comprehensive holding company supervision 
is a combination of ongoing offsite monitoring, targeted 
reviews of key businesses or functions, and regular onsite 
examinations.
    This approach permits OTS to understand the business and 
its inherent risks as well as the affiliations and the 
transactions of the enterprise. It also enables us to assess 
the potential impact of the broader economy, the insured 
depository institution, and the potential exposure to the 
Federal safety net.
    As currently drafted, H.R. 698 preserves OTS's statutory 
oversight of savings and loan holding companies that own or 
control ILCs, promotes functional regulation while promoting 
consolidated regulatory oversight and it maintains a risk-based 
focus on companies owning or controlling institutions with 
access to the Federal safety net. For these reasons, we support 
H.R. 698 as introduced by Chairman Frank, Congressman Gillmor, 
and other sponsors on the committee.
    Thank you, and I'll be happy to take questions.
    [The prepared statement of Director Reich can be found on 
page 183 of the appendix.]
    The Chairman. Thank you, and next we have Mr. Robert Colby, 
who is the Deputy Director of the Division of Market Regulation 
of the SEC. Mr. Colby, thank you. Please go ahead.

STATEMENT OF ROBERT COLBY, DEPUTY DIRECTOR, MARKET REGULATION, 
               SECURITIES AND EXCHANGE COMMISSION

    Mr. Colby. Thank you. I'm very pleased to have the 
opportunity this morning to describe the Securities and 
Exchange Commission's program for supervising U.S. securities 
firms on a consolidated basis and how this provides protection 
to all regulated entities in the consolidated group including 
industrial loan companies that are the topic of this morning's 
hearing.
    And I appreciate the discussions we've had with Chairman 
Frank and his staff about possible amendments to H.R. 698 that 
would avoid subjecting U.S. securities firms already supervised 
by the Commission under comprehensive and effective program to 
a second and duplicative consolidated supervision regime.
    The Commission currently supervises five of the major U.S. 
securities firms on a consolidated or group-wide basis. For 
such firms, referred to as Consolidated Supervised Entities, or 
CSEs, the Commission oversees not only the U.S.-registered 
broker dealer, but also the holding company and all affiliates 
on a consolidated basis. These affiliates also include other 
regulated entities such as foreign registered broker dealers 
and banks as well as unregulated entities such as derivatives 
dealers.
    Four of the CSEs, Goldman Sachs, Lehman Brothers, Merrill 
Lynch, and Morgan Stanley own ILCs that account for 1.1-, .7-, 
7.2-, and 1.2 percent of their consolidated assets 
respectively. Three of the firms, Lehman Brothers, Merrill 
Lynch, and Morgan Stanley also own thrifts that account for 
3.8-, 1.7-, and less than one one-hundredth of one percent of 
their consolidated assets respectively.
    The CSE program provides consolidated supervision to 
investment bank holding companies that's designed to be broadly 
consistent with the Federal Reserve oversight of bank holding 
companies. This prudential program is crafted to allow the 
Commission to monitor for and act quickly in response to 
financial or operational weakness in a CSE holding company or 
its unregulated affiliates that might place regulated entities, 
including U.S. and foreign registered investment banks and 
broker dealers or the broader financial system at risk.
    When a CSE firm has a regulated entity in the consolidated 
group that is subject to oversight by another functional 
regulator, the Commission defers to that functional regulator 
as the supervisor of the regulated affiliate. We also share 
relevant information concerning the holding company with our 
fellow regulators both domestically and internationally. The 
Commission's CSE program has been recognized as equivalent to 
that of other internationally recognized supervisors, including 
the U.S. Federal Reserve, for purposes of the European Union's 
Financial Conglomerate Directive.
    While maintaining broad consistency with the Federal 
Reserve holding company oversight, the CSE program is tailored 
to reflect two fundamental differences between investment bank 
and commercial bank holding companies. First, the CSE program 
reflects the reliance of securities firms on market-to-market 
accounting as a critical risk and governance control. Second, 
the design of the CSE program reflects the critical importance 
of maintaining adequate liquidity in all market environments 
for holding companies that do not have access to the external 
liquidity provider.
    The Commission's concern regarding the need for group-wide 
risk monitoring, which developed over the course of a number of 
years beginning with the Drexel Burnham liquidation in 1990, 
was paralleled by the European Union's Financial Conglomerate 
Directive, which essentially requires non-EU financial 
institutions doing business in Europe to be supervised on a 
consolidated basis.
    In response, in 2004, the Commission crafted a new, 
comprehensive consolidated supervision program that was 
intended to protect all regulated entities within a group, 
including broker-dealers. The rule restricted CSE eligibility 
to groups with large and well-capitalized broker-dealers. The 
Commission believed that it could only supervise on a 
consolidated basis those firms engaged primarily in securities 
business and not holding companies that are affiliated with the 
broker-dealer as an incident to their primary business 
activities. To this end, the rule effectively requires that the 
principal broker-dealer have a tentative net capital of at 
least $5 billion.
    The CSE program has five principal components. First, CSE 
holding companies are required to maintain and document a 
system of internal controls that must be approved by the 
Commission at the time of initial application. Second, before 
approval, and on an ongoing basis, the Commission examines the 
implementation of these controls. Third, CSEs are monitored 
continuously for financial or operational weakness that might 
put at risk regulated entities within the group or the broader 
financial system. Fourth, CSEs are required to compute a 
capital adequacy measure at the holding company level that's 
consistent with the Basel standard. Finally, CSEs are required 
to maintain significant pools of liquidity at the holding 
company where these are available for use in any regulated or 
unregulated entity within the group without regulatory 
restriction.
    I'd like to point out that these five principal components 
are implemented in conjunction with the authority to protect 
regulated entities within the groups. When potential weaknesses 
are identified, the Commission has broad discretion under our 
rules to respond. For example, the Commission could mandate 
changes to a firm's risk management policies and procedures, 
effectively require an increase in the amount of regulatory 
capital maintained at the holding company, or require an 
expansion of the pool of highly liquid assets held at the 
parent.
    These powers are not theoretical abstractions. All three of 
these steps have been taken at various CSEs over the past 2 
years.
    This program of consolidated supervision reduces the 
likelihood that weakness within the holding company or an 
unregulated affiliate will place a regulated entity including 
the ILC or the broader financial system at risk. My written 
testimony describes in greater detail the means by which we 
monitor the financial operational condition of the holding 
company.
    In conclusion, while we generally support the goals of H.R. 
698, the bill as introduced would subject the CSEs that are 
already highly regulated under the Commission's consolidated 
supervised program to an additional level of duplicative and 
burdensome holding company oversight. We believe the bill 
should be amended to recognize the demonstrated ability of the 
Commission to comprehensively supervise the consolidated groups 
that are overwhelmingly in the securities business, especially 
given the heightened focus on these issues in an area of 
increased global competitiveness.
    Because the Commission has established a successful 
consolidated supervision program based on its unique expertise 
in overseeing securities firms, the CSE should be carved out of 
this legislation in the same way as the holding companies 
supervised by the Federal Reserve and OTS.
    Thank you again for the opportunity to speak on behalf of 
the Commission.
    [The prepared statement of Mr. Colby can be found on page 
71 of the appendix.]
    The Chairman. Thank you, Mr. Colby. And finally I want to 
again welcome Commissioner Leary from the Department of 
Financial Institutions, State of Utah. He has been very 
accommodating in appearing before the committee and helping us 
in our deliberations. Commissioner, thank you, and please 
proceed.

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

    Mr. Leary. Good morning. Thank you, Chairman Frank, Ranking 
Member Bachus, and members of the committee. Thank you for the 
opportunity to share Utah's view on H.R. 698, the Industrial 
Bank Holding Company Act of 2007.
    I am Edward Leary, commissioner of financial institutions 
for the State of Utah. I have been involved with banking for 33 
years, first as a community banker, then 15 years in various 
bank examiner positions with the Utah department and for the 
last 15 years as its commissioner.
    The Utah Department of Financial Institutions views H.R. 
698 as unnecessary and an effort to restrict and restrain 
state-chartered industrial banking without a valid safety and 
soundness concern or a crisis. Utah believes there is good 
supervision and good regulatory model over the industry without 
a question of the competency of the regulators in that there 
has not been an industrial bank failure warranting this change 
in public policy.
    I believe that I am here today because of the success of 
that regulatory model, not its failure. Utah, in partnership 
with the FDIC, has built a regulatory model to which the 
financial services market has reacted favorably.
    This regulatory model is not a system of lax regulation and 
supervision or inadequate enforcement. Utah industrial banks 
are safe, sound, and appropriately regulated by both the State 
which charters them, and the FDIC, which is the relevant 
Federal regulator and deposit insurance provider.
    I am told the articulated threat which warrants passage of 
this bill is a potential threat of misuse of the charter by 
holding companies which are non-financially oriented. This bill 
seeks to remove a potential threat even before the threat has 
materialized or manifests itself.
    We should be clear. We are talking about an industry today 
that constitutes 1.8 percent of banking assets. This is not a 
systemic crisis that threatens banking.
    An analysis of the numbers as of December 31, 2006, 
developed by Utah, indicates that we hold 88 percent of all 
industrial bank assets. Based upon our knowledge of the holding 
companies, we estimate that 86 percent of Utah industrial bank 
assets would be considered held by financial entities, 
constituting 22 companies, and 14 percent by non-financial 
entities, constituting 9 companies.
    Our analysis is that 7 of Utah's industrial banks, 
representing approximately 80 percent of our assets are subject 
to consolidated Federal agency supervision at the holding 
company level. The Federal agencies we considered are: one, the 
Federal Reserve, with jurisdiction over our 2nd largest bank; 
the OTS, with jurisdiction over our largest, 3rd, and 4th 
largest banks; and the SEC, with jurisdiction over our 6th 
largest bank.
    The record of the last 18 months is that no de novo 
industrial bank charter was approved by the FDIC from November 
4, 2005, until March 20, 2007. H.R. 698 will dismantle a Utah 
industrial banking industry of 31 charters and a regulatory 
structure that has matured over 20 years with a record of safe, 
sound operations to forestall one entity from being granted a 
charter.
    This bill, with its provisions that are designed to block 
any and all conceivable ways in which a retailer may employ an 
industrial bank charter today or in the future are 
disappointingly anti-competitive and anti-consumer. The 
targeted large retailer withdrew its application with the 
application having never been accepted by the Utah department.
    H.R. 698 provisions are being justified under the text of 
preserving the prohibition against the merging of banking and 
commerce. The broad brush strokes of this bill include as 
collateral damage large financial arms of entities which have 
been in the financial arena for decades, such as Daimler 
Chrysler and Ford.
    The former submitted an application for an industrial bank 
charter in May of 2005, which was approved by my State a year 
ago. Now, under the provisions of this bill, we will not be 
allowed to proceed. This is a disappointing outcome when other 
auto lenders have a bank charter.
    The supporters of 698 present the bill as a compromise 
piece of legislation. I am challenged to determine how this 
bill is a compromise when industrial banks do not receive 
additional powers or authorities or have any of the current 
restrictions lifted, let alone given the right to issue 
commercial mal accounts as has previously been passed by this 
committee.
    As a State regulator, what is most disappointing to observe 
is that while this committee is aggressively moving H.R. 698, a 
bill which restricts and limits the one segment of state-
chartered banking that could be identified as innovative and 
creative, Congress has not taken seriously the threat to State 
banking of the broad, Federal preemption of State laws by the 
Comptroller's office. Many State commissioners believe that 
without congressional intervention, the diminishing assets 
under State charter will eventually render the State banking 
system irrelevant.
    In conclusion, the industrial banking industry represents 
1.8 percent of total banking assets. This is not an industry 
which threatens the safety and soundness of banking. The 
regulatory model is not a parallel bank regulatory system in 
that 80 percent of Utah assets are subject to Federal agency 
oversight at the holding company level.
    Thank you for allowing me the opportunity to express my 
thoughts and for your willingness to listen to a State 
regulator.
    [The prepared statement of Mr. Leary can be found on page 
149 of the appendix.]
    The Chairman. I'm going to begin with that. Your suggestion 
that we don't pay attention to State regulators is really 
unfounded, and I vigorously disagree with your assertion that 
we are ignoring the implications for federalism of the 
preemption decision.
    Many of us in this committee last year were quite active in 
opposing that. When party control changed, frankly, and some of 
us had the opportunity to do something about it, we held off 
because of the pendency of the Wachovia decision. And, frankly, 
contrary to the suggestion you made implicitly, I think it 
would have been irresponsible for us to have jumped in while 
the Wachovia decision was pending, because there was a real 
issue there. The Supreme Court voted 5 to 3, I think, if 
Justice Thomas hadn't recused, looking at the past, it would 
have been 5 to 4. Well, a 5 to 4 decision suggested there was 
some real uncertainty. And, no, we couldn't act until we knew 
that.
    Now many of us do plan to act, and the gentlewoman from New 
York and I have had several conversations about this. I don't 
know that we--I don't think, to be honest, that we're in a 
position to have the votes to overturn that. We do plan to ask 
the Comptroller and the Office of Thrift Supervision, who are 
the ones who now have preempted, to tell us what they plan to 
do with regard to enforcement. And that includes trying to 
restore, in my judgment, some State visitation rights. So I 
just want to clear up what I think is an erroneous suggestion 
that we have been indifferent to that. And as I said, we would 
have started on it quicker, but we waited for Wachovia. We have 
had these conversations.
    Second, I just want to ask you, would you favor legislation 
that removed the restriction on the granting of ILC charters to 
only those six States that were grandfathered?
    Mr. Leary. I have been asked in numerous forums, Mr. 
Chairman, how I address that issue that only six, I believe the 
exemption granted in--
    The Chairman. No, I just asked you--no, excuse me, Mr. 
Leary. Excuse me. History isn't the fact here. I'm asking you 
as a matter of public policy if you would support our removing 
that restriction and allowing every State to do it.
    Mr. Leary. I have no problem with that, provided that the 
safety and soundness and the--
    The Chairman. Well, I have no problem with--are you in 
favor--would you support such a bill?
    Mr. Leary. I am.
    The Chairman. What about the fundamental distinction 
between banking and commerce that's in Gramm-Leach-Bliley? 
Would you support that? I say that because some advocates of 
the ILC say really that's a mistake to have that, to maintain 
that restriction. Would you maintain it or abolish it?
    Mr. Leary. I went on record last time when I was in front 
of the subcommittee saying I do not favor repeal of the Bank 
Holding Company Act, no. I'm a lifelong regulator; I believe in 
slow, measured steps towards this system. I believe what Utah 
created is a safe and sound system. I am articulating, I hope--
    The Chairman. So you would maintain the distinction between 
banking and commerce?
    Mr. Leary. I would work towards a system where this could 
be more competitive than it currently is.
    The Chairman. I don't understand that. Would you maintain 
the distinction between banking and commerce?
    Mr. Leary. I do not believe that I would.
    The Chairman. So you would do away with the distinction--
you would do it more slowly than some others might. But you--
    Mr. Leary. I would do it, as I tried to say, in slow, 
measured steps.
    The Chairman. Okay, and I think that puts it fairly. I 
think that's a defensible and actual position with which I 
disagree. I do not think it is a defensible and actual position 
to say that we should maintain the distinction between banking 
and commerce and allow six States to be exceptions from it. You 
haven't maintained that. Others have. And I do think it's--
people ought to understand the implications of what we are 
doing.
    Let me ask Chairwoman Bair, who has a major role in this, 
and whose administrative limbo we hope to--I notice that the 
Pope is thinking of doing away with the kind of ambiguous 
category. We should do at least the same for you.
    [Laughter]
    The Chairman. But one--look, the House is going to pass a 
bill that I believe is fairly restrictive. I also understand 
that the Senate is probably not going to pass a bill similar to 
ours. Indeed, there are days, of course, when one wonders 
whether the Senate will ever pass any bill at all on anything, 
but that's a broader set of questions.
    If we were to go to a House-Senate conference in which 
something very much like the bill the gentleman from Ohio and I 
have sponsored had passed the House, and a bill had passed the 
Senate that allowed for some things. It's no secret. The 
commissioner mentioned, for instance, the Daimler Chrysler and 
Ford situations.
    There is a GM thing, and we appreciate it, and as you know, 
when GM wanted to sell to Cerebus, we communicated that we 
thought that was a situation that could get resolved. It's not 
a secret that the Senate is probably going to do, I believe 
something, not quite as restrictive as--if the Senate were to 
pass legislation that allowed for some continuation but with 
some restriction--or let's put it this way. If you were given 
the authority, not that you asked for it, but if you were given 
the authority to grant sort of limited extensions, would you 
have the power now to enforce that? I guess that's the 
question. That if there is--there will be two questions.
    Is there a hybrid of some sort? And the gentleman from Ohio 
and I want as little of that as possible. I'm not encouraging 
it or asking for it, but I recognize that it may happen. If it 
does, it does seem to me then the one critical question will 
be, what will be the enforcement, the capability of the FDIC to 
impose these restrictions and subsequently to enforce them? 
Would you address that?
    Ms. Bair. The Fed and FDIC both agree that the current 
exception is quite broad. So for us to come in and say, certain 
categories of commercial owners can have ILCs and certain 
categories cannot, I don't see how we can do that under the 
existing framework, which is again where we think legislation 
would be very helpful. We're not taking a position about where 
to draw the line, but we think clarification would be very 
helpful. So, once Congress clarifies what those parameters are, 
yes, we would have--or we could use our existing enforcement 
authority regarding the ILC. And assuming we were given holding 
company authorities, we would be able to supervise them.
    The Chairman. And we would do that for all of the agencies. 
And I do want to say in closing, we appreciate the cooperation, 
frankly, that we've seen from all of the agencies here. And 
maybe you have--the fact that were all able to cooperate so 
well may to some extent alleviate the FSA envy that appears to 
have run through the American financial entities in which the 
lament the fact that there are so many of you and dream of 
having only one.
    Since that dream is not going to come true, we are pleased 
that you were able to show them an ability to cooperate in this 
situation.
    The gentleman from Alabama.
    Mr. Bachus. Thank you, Mr. Chairman. My first question I'll 
just ask all the regulators is, I'll start with Chairman Bair 
maybe and work across. Have ILCs, including those owned by 
commercial firms, posed safety and soundness problems to a 
greater or lesser extent than those depository institutions 
owned by traditional bank holding companies?
    Ms. Bair. No. The safety and soundness record to date is 
very comparable to that of other types of depository 
institutions. That was acknowledged in the GAO report. I would 
also add that actually the commercially-owned ILCs have the 
better safety and soundness record. Among commercially-owned 
ILCs, as well as Utah-chartered ILCs, there has never been a 
failure.
    Mr. Bachus. Okay. Anybody?
    Mr. Kohn. No, sir. I don't think that the ILCs to date have 
posed an unusual safety and soundness issue. But as all of us 
have pointed out in our testimony, we're really at the cusp of 
a change, a wave of change, in how the ILC charter has been 
used. Some of those changes are very recent, and therefore the 
amount of deposits and assets in ILCs have grown 
extraordinarily rapidly in the last few years. And if something 
isn't done, it'll grow even more rapidly in the future.
    So, yes, this is about a potential problem.
    Mr. Bachus. Okay.
    Mr. Kohn. And the potential problem is the inadequate 
supervision and regulation of the companies that own ILCs.
    Mr. Bachus. All right. There's a notion that if commercial 
companies own ILCs, the deposit insurance fund is at risk if 
the company encounters financial difficulties. Is that true? 
And I guess as the assets grow, it becomes--
    Mr. Kohn. I think there's a history of problems spilling 
from one part of a holding company to another, even when--say, 
the insured entity in the holding company has been well-
regulated. There are reputational risks. There are legal risks. 
Many of these ILCs and banks, for that matter, are managed on a 
very closely integrated basis with their affiliate companies.
    The companies that manage depository institutions and 
holding companies don't really differentiate between the 
depository institution, many of them, and the other entities. 
The public is looking at the consolidated entity. Therefore, it 
doesn't really differentiate, and many of the depository 
institutions rely on the affiliates for many of the services 
they use.
    So, I think there is a history of problems occurring 
outside the depository that impugn and reflect on the 
reputation of the depository itself. That's why Congress itself 
in 1957, 1970, 1987, and 1999 decided that consolidated 
regulation was the way to protect--
    Mr. Bachus. Okay. Let me--Mr. Leary, let me ask you. Has 
there ever been a case when an ILC owned by a commercial firm 
has had financial difficulty that affected the ILC?
    Mr. Leary. In our case, the two cases which you could cite, 
which would be Conseco and Tyco, both--one case, the ultimate 
parent filed bankruptcy. In the second one, the parent had 
difficulties in both case. The industrial bank component within 
that entity in one case was sold off. In the other case, they 
spun it off in an IPO and actually incurred a premium from 
that.
    So, I would not want to represent that it was not without 
lots of concerns, blood, sweat, and tears. It successfully 
passed the test, and those examples are in my testimony.
    Mr. Bachus. Okay.
    Mr. Leary. May I respond to your question on commercial 
entities?
    Mr. Bachus. Yes.
    Mr. Leary. Because I don't believe the lines are as solid 
as some would like to believe. Two of our nine nonfinancial 
entities, one of which is BMW, have already been cited. The 
other is Volkswagen. Both of those, while they are perceived in 
the United States as being commercial entities, have very large 
banking operations in Europe. So, I believe the line is not as 
strict as it is.
    And if I can beg your indulgence one step further, one of 
the others, Transportation Alliance Bank, is the one cited, I 
believe by Chairman Bair in her testimony, which has 
specifically targeted long-haul truckers and the trucking 
industry, which they believe is underserved by existing 
financial services companies. And they have targeted that 
business line and tried to provide financial services to that 
industry.
    Mr. Bachus. You know, you're talking about BMW and 
Volkswagen, I guess, are both German companies--
    Mr. Leary. Correct.
    Mr. Bachus. So they have a strong banking regulator in 
their home country. But what if it were, say, they were 
headquartered in a country that didn't have a--where they 
weren't subject to consolidated supervision in their home 
country? Would that concern you?
    Mr. Leary. We would require them to establish U.S. 
operations. And before we'd even consider the applications, it 
would be strictly reviewed. I think as we looked at, for 
example, UBS, we relied on the FDIC to look at the home country 
supervisor and supervision at that level, but we also required 
strong measures and prudential standards when we chartered UBS 
Bank in Utah.
    Mr. Bachus. I know Mr. Kohn mentioned that the ILC 
exception, however, allows a foreign bank that is not subject 
to consolidated supervision in its home country to evade this 
requirement and acquire an FDIC-insured bank with broad deposit 
taking and lending power. This gap in current law needs to be 
addressed. Would the two of you comment on that?
    Mr. Kohn. I think my testimony speaks for itself, Mr. 
Bachus. Congress passed that requirement after BCCI, which was 
a case in which there were regulated entities in the United 
States but problems overseas in a vast network of unregulated 
entities or inadequately regulated entities, that ended up 
spilling over into and onto the U.S. entities.
    So, just having a regulated entity in the United States, in 
Congress's view, and I agree with it, was not sufficient to 
protect.
    Mr. Bachus. Does this legislation set up such a protection, 
or would it still be--
    Mr. Kohn. Not as currently submitted. It does not have the 
requirement for consolidated supervision of a foreign entity.
    Mr. Bachus. So a foreign bank in a country where it doesn't 
have consolidated supervision could obtain a--
    Mr. Kohn. Could establish an ILC under the law, under the 
act as proposed, bill as proposed.
    Mr. Bachus. Okay. Thank you.
    Mrs. Maloney. [presiding] Thank you. The Chair recognizes 
herself for 5 minutes, and I raised the question with--the same 
question with Chairman Frank earlier, and he says that they are 
working with language that would require the consolidated 
supervision. So that is a positive step forward coming out of 
this hearing.
    I heard in some of the testimony that the current 
regulatory structure of the ILCs creates an uneven playing 
field within the banking industry. Could you please explain 
this further and what we can do to level this playing field?
    Ms. Bair. Well, I think the argument is that ILCs chartered 
in the States specified in CEBA are exempt from Bank Holding 
Company Act regulation. I think that is at the core of the 
regulatory playing field argument.
    It has also been argued, especially by community banks, 
that it doesn't work both ways. The commercial entities under 
the ILC exception can own banks, but banks can't do commercial 
activities, so I think those are the arguments.
    Mrs. Maloney. You outlined in your testimony, Ms. Bair, the 
regulatory tools for ILC parents being the same as for bank 
holding companies. If that was legislated into law, would that 
address this challenge?
    Ms. Bair. Yes. There are a variety of holding company 
regimes. The Fed obviously is the leading bank holding company 
regulator. The OTS has also long been involved in holding 
company supervision, and the SEC has recently crafted its own 
system of consolidated supervision, so you have a variety of 
different approaches.
    We think, as my written testimony indicates, that we would 
like powers comparable to the Fed. If you're going to make us a 
holding company supervisor, we think all three are certainly 
very good supervisors, but the Fed's authorities under the Bank 
Holding Company Act would be most desirable.
    Mr. Kohn. Congresswoman, may I comment?
    Mrs. Maloney. Surely.
    Mr. Kohn. There's another aspect of the competitive 
inequality, and that's the mixing of banking and commerce. So 
even under the bill as proposed, the ILCs would be able to have 
15 percent commerce activities, and that is not permitted to 
financial holding companies and bank holding companies.
    So the supervision, the consolidated supervision, is an 
extremely important point, clearing up the foreign bank issue 
is an extremely important point, but it doesn't go all the way 
to leveling the playing field. And the way to level the playing 
field is to simply close the loophole and make insured ILCs 
subject to the same regulations every other insured bank is 
subject to.
    Mrs. Maloney. Under Gramm-Leach-Bliley, doesn't that allow 
a 15 percent--
    Mr. Kohn. No, ma'am, it does not. In Gramm-Leach-Bliley, 
there was a transition provision such that a financial holding 
company that had commercial activities would have some time to 
get rid of those commercial activities, but it must divest 
itself of those commercial activities.
    There is no commercial basket in Gramm-Leach-Bliley. And 
the Federal Reserve gives banks--or financial holding 
companies--2 years, which can be extended for a couple of 
years, up to 5 years, to divest themselves of all their 
commercial activities. There are no commercial activities, 
except as might be incidental to a financial activity, allowed 
in Gramm-Leach-Bliley. There is no 15 percent basket there.
    Mrs. Maloney. Would you elaborate further on the risks of 
mixing banking and commerce? You seem tremendously concerned 
about this. What are the conflicts of interest that arise 
between the bank and the commercial transactions of a business? 
Could you elaborate further why you feel this so-called 
loophole should be closed?
    Mr. Kohn. I think mixing banking and commerce raises a 
number of very difficult issues that the Congress needs to 
consider thoroughly before allowing even a limited exception to 
this.
    There is the potential for conflicts of interest. Is the 
bank making loans on more favorable terms to its affiliates--
there are restrictions here--or to customers of its affiliates, 
than it would to a customer of an unaffiliated institution? If 
a commercial firm owns a bank, can competitors of that 
commercial firm have the same access to credit on the same 
terms as the commercial firm itself?
    There are issues about the potential for spreading the 
safety net. Banks are special. They have deposit insurance. 
They have access to the discount window. Congress has 
recognized that this carries the risk that there will be a 
perception that they have specific protections. They have 
access to the safety net.
    I think because, as I noted before, banks and their 
affiliates often operate on a very consolidated basis, there's 
a risk that when a commercial affiliate is connected with a 
bank, the perception will be that the authorities wouldn't let 
problems in that commercial affiliate sort of cascade into the 
bank, that the commercial affiliate would have a special access 
to the safety net.
    And finally, as I think Mr. Marshall pointed out in his 
opening comments, I think the consolidated regulation that 
we're talking about imposing would be much more difficult if 
there is a commercial component to the holding company. Working 
with the SEC, the thrift regulators, and insurance regulators, 
I think we have a better handle on the safety and soundness of 
non-bank financial affiliates of banks.
    I think this would be very, very difficult to really do 
effective consolidated regulation if there is a commercial 
affiliate of the regulated institution.
    Mrs. Maloney. Well, this is--just very briefly, could we 
just go down the line and see how people feel? Do they feel 
that this is--that the 15 percent commercial activity is a 
challenge? Ms. Bair?
    Ms. Bair. We think the 15 percent is workable. We're being 
agnostic about where you want to draw the line. I would say, 
again, in the past, there already has been some experimentation 
with commercial ownership with the ILC charter to date. We have 
a good safety and soundness record to date. It certainly would 
also be within the prerogative of the committee to allow some 
limited mixing using this 15 percent criterion.
    In our view, it's the committee's decision. It's a policy 
call to make.
    Mrs. Maloney. Okay.
    Mr. Reich. I would agree with Chairman Bair. It certainly 
is the committee's policy call. I think there are other 
examples, particularly in the tax code, where 15 percent has 
been used sort of as a de minimis level of unrelated income.
    Mr. Colby. This is not an area of core expertise for the 
Commission. We really think it's an area for the Congress to 
decide.
    Mrs. Maloney. Okay. Commissioner?
    Mr. Leary. I would endorse it, yes. I believe what we have 
attempted to do in Utah is to very effectively work within this 
core threat of having a commercial parent and allowing a 
basket, whatever the committee establishes, I think we would be 
very comfortable with.
    We are currently working with General Electric, that has an 
OTS bank and a Utah Industrial Bank, and I think we are working 
very carefully at ensuring that safety net does not extend to 
the whole GE operation, that we isolate that--those insured 
entities very carefully.
    Mrs. Maloney. Okay. My time has expired. Mr. Gillmor, the 
co-sponsor of the legislation.
    Mr. Gillmor. Thank you, Madam Chairwoman. A couple of 
questions, Commissioner Leary. You stated a number of times 
that the legislation would restrict banks and would make State 
banking irrelevant.
    I don't think that's an accurate description of the 
legislation. The legislation doesn't do anything to affect the 
operation of the bank. Nothing. The only thing the legislation 
deals with--well, I'll ask you. Maybe you could point out 
specifically what it does to restrict, because mainly what 
we're talking about is ownership at a holding company.
    Mr. Leary. I would answer it this way, sir. In our case, 
we've approved three charters that the FDIC, under its 
moratorium, has not been able to successfully approve. We would 
not have approved those charters if we did not believe they 
warrant the granting of the charter and warrant the granting of 
deposit insurance from the entities.
    I believe that what we have developed is a safe and sound 
model.
    Mr. Gillmor. Well, I guess the other thing I'd like you to 
do, since other state-chartered banks and other banks are 
subject to these same rules, do you think those rules restrict 
them? I mean, why would it only restrict ILCs?
    Mr. Leary. I would probably take a tack that I've developed 
in my own logic trail over the years.
    What I believe we're doing with a number of these companies 
is when they've been identified as commercial entity, I do not 
see it much differently than the majority of my community banks 
that are primarily owned by businesspeople in the community, 
whether it's the lumber operator, the gas station owner, or 
whatever. So, they bring with them a specific commercial 
expertise and a commercial perspective. I think that's very 
similar to what we're doing with some of these companies.
    Do we want to isolate that and provide safety and soundness 
mechanisms? I believe Regulation 23A and B does that, and for 
the ILCs, we religiously enforce that upon them. So, my answer 
is, I think there is conceptually, it's not far to go from 
businesspeople owning a community bank to an entity that is 
large that has a small component which is an insured bank.
    I hope I've answered your question.
    Mr. Gillmor. I think we just have a different philosophy. 
For example, when you said that restricting commercial 
ownership of ILCs would be anticompetitive, do you think the 
Bank Holding Company Act is anticompetitive?
    Mr. Leary. No. But I think I've already gone on record as 
saying I think there are some areas that could be worked on. Do 
I endorse repealing? No.
    Mr. Gillmor. You don't endorse repealing that?
    Mr. Leary. I do not.
    Mr. Gillmor. But you don't want ILCs subject to comparable 
type of provisions?
    Mr. Leary. I think they are. Everybody keeps talking about 
the one side, but the ILCs are limited. They cannot have demand 
deposits if they exceed $100 million. I brought up in my 
remarks that at one point, the committee passed a bill that 
would allow commercial NOW accounts for ILCs, somewhat leveling 
the offerings that the industrial banks can offer to their 
customers.
    So, I think it's a very delicate balance, but I do not have 
a problem with what we're doing here, provided it's safe, and 
provided it's sound.
    Mr. Gillmor. Okay. Thank you. Let me ask the SEC, because 
there's a possibility under this legislation that you're going 
to be a consolidated regulator. If you were given the power to 
regulate industrial bank parents, depending on what kind of 
parent it is, do you think the SEC would have to request 
additional powers to provide for safety and soundness, or are 
you equipped now to do that?
    Mr. Colby. I believe that the program that we're currently 
operating can take into account the needs of the ILC because 
the possibility that what happens in the holding company could 
affect the ILC, so I don't think you'd need more safety and 
soundness power.
    Mr. Gillmor. Okay.
    Mr. Colby. But if the Congress decides that's something 
that's appropriate for the bank regulators to have, we wouldn't 
oppose it.
    Mr. Gillmor. Let me ask Mr. Kohn. Mr. Leary said that it 
would be okay, in his view, to repeal the Bank Holding Company 
Act. Would you like to make the other case?
    Mr. Kohn. I think I already did, Mr. Gillmor. And I will 
just repeat that I think the mixing of banking and commerce 
would be a very major step. The U.S.--Mr. Bachus cited two 
German firms that operate in a country in which banking and 
commerce have been closely integrated over the years. I think 
the U.S. financial system has benefitted considerably by having 
these two separate. We have a much more resilient financial 
system in which commercial firms have many avenues for raising 
funds that are not tied to their banks. And as a consequence, I 
would tread very, very lightly on moving away from a formula 
that has given us, I think, a very safe banking system, a 
resilient financial system, one in which of course there are 
always difficulties and conflicts of interest, but have stayed 
away from some of the difficulties that could arise if we mixed 
banking and commerce.
    I don't know that the answer is zero banking and commerce, 
but I think I would be very cautious about moving away from 
what Congress just looked at 8 years ago and made a very 
conscious decision that zero was the right number.
    Mr. Gillmor. Thank you very much. I was going to throw a 
softball to Chairman Bair, but my time has expired, so I yield 
back.
    The Chairman. I thank the gentleman for his restraint. And 
I now recognize the gentleman from New York who has been very 
interested in this and has an issue that we're going to pursue. 
I guarantee him that at some point, it's going to get resolved; 
we're just not sure when. The gentleman from New York.
    Mr. Meeks. I was going to ask their opinion on that 
particular issue just to see what their interpretation would be 
on a hypothetical situation that I've been working with the 
chairman on. And that is, say there's a company that is 
primarily financial in nature. It receives its approval for an 
ILC to finance a particular service industry after October 1, 
2003, but before 2007. The parent company receives some 
commercial revenue of less than 10 percent. In the years 
following 2007, the commercial revenue of the parent company 
exceeds 15 percent. Are there any restrictions upon the ILC 
once that 15 percent commercial revenue threshold has been 
reached or exceeded? What's your opinion?
    Ms. Bair. Well, this is a question about the construction 
of the legislation. As I understand it, if it's chartered 
between October 2003 and January 2007, it is not subject to the 
15 percent. However, its business plan is frozen and it is 
prohibited from additional branching. So, even though the 15 
percent commercial revenue limitation would not apply, it could 
not undertake new activities beyond what is already in its 
business plan, nor could it establish new branches.
    Mr. Meeks. Do you agree?
    Mr. Kohn. Yes, I agree.
    Mr. Meeks. Okay. Let me ask Ms. Bair, do you believe that 
the FDIC currently has the authority that it needs to fully 
deny an ILC any future powers that it may request?
    Ms. Bair. Well, in terms of the activities of the ILC, yes. 
That is subject to exactly the same activity restrictions that 
other depository institutions are subject to. We're finding 
that most of the issues relate to commercial entities owning an 
ILC. But in terms of the ILC's activities itself, those are 
subject to the same restrictions.
    Mr. Meeks. And, Mr. Kohn, I know that you believe that we 
should separate--that commercial entities shouldn't own ILCs, 
etc. But say if, in fact, they continue to own them, who do you 
think should regulate them? Should it be the FDIC which 
currently regulates, or the Federal Reserve Bank, which has 
more experience with consolidation regulation?
    Mr. Kohn. I think the most important thing is that someone 
should regulate the consolidated entity. That's my first point.
    Mr. Meeks. You should be up here. That's a political 
answer.
    Mr. Kohn. Secondly, I think that if Congress were to give 
this authority to the FDIC, it would be creating another 
parallel regulatory environment. We already have both the Fed 
and the OTS regulating financial holding companies, depending 
on the nature of the subsidiary depository institution. This 
would create a third line of regulation, one that could define 
financial in a different way than the Federal Reserve defines 
financial.
    So I would think Congress should think very carefully 
before creating another line of parallel regulation for 
consolidated entities.
    Mr. Meeks. Ms. Bair, do you agree?
    Ms. Bair. We are not seeking to become a holding company 
supervisor. We're happy to have the authorities should Congress 
decide to grant those to us. We have tremendous respect for the 
Fed. If we were given those authorities, we would consult with 
them closely. I agree. We would not want differentiations in 
how financial is defined.
    I would also have to say that if you let the SEC in, you're 
going to have four. But, you know, I think the argument for 
allowing the FDIC to become holding company supervisor is that 
we do have the longest history with this industry, with these 
individual institutions. Also, the Fed already has two ILCs in 
holding companies subject to Fed supervision. Eight are under 
the OTS. And I believe four more would be under the SEC if you 
recognize them. So it would only be with regard to the 
remaining institutions where we would be having that role.
    Mr. Meeks. Thank you. I yield back.
    The Chairman. The gentleman from Texas, Mr. Neugebauer.
    Mr. Neugebauer. Thank you, Mr. Chairman. Ms. Bair, in your 
testimony you specified that there are four categories of ILCs, 
and the fourth one is those that directly support the parent 
companies' or organizations' commercial activities and that 
they can maintain those entities by funding them, the parent, 
through forms of deposits, borrowings, and equity and so forth. 
How does your regulatory or oversight of those ILCs differ from 
the other ILCs that you oversee?
    Ms. Bair. Well, those types of applications obviously go 
through a very stringent Section 23A and 23B review. This is an 
area where we very closely consult with the Fed in terms of how 
to interpret and apply those provisions, and our supervisory 
program also heavily scrutinizes those relationships to make 
sure there is full compliance with 23A and 23B.
    Mr. Neugebauer. And have you ever experienced any problems 
with those relationships?
    Ms. Bair. There is one institution that comes to mind, 
though I don't like to talk publicly about individual cases. If 
you'd like to submit a question in writing, we can have our 
general counsel put something together to respond to that.
    Mr. Neugebauer. All right. Thank you. I guess this is a 
question to the panel as a whole. If we go forward with this 
legislation, we are going to, in fact, grandfather some 
institutions that came in under the previous regulation, and, 
therefore, if there are other organizations that would be, you 
know, competing with those organizations, in fact they are now 
going to maybe have a competitive advantage because they were 
grandfathered.
    Is that good, fair, consistent policy for this country? And 
I'll just go down the--
    Ms. Bair. Well, I don't know how else to do it. You had to 
do it when you closed the non-bank bank loophole. You had to do 
it when you closed the unitary thrift loophole, and inevitably, 
there are going to be some winners and some losers.
    Mr. Kohn. I agree with Chairman Bair. I think the problem, 
as she notes, is that you can't make everybody happy here. I 
think the most important thing is to cut things off. And there 
are people who have been operating under this charter for a 
while, and they should be allowed to continue operating under 
the charter.
    But it would give them at least some competitive advantage 
against others, as I think Commissioner Leary was pointing out 
about the auto companies. But I think that's kind of the lesser 
of the evils. I'd rather have the loophole closed, people 
grandfathered in, and have no more going forward.
    Mr. Reich. It would not be a perfect solution by any means, 
but it would--it is about the only option you have if you were 
to move in that direction.
    Mr. Colby. I have nothing to add to that.
    Mr. Leary. From my perspective, I don't believe the cutoff 
is needed.
    Mr. Neugebauer. Mr. Leary, if this legislation--because 
your State is one of the States that still allows that kind of 
activity--what do you see the impact moving forward with future 
ILC applications and activity in your State?
    Mr. Leary. With the commercial activity restricted? I would 
hope it would continue. I cannot predict how it would continue. 
I would simply indicate that while Utah may be an anomaly in 
that our commercial bankers and our industrial bankers are in 
the same association and work well together thus far in all of 
these operations, I would hope that it would continue.
    Mr. Bachus. Would the gentleman yield?
    Mr. Neugebauer. Yes, I would.
    Mr. Bachus. In the conversation about our automobile 
manufacturers, you said the only option would be to close the 
loophole and leave some in and some out. Obviously, what 
concerns many of us is that Ford and Chrysler are the two that 
do not have ILCs are our domestic producers, two of our three 
domestic producers. And our domestic automobile manufacturers, 
I think, are very important in a bipartisan way.
    I guess there would be another solution, and that's as only 
to automobile manufacturers to allow a continuing or to allow a 
certain space of time to those that had made application. Any 
comment on that?
    Mr. Kohn. I think I'd be a little concerned that once you 
crack the door, people would be pushing against it, and more 
would want to come in. So I do think the--
    Mr. Bachus. Of course if it were narrowly drawn and in that 
one regard. But I understand, it is a quandary.
    The Chairman. If the gentleman would yield. My sense is, 
and I know the gentleman from Ohio and I have talked about 
this, my impression is that's an issue we will be dealing with 
when the bill comes out of the Senate. And sufficient unto the 
day is the evil thereof is, I think, the appropriate model 
there.
    But I do think being realistic, there will be some Senate 
negotiations, and I think there will be some distinction drawn 
ultimately--this is a prediction--between those entities that 
are very limited to a kind of a self-financing situation in 
which they are processing some of their own paper, and entities 
that might seek a broader kind of franchise. But I do believe 
that's something we will be dealing with at that time.
    Mr. Bachus. Thank you. Because as you know, many members 
are concerned about that.
    The Chairman. The gentleman from Georgia.
    Mr. Scott. Thank you very much, Mr. Chairman. Let me start 
if I may by looking at this from a concept of what is in the 
best interests of the consumer. Because in the final analysis, 
that's really what we're here for. And that begs the question 
as to what is in the best interest of the consumer is the fact 
that the genie is sort of out of the bottle, because there are 
some companies who are already doing this.
    What empirical data do we have that these companies 
provided a threat to our way of life, to the banking system? 
There has been none. You have Target; you have GE; you have 
Sears; and a number of others. But in fact, in some cases, the 
consumer has benefitted through added consumer convenience and 
lower costs in some areas. But in each of your testimonies, 
there has been consistent woe, but there has been no evidence, 
no empirical evidence that those who have the charter have been 
threatening to the system in any way. And I was wondering. And 
by that, Ms. Bair, I mean, wouldn't the FDIC, don't you think 
that they have the current oversight to make sure that these 
safeguards are there? And again, what evidence do we have 
that--
    Ms. Bair. Well, Congressman, you're right. To date, the 
commercially owned ILCs have a good safety and soundness 
record. They have been the source of product innovations and 
expansion of financial services to certain segments of the 
population.
    I think what we're really talking about is prospectively 
how far you want to go with this. The current ILC exception is 
quite broad, and I think a lot of the concern about some of the 
pending applications that have gotten so much press and 
controversy has been not so much about what's currently being 
proposed, but what might happen in the future, where do we draw 
the line? Do you want major retailers being able to provide the 
full panoply of financial services?
    We're being agnostic. Those are the kinds of policy issues 
that Congress needs to make. But, you know, I think they are 
good questions to be asking, and I think perhaps going forward, 
you do want to consider providing some limited ability to 
experiment with a very limited mixing of banking and commerce. 
Those are the right questions to be asking, but, again, we 
think it's a policy call for Congress to make.
    Mr. Scott. Mr. Kohn, let me get to a point that you talked 
about in terms of some issues and complexities you said, 
conflicts of interest. Let us take an example. In the 
provision, isn't it true that the ILCs have what we call an 
anti-tying prohibition that is a safeguard?
    Under this provision, an ILC could not condition a loan on 
a requirement that the borrower obtain services from an 
affiliate, and the affiliate could not tie a product sale to a 
requirement that the customer obtain banking services from the 
ILC. So, if the Home Depot, for example--it's a good example 
here, which I think as we move this process along, I think the 
bill will move forward. And when it gets to the Senate, there's 
going to be some deliberation. I agree with your point, but I 
do think that we ought not to sort of throw the baby out with 
the bath water here. But maybe to look at some of these 
situations on an individual basis.
    So, for example, if the Home Depot were to operate an ILC, 
they could not require contractors to finance their supplies 
through the ILC, nor could the ILC require loan applicants to 
use the loan proceeds to buy supplies from the Home Depot. And 
I point this out because the anti-tying requirement for 
traditional banks, on the other hand, are applicable only to 
the bank itself.
    So my--the point I want to make is that in some cases, for 
example, we take again the Home Depot case where this is going 
on now. I mean, it's basically a design to have a major 
consumer benefit. Now a consumer comes in, and they want to 
expand their line of credit. We're talking about a very small 
amount here that is certainly nonthreatening, but would be a 
major help to the consumer, to be able to transact his 
transaction there.
    Now this same process happens, but in this case, Home Depot 
has to go and farm this out to, say, a CitiGroup or a bank like 
that, when you could have it here. And I think with the anti-
tying provisions in here, there should be safeguards in and of 
itself.
    Mr. Kohn. I think there are regulations in place and that 
could be put in place which help protect against this sort of 
thing. Now, whether they would really protect a consumer or a 
contractor who felt somewhat dependent on Home Depot, that 
consumer or contractor really felt that they had a fully 
panoply of choice and weren't being pushed into the financial 
offering that Home Depot was tying to its transaction, I think 
is an open question.
    We've talked a lot about competition here, and the 
consumer. You've framed our question in terms of the consumer. 
There is a lot of competition in the financial services 
industry. There is relatively free entry into banking and 
thrifts. We charter hundreds of new institutions a year. I 
think if there is a need for financial services, there are 
people out there willing to start institutions or expand what 
they're doing--
    The Chairman. Mr. Kohn, you have to wrap this up, please.
    Mr. Kohn. Okay. That concludes my response.
    The Chairman. Thank you. The gentleman from California, 
then the gentleman from Ohio. The gentleman from California.
    Mr. Sherman. Thank you. I got a button yesterday, ``Don't 
Mix Banking and Commerce.'' I got it from the Independent 
Community Bankers Association and I'd put in the record, but 
the pin would stick people.
    And I've been interested to see the development of the 
whole idea of mixing banking and commerce. Because I've seen 
many bank regulators, particularly the Fed, be opposed to 
commercial institutions entering banking, and not nearly as 
opposed to banking institutions entering commerce. That is to 
say, when Wal-Mart wants to enter banking, the banking world 
says, Oh my God, look at Japan. Look at what happens when you 
mix banking and commerce.''
    But when banks want to go into real estate sales, auto 
sales, whatever, the bank regulators have been helping them, 
and we in Congress have stopped the presumed train wreck 
described by the community bankers when you mix banking and 
commerce. So perhaps you could comment, is it as bad an idea 
for bankers to get into commerce as for commercial 
organizations to get into banking?
    Mr. Kohn. I think it would be a bad idea for bankers to get 
into commerce in a major way. What we allow now are commercial 
activities that are incidental to the basic financial 
activities of the banks. This is under the guidelines put out 
by Congress.
    Mr. Sherman. But we could call anything incidental to 
banking. I bought this tie in a tie store, but I financed it on 
a credit card, and I hope before it wears out, I will pay off 
that bill. So it was a financial institution. In fact, the bank 
may make a larger profit on this tie than the haberdasher.
    That being the case, is it your position that anytime you 
sell something that has to get financed--and I'd like to hear 
from your colleague sitting to your left as well.
    Mr. Reich. I think we regulators are a pretty conservative 
group when it comes to banks expanding into a variety of 
commercial activities. We are not the cheerleaders for the 
banking industry to expand into commercial activities.
    Mr. Sherman. Is there anyone on the panel who thinks that 
real estate sales is somehow incidental to real estate 
financing or is for some other reason not part of commerce? Let 
the record show there were no responses, and I yield back.
    The Chairman. I thank the gentleman. The one example he did 
give might have been covered by the anti-tying rules.
    [Laughter]
    The Chairman. The gentleman from Ohio.
    Mr. Wilson. No questions.
    The Chairman. The gentleman from Colorado.
    Mr. Perlmutter. Pass.
    The Chairman. The gentleman from Utah probably doesn't want 
to pass. I would note again, the gentleman from Utah is not now 
a member of the committee, but we did get unanimous consent, 
given his interest, for him to participate.
    Mr. Matheson. And I would be remiss if I did not open by 
thanking both Chairman Frank and Ranking Member Bachus for 
their generosity in allowing me to participate today. It is 
very nice of you to do that.
    I have all kinds of questions in 5 minutes, so we'll see 
how this goes. Mr. Leary, if you could just briefly confirm a 
couple of things for me. Number one, there were some references 
made in opening statements about lack of CRA participation by 
ILCs. Could you clarify what's really going on with CRA 
participation?
    Mr. Leary. I think from the State of Utah, and even from 
consumer activist groups, they would tell you CRA activity of 
the industrial banks in Utah is outstanding. They have been 
noted for proactive work. They are out there doing it the best 
they can. And what is unusual, while my background and 
experience is in community banking, the CRA group has sat down 
and tried to proactively figure out ways that create micro 
enterprise loan funds. They've created Utah Community 
Reinvestment Corporation. I think they've been very aggressive.
    Mr. Matheson. Thank you. I think it's interesting to note 
that from the chairman's opening remarks to just about 
everybody on the panel, I think everybody here has said that 
there's no safety and soundness issue to date in this industry.
    And it reminds me of when we had the subcommittee hearing 
in the last Congress, and when then-subcommittee Chairman 
Bachus concluded the hearing, he said, you know, legislation is 
usually a solution to a problem, and it isn't clear where the 
problem is. He said that at the time, I'm not sure there is a 
problem. And I think that's the underlying question we need to 
be talking about today is where is the problem? Since we've all 
apparently stipulated there's no safety and soundness issue to 
date in this industry.
    And yet, Mr. Leary, some people are concerned that only six 
States benefit. You've already said you wouldn't care if other 
States had access to this charter.
    Mr. Leary. I do not.
    Mr. Matheson. Is it your understanding that the 
beneficiaries of industrial-owned company services, namely, 
consumers, that those beneficiaries are in all 50 States, and 
in fact people throughout this country benefit from the 
industry?
    Mr. Leary. Yes they are.
    Mr. Matheson. Ms. Bair, I wanted to know, is it true--would 
you verify that the FDIC does in fact vigorously enforce 
Sections 23A and 23B in the anti-tying provisions applicable to 
the banks you regulate?
    Ms. Bair. Yes, we do.
    Mr. Matheson. You said you were agnostic about what we do. 
But you enacted a moratorium, and I don't know that that's 
agnostic.
    Ms. Bair. Yes.
    Mr. Matheson. And you've extended the moratorium, and if 
you ask Mr. Leary about what that's meant to people who are 
applying for charters, that is not a hold-harmless provision. 
That is not agnostic.
    Ms. Bair. Yes.
    Mr. Matheson. And I'm curious what's happened at the FDIC 
to sort of change this position? Because if you look at what 
your predecessor said, I quote remarks before State bank 
supervisors in 2003, after describing the FDIC's examination of 
industrial loan banks, he said, ``These organizations are 
rigorously and sufficiently supervised by the state supervisors 
and the FDIC on an ongoing basis.''
    And then he addressed concerns about oversight of the 
parent companies. And he said, ``While I understand these 
concerns, the FDIC has, and often uses, a number of tools to 
manage both the holding company's involvement with the 
financial institution and to manage transactions between the 
two entities. We can and do visit the parent companies and 
other affiliated entities for that matter, to look over issues 
or operations that could impact the insured institution. 
Congress has given us the power to protect the integrity of 
those relationships. We have exercised that power, and we have 
coordinated closely with you, the State regulators, in our 
work. We have found parent companies of ILCs to be acutely 
conscious of their responsibilities with respect to their ILC 
subsidiaries and the consequences of violating applicable laws 
and regulations.''
    He has also said, ``We at the FDIC must be vigilant in our 
supervisory role, but I will reiterate, the FDIC believes the 
ILC charter per se poses no greater safety and soundness risk 
than other charters.''
    Ms. Bair. Yes.
    Mr. Matheson. What has changed?
    Ms. Bair. Well, I could read excerpts from the GAO report, 
from our own IG, from a number of members of this committee and 
in the Senate, and from a number of public commentors who would 
raise a lot of concerns about the current regulatory structure.
    I felt when I came into this situation at the end of June 
last year that we needed to take a step back and evaluate all 
the issues, given that there were a lot of credible voices 
saying that the supervisory regime was not adequate.
    And, Congressman, I do honestly think that this controversy 
about the ILC charter is not going to go away, because there 
are in fact no meaningful limitations on the FDIC's ability, 
other than safety and soundness considerations, to prevent 
major commercial entities from getting into banking in a very 
large way. That has not happened to date.
    Mr. Matheson. And you're questioning the FDIC's ability to 
adequately regulate, along with the State, those--
    Ms. Bair. I'm questioning whether the FDIC should be the 
decisionmaker in allowing major commercial retail entities to 
get into banking in a major way in this country. I don't think 
that's our decision right now.
    Mr. Matheson. Let me just ask if Congress did decide to 
allow this to happen instead of this legislation that's being 
proposed, do you think the FDIC has the adequate capability to 
regulate that industry in that context?
    Ms. Bair. We will have to evaluate each application on a 
case-by-case basis. But any decision we made would have to be 
based on safety and soundness considerations. It couldn't be 
based on policy considerations relating to commercial 
ownership.
    Mr. Matheson. Do you think that the commercial ownership 
issue has evolved in the last few years due to a particular 
application?
    Ms. Bair. Our decision wasn't driven by any individual 
applications, but there has been a trend and greater interest 
in this charter by major retailers, yes.
    Mr. Matheson. Do you think that when you look at FDIC and 
the bank-centric model that we've had here, do you see areas 
that we--or capabilities that you don't have now that would 
help you better regulate this industry, or are you satisfied 
with the tools you have at your disposal?
    Ms. Bair. I think holding company authorities, particularly 
the ability to examine affiliates, would be helpful, yes, I do.
    Mr. Matheson. And you don't think you have that--
    Ms. Bair. We do not have that now, no. We have--
    Mr. Matheson. Do you take issue with what your predecessor 
said about that?
    Ms. Bair. Well, our ability to examine affiliates is only 
with regard to determining what the relationship is with the 
ILC. So unless there's a relationship, we could be challenged 
in our ability to examine affiliates.
    Mr. Matheson. Okay. Mr. Chairman, I see my time has 
expired, and I do not want to abuse the privilege. Thank you so 
much.
    The Chairman. I thank the gentleman. And with that, we will 
thank the witnesses. Did the gentleman from Illinois wish to 
ask questions? Then we thank the witnesses very much, and we 
will ask them to leave expeditiously, and we'll empanel the 
next panel. And everybody who wants to be polite to each other, 
do that in the hall. Just leave quickly.
    We ask people to leave quickly. Don't black the aisles, one 
panel to the next panel. We'll try to do as much as we can 
before we're interrupted for votes. And let us have the next 
panel be seated, please.
    Would the members of the panel please move up here and be 
seated so we can get started? Would the people to the Chair's 
left please leave? Thank you.
    The second panel will begin. We will ask that those doors 
be closed. And the first witness is Ms. Amy Isaacs, who is the 
national director of Americans for Democratic Action.
    Please just sit down and let us start talking, guys. Come 
on, we're in a hurry.
    Ms. Isaacs.
    Excuse me. Members of the staff, close those doors, please. 
People either seated, or on the other side of the door.
    Thank you. Please continue.

   STATEMENT OF AMY ISAACS, NATIONAL DIRECTOR, AMERICANS FOR 
                       DEMOCRATIC ACTION

    Ms. Isaacs. Mr. Chairman, thank you. I appreciate the 
opportunity to testify representing our more than 65,000 
members. Unlike my colleagues on this panel and the preceding 
one, I am not an expert in banking. I am, however, a consumer, 
as are the members of my organization. And because we are 
concerned about the impact that granting an ILC charter to any 
retail enterprise could have on individual consumers and small 
business, we endorse H.R. 698, the Industrial Bank Holding 
Company Act of 2007.
    Although H.R. 698 is not specifically about Wal-Mart, I 
will focus on Wal-Mart as perhaps the most pernicious example 
of the problems which can arise when banking and commerce are 
intertwined. We believe a bright line between the two must be 
drawn.
    Wal-Mart's recently withdrawn application to enter the 
banking business was fraught with risk, which would have been 
guaranteed by American taxpayers. A bank tied to one of the 
world's largest retailers would face unique commercial and 
reputational risks. Regulatory agencies charged with 
supervising these risks lack the experience or the capacity to 
understand how to evaluate or minimize them.
    Giant retailers have been forced into Chapter 11 or have 
disappeared because of changes in the commercial environment. 
K-Mart, Ames, Woolworth, and Montgomery Ward are examples of 
retailers who have reorganized or have disappeared. Business 
models change, as do consumer preferences. The Federal 
Government is not and should not be in the business of 
understanding the risks of large-scale retailing. It should not 
have to worry about the safety and soundness of a global retail 
business, dependent on complex global supply systems. If the 
retail operation faces disaster, so will the bank.
    Wal-Mart also faces the risk of social ostracism for its 
routine antisocial behavior. Wal-Mart has an established 
pattern of irresponsible practices. It shorts employees on 
health care, it has flouted hourly wage laws, and it has been 
involved in multiple cases of alleged discrimination. The 
company has been accused of using undocumented workers and a 
senior executive said he padded his expenses to conceal anti-
union expenditures.
    Such behavior carries the risk of a damaged reputation, and 
with it, a run on the bank. The government cannot be in the 
position of insuring against the risk. There are many other 
examples of antisocial behavior leading to the demise of 
financial institutions. Riggs Bank is a prime example.
    We also are deeply concerned that large scale commercial 
enterprises could misuse their market power. As state-chartered 
ILCs, they would not be subject to the stricter regulations of 
bank holding companies. They could use their position in the 
marketplace and control of prime real estate for their own 
advantage, instead of the interests of the community they 
purport to serve.
    Had Wal-Mart been granted an ILC charter, it would have 
been able to offer anything an ordinary bank could--savings 
accounts, checking accounts, mortgages, and a variety of loans 
for everything from home improvement to car purchases to small 
business loans. The potential for conflict of interest is 
obvious.
    Would retailers make loans to competitors? Should they have 
access to credit information about competitors?
    Retailers operate with the goal of dominating markets. They 
work to control competition. The result has been the extinction 
of long-term community small businesses. There is no reason to 
believe that a foray into banking would have a different 
outcome.
    Retailers are not offering banking services to save 
consumers money. They are not charities. They are in business 
to make money. They want to use their retail power to muscle 
their way into the financial services industry.
    Had Wal-Mart been granted a charter, it would have used its 
power to muscle past community banks and credit unions, which 
do care about their own communities. Among the factors the law 
requires be considered in accepting an application for an ILC 
charter is the convenience and needs of the community to be 
served. Mixing retail commerce and banking makes it impossible 
to meet that standard. The conflict of interest and the push 
for market dominance argue against a charter serving any need 
or convenience other than the retailers'.
    Existing institutions leasing space in retail stores serve 
customers. Many banks have arrangements with supermarket 
chains. These bank branches meet the needs of both consumers 
and the community.
    Wal-Mart saw the handwriting on the wall when it withdrew 
its application. But until and unless H.R. 698 is signed into 
law, we cannot guarantee that a similar problem will not recur. 
Americans for Democratic Action stands for liberal values. We 
see bank regulation as an area where true conservative values 
should prevail. By granting a charter and deposit insurance, 
the government should not be risking regulating a business it 
does not understand. It should not insure depositors against a 
corporation's antisocial behavior and the attendant risks.
    For these reasons, Americans for Democratic Action urges 
passage of H.R. 698. Thank you for your consideration.
    [The prepared statement of Ms. Isaacs can be found on page 
113 of the appendix.]
    The Chairman. Thank you.
    And next, testifying on behalf of America's Community 
Bankers, for the chairman a familiar face, not to mention 
accent, one of our leading bankers in Massachusetts, Arthur 
Connelly from South Shore Bank.

 STATEMENT OF ARTHUR R. CONNELLY, CHAIRMAN AND CHIEF EXECUTIVE 
   OFFICER, SOUTH SHORE BANCORP MHC, ON BEHALF OF AMERICA'S 
                       COMMUNITY BANKERS

    Mr. Connelly. Thank you. Chairman Frank, Ranking Member 
Bachus, and members of the committee, thanks for inviting me to 
testify before you today on the Industrial Bank Holding Company 
Act of 2007.
    My name is Art Connelly, as the chairman said. I am the 
chairman and CEO of South Shore Bancorp, and I also serve as 
the first vice chairman of America's Community Bankers, and I 
am here today to testify on their behalf.
    The appropriate regulatory structure for industrial loan 
companies is incredibly important and should be addressed by 
Congress. First, I want to say that ACB strongly supports H.R. 
698. We believe that this commonsense legislation is necessary 
to improve the safety and soundness of the banking system. ACB 
believes that the withdrawal of Wal-Mart's ILC application does 
not end the need for comprehensive ILC regulatory reform.
    The ILC charter is the only bank charter that can be 
obtained by a commercial entity. Furthermore, there is no 
holding company oversight for ILCs that are not otherwise 
supervised by the OTS or the Federal Reserve.
    These structural issues run contrary to legislation passed 
by Congress. Consistently throughout the 20th century, Congress 
made it clear that it does not want commercial ownership of 
banks in the United States and wants insured banks to have 
consolidated holding company oversight.
    There are good reasons to have concerns about commercial 
ownership of banks, especially with ILCs. Commercially owned 
banks can face conflict of interest pressures from their 
commercial owners. We have seen this problem in other 
countries, where a commercially owned bank can be pressured by 
its parent to make loans based not on sound underwriting but on 
the needs of its commercial parent. Concerns about the payment 
system integrity might also exist if a commercial parent 
improperly influences the actions of an ILC subsidiary that 
processes payments.
    Furthermore, these problems are greater for ILCs because 
commercially owned ILCs that are not affiliated with a bank or 
a savings association have no holding company regulator that 
can help oversee risks to the depository institution on a 
consolidated basis. While the FDIC has done an admirable job in 
regulating ILCs for safety and soundness so far, it does not 
have the statutory authority to examine the parent company.
    The recent surge in commercial ILC application brings these 
concerns to the forefront. Until recently, the majority of ILC 
asset growth has been in ILCs that are affiliated with banks or 
savings associations and have holding company supervision. If 
no regulatory supervision is passed, we could see dramatic 
growth in commercially owned ILCs with no holding company 
oversight.
    That brings me to H.R. 698. On examining the bill, it is 
helpful to look at Gramm-Leach-Bliley, where Congress 
prohibited any future ownership of unitary thrifts by 
commercial companies. However, Congress grandfathered all 
unitary thrifts that were commercially owned prior to 1999. 
This appears to be the model for the Industrial Bank Holding 
Company Act, and we believe it to be a fair one.
    H.R. 698 creates an FDIC regulated holding company 
structure for ILCs not regulated as a bank or a savings and 
loan holding company. Providing the FDIC with the authority to 
supervise the parent companies of these ILCs on a consolidated 
basis will allow it to ensure the safety and soundness of the 
institution. The legislation also utilizes a grandfathering 
system similar to the one in Gramm-Leach-Bliley.
    In conclusion, Mr. Chairman, we believe H.R. 698 is sound 
legislation that will fill a current gap in our financial 
regulatory structure. I will gladly take any questions that you 
might have. Thank you.
    [The prepared statement of Mr. Connelly can be found on 
page 82 of the appendix.]
    The Chairman. Thank you. Next, from the Independent 
Community Bankers of America, Mr. Jim Ghiglieri. Please, Mr. 
Ghiglieri.

    STATEMENT OF JAMES P. GHIGLIERI, JR., PRESIDENT, ALPHA 
COMMUNITY BANK, ON BEHALF OF THE INDEPENDENT COMMUNITY BANKERS 
                           OF AMERICA

    Mr. Ghiglieri. Mr. Chairman, Ranking Member Bachus, and 
members of the committee, my name is Jim Ghiglieri, and I am 
president of Alpha Community Bank in Toluca, Illinois. I am 
also chairman of the Independent Community Bankers of America. 
ICBA is pleased to have this opportunity to testify.
    The ILC charter threatens our Nation's historic separation 
of banking and commerce and undermines our system of holding 
company supervision. The fact that Wal-Mart has withdrawn its 
ILC application does not diminish the need to act. Other 
applications are pending and more could be filed.
    ICBA was pleased that the FDIC unanimously adopted the 
recommendations of Chairman Frank and Representative Gillmor 
and many of their colleagues to impose a 1-year moratorium on 
ILC applications by commercial firms. The entire FDIC Board 
clearly recognizes that these applications raise broad public 
policy issues that Congress must confront. Congress can do that 
by enacting H.R. 698.
    Like much good legislation, H.R. 698 is a compromise. That 
is its strength. Institutions that are already in business 
could remain in place. Financial companies could continue to 
acquire, establish, and operate ILCs. The legislation addresses 
the key concerns without needlessly disrupting ongoing 
activity, and it gives the FDIC the basic tools it will need to 
be an effective consolidated regulator.
    Why do we ask Congress to pass this bill? First, the 
loophole threatens the safety and soundness of the financial 
system. Second, mixing banking and commerce presents serious 
conflicts of interest. Third, ILCs could destabilize local 
communities and harm consumers. Fourth, ILCs could jeopardize 
the payment system. And, fifth, ILC holding companies need 
stronger regulation.
    Let me briefly elaborate. First, safety and soundness. 
Allowing commercial firms to own federally insured ILCs adds 
tremendous new risk to the Deposit Insurance Fund. For example, 
Ford Motor Company applied for an ILC charter. Ford's financial 
difficulties are well-documented. Banking regulators will not 
allow banks to buy Ford bonds. Ford hardly sounds like a source 
of strength for an FDIC-insured ILC.
    Home Depot and its ILC acquisition target are susceptible 
to fluctuations in real estate. According to Bloomberg News on 
February 21st, and I quote, ``Home Depot reported its biggest 
drop in quarterly profit as the decline in U.S. home sales 
sapped demand for building supplies.''
    Financial services regulators, no matter how competent, do 
not have the expertise to understand each of these economic 
areas and protect the safety and soundness of an ILC from 
problems that may befall its parent. A financial regulator 
should not become involved in market decisions of a major 
commercial firm.
    Second, conflicts of interest. Home Depot could be tempted 
to direct its bank to offer unsound loan terms to its customers 
provided they agree to purchase products from Home Depot. Or 
Home Depot could offer discounts on its product if a customer 
takes out a loan from its bank. The idea that a bank should be 
an objective credit grantor gets thrown out the window either 
way.
    Third, harm to consumers and communities. An ILC owned by a 
retail firm is unlikely to make loans to its local competitors. 
An ILC with a nationwide deposit taking network could draw 
funds out of local communities, sending them to corporate 
headquarters. Major commercial firms have the size and 
resources to engage in predatory pricing for as long as it 
takes to drive local competitors out of the market, both 
locally owned small businesses and community banks.
    Fourth, the payment system. The Wal-Mart application 
highlighted potential risk to the objectivity and security of 
the payment system. If retailers control the payment system, 
they will seek competitive advantage rather than control risk. 
Consumers, small businesses and banks of all sizes would be the 
victims.
    And finally, lack of regulatory authority. The FDIC 
currently lacks clear statutory authority to consider all of 
the broad policy implications when considering ILC applications 
and to regulate ILC holding companies.
    While ICBA believes that the FDIC has ample grounds under 
current law to deny several of the pending applications, 
especially Home Depot's, it may eventually be compelled to 
grant a disturbing number of them. Senator Garn told the FDIC 
that the ILC charter was grandfathered in 1987 and exempted 
from the Bank Holding Company Act to serve narrow purposes. But 
that is rapidly changing. A GAO report highlighted the need for 
enhanced supervision of ILCs, especially the need for 
consolidated supervision over both the ILCs and their holding 
companies. Successive Federal Reserve chairmen have repeatedly 
made similar points.
    Congress has ample precedent for closing the ILC loophole. 
You closed the non-bank bank loophole in 1987 and closed the 
unitary thrift loophole in 1999. Now it is time to close the 
ILC loophole.
    Thank you very much.
    [The prepared statement of Mr. Ghiglieri can be found on 
page 95 of the appendix.]
    The Chairman. Thank you.
    Next, Mr. McVicker, who is the chairman and CEO of the 
Central Bank and Trust Company, and he is testifying on behalf 
of the ABA, the American Bankers Association.
    Mr. McVicker.

  STATEMENT OF EARL D. McVICKER, CHAIRMAN AND CHIEF EXECUTIVE 
    OFFICER, CENTRAL BANK & TRUST COMPANY, ON BEHALF OF THE 
                  AMERICAN BANKERS ASSOCIATION

    Mr. McVicker. Mr. Chairman, and members of the committee, 
my name is Earl McVicker. I am chairman and CEO of Central Bank 
and Trust Company in Hutchinson, Kansas, and chairman of the 
American Bankers Association. Thank you for the opportunity to 
present ABA's views on the regulation of ILCs.
    Since Congress last enacted legislation concerning the 
ownership of ILCs nearly 20 years ago, the ILC industry has 
changed dramatically. Unfortunately, these changes now threaten 
to undermine the separation of banking and nonfinancial 
commerce that has long been a feature of U.S. law. In fact, 
over the last 50 years, Congress has repeatedly curtailed the 
ability of nonfinancial commercial firms to engage in banking 
activities.
    In each of these instances, the legislation was a reaction 
to nonfinancial firms that were taking advantage of statutory 
provisions to engage in banking. Moreover, in each instance, 
Congress was consistent in enacting legislation to maintain the 
separation between banking and nonfinancial commerce.
    Today, unintended use of the ILC charter has made it 
necessary for Congress to act once again to maintain this 
separation. When the term bank was redefined in 1987, ILCs were 
specifically excluded from the definition. At that time, most 
ILCs were small. And the few States that were able to charter 
ILCs were not promoting the charter. Simply put, there was no 
significant risk that problems caused by mixing banking and 
nonfinancial commerce would arise at the time the exemption was 
codified.
    That is not the case today. By the end of 2006, aggregate 
ILC assets totaled almost $213 billion, an increase of more 
than 5,500 percent since 1987. The average ILC now holds close 
to $3.7 billion in assets.
    Recent ILC asset growth is no accident. When Congress cut 
off the ability of nonfinancial commercial firms to engage in 
banking through unitary thrifts in 1999, these firms were 
forced to look for other means of doing so. It is no 
coincidence that total aggregate ILC assets more than doubled 
from $44 billion in 1999 to over $90 billion in 2000. Clearly, 
with the closure of one avenue into the banking world, 
nonfinancial commercial entities began to exploit another.
    It is fair to assume that Congress did not anticipate that 
the ILC exemption would be used for this purpose. There is a 
significant risk if the separation is not maintained. A 
nonfinancial parent, seeking to further its commercial 
pursuits, could put depositors' funds, the capital of the bank 
and the deposit insurance fund at risk.
    Congress has recognized these risks and should once again 
act to preserve the separation of banking and nonfinancial 
commerce by closing this exemption. Thus the ABA supports the 
Frank-Gillmor bill, H.R. 698, which would create a general rule 
that commercial firms may not own an ILC. The bill would 
grandfather commercial firms that currently own an ILC, and we 
support bringing grandfathered institutions within the 
jurisdiction of a Federal bank regulator, and vesting that 
regulator with the full range of supervisory and enforcement 
tools.
    We stand ready to work with Congress to maintain the 
important separation between banking and commerce. Thank you.
    [The prepared statement of Mr. McVicker can be found on 
page 172 of the appendix.]
    The Chairman. Thank you very much, Mr. McVicker.
    Next, John Douglas from Alston and Bird, who is testifying 
on behalf of the American Financial Services Association.

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

    Mr. Douglas. Mr. Chairman, and members of the committee, 
thank you very much for allowing us to present testimony on 
this important bill.
    American Financial Services Association is the national 
trade association representing many of the Nation's most 
important lenders, providing access to credit for millions of 
consumers and small businesses. AFSA strongly believes that the 
industrial bank option represents a safe and sound and 
appropriate means to deliver financial services to the public.
    Congress established a framework within which commercial 
companies can provide deposit, loan, and other banking products 
to their customers. This framework is highlighted by stringent 
and appropriate supervision, by strong enforcement powers, and 
by a structure of laws and regulations that mitigate the 
consequences of the hypothetical and unproven evils raised by 
the opponents of commercial ownership of industrial banks.
    I testified on this issue last year and don't intend to 
repeat my testimony. Since that time, we've endured a lengthy 
moratorium by the FDIC and a long comment period where the FDIC 
sought guidance on how to deal with this important issue. There 
were thousands of comments, most in opposition.
    It is important to recognize, however, that nothing, no 
event, no failure, no fact, lends any substance to the 
allegation of the great dangers to our economy that would 
result from commercial ownership of industrial banks. Indeed, 
all we have is speculation.
    There are three main allegations. First, that there is some 
gap in our supervisory framework that poses danger to our 
economy and banking system. Second, that if commercial 
companies are allowed to own industrial banks, rampant tying or 
other unseemly activities would occur and the FDIC couldn't 
stop them. And, third, there is something fundamentally un-
American and dangerous about mixing banking and commerce. I 
respectfully submit that these allegations are not true.
    First, industrial banks are subject to the same 
comprehensive framework of supervision and examination as 
normal commercial banks. They have no special powers, no 
special authorities, and are exempt from no statute or 
regulation. They comply with 23A and B, regulation O, capital 
requirements, prompt corrective action, anti-tying provisions, 
and the Community Reinvestment Act.
    Second, the FDIC has been given full and ample authority to 
supervise and regulate these institutions and can exercise the 
full range of enforcement powers. I was a participant in the 
political process that led to a rewrite of these provisions in 
1989 as part of FIRREA and it was our intention to give the 
FDIC and the other regulators all the enforcement powers they 
needed, which they exercised.
    Third, I can attest from experience that the FDIC does 
exercise these powers. It requires an independent board, 
adequate capital, safe and sound operations, and effective 
internal audit. It examines, it scrutinizes, and it exercises 
its powers to protect our system.
    And finally, the FDIC's experienced with industrial banks, 
similar to the experience of the OTS with respect to 
diversified owners of savings associations, belies any 
fundamental concerns to threats to our banking system. This is 
a well-capitalized, well-managed segment of the industry, 
making important contributions to consumers and small 
businesses. The FDIC's experience has been good.
    Finally, I want to address once more this myth of 
separation in banking and commerce. The Gramm-Leach-Bliley Act, 
to say that it was designed to make permanent that separation, 
is to ignore important provisions of that Act. There have 
always been affiliations and relationships between banking and 
commercial firms. These relationships have been carefully 
reviewed by Congress.
    If we were serious about eliminating it, we would preclude 
our banks from being affiliated with any entity. We wouldn't 
let Bank of America be affiliated with Bank of America 
securities, lest it favor its customers over those of Merrill 
Lynch. We would more closely scrutinize the propriety of a 
small business owner, a real estate developer, a car dealer 
owning a commercial bank in a small community, where sources of 
credit are lax.
    If we were really concerned, we would repeal the merchant 
banking powers in Gramm-Leach-Bliley and repeal the FDIC's 
power to grant commercial activity--permit commercial banks to 
engage in commercial activities in FDICIA. It is anomalous at 
best to be asserting that there is something wrong with a 
commercial entity engaging in banking when we have opened the 
door broadly and widely for banks to engage in and invest in 
commercial activities.
    I want to emphasize this last point. It is permissible 
under current law for any one of a number of banking 
organizations to use their powers granted under Gramm-Leach-
Bliley to acquire any commercial entity. This bill would 
preclude any commercial entity from establishing a bank to 
facilitate the needs of meeting its customers, regardless of 
the size of the bank, the needs of its customers, or any other 
factor that might benefit our economy or our communities.
    I would submit that the breadth of our markets and the 
strength of competition in our financial services industry has 
served us well and submit that it would be unwise to roll back 
the clock by taking steps to limit competition in this area. 
Thank you very much.
    [The prepared statement of Mr. Douglas can be found on page 
87 of the appendix.]
    The Chairman. Thank you, Mr. Douglas.
    And next, Mr. Marc Lackritz, who is the chief executive 
officer of SIFMA.

    STATEMENT OF MARC E. LACKRITZ, CHIEF EXECUTIVE OFFICER, 
     SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION

    Mr. Lackritz. Thank you, Mr. Chairman. I appreciate the 
opportunity to testify today before the committee, because the 
SIFMA members own a vast majority of the industrial bank assets 
in the United States. And as you know, Mr. Chairman, Congress 
passed Gramm-Leach-Bliley back in 1999 to allow affiliations 
between and among securities firms, banks, and insurance 
companies, combined with functional regulation.
    This ability to structure their operations optimally within 
existing law has really been critical to the success of 
industrial banks and their owners. Many of these companies are 
among the most advanced, sophisticated, and competent providers 
of financial services anywhere. And we support the ability of 
regulated securities firms to continue to own industrial banks 
the way they do under existing law.
    Federally insured industrial banks are subject to State 
banking supervision, FDIC oversight, and all the banking laws 
that govern relevant banking activities. Most importantly, the 
FDIC has the authority to examine the affairs of any affiliate 
of any depository institution, including its parent company.
    The FDIC's regulation of industrial banks has proven safe 
and effective. Industrial banks do not pose any greater safety 
and soundness risks than any other charter types and should not 
be subject to additional constraints beyond those imposed on 
other FDIC insured institutions.
    H.R. 698 would create a new holding company regime for the 
owners of industrial banks by expanding the existing authority 
of the FDIC over the owners of these institutions. Bank and 
thrift holding companies that own industrial banks would be 
exempted from this regime, presumably because they are already 
subject to holding company oversight by the Fed or the Office 
of Thrift Supervision. However, the bill fails to provide an 
exemption for industrial bank owners who are regulated as 
consolidated, supervised entities by the SEC.
    We believe it is critical that H.R. 698 be amended to 
recognize the SEC's CSE regime. The Commission established its 
CSE framework in 2004 in part to allow major securities firms 
doing business in the European Union to comply with its 
financial conglomerates directive. That directive requires that 
non-European firms doing business in Europe demonstrate that 
they are subject to a form of consolidated supervision by their 
home regulator that is equivalent to that required of their 
European counterparts.
    The GAO found in its recently released report on CSEs that 
the Federal Reserve, OTS, and the SEC were generally meeting 
criteria for comprehensive consolidated supervision. We agree 
that the CSE regime is both robust and comprehensive. 
Importantly, the Commission's CSE oversight, just like the 
Federal Reserve's oversight of bank holding companies, meets 
the EU's equivalency standard. In addition, the SEC's 
consolidated regulation standards closely parallel the Fed's 
standards to assess whether a foreign regulatory regime 
qualifies as consolidated regulation for a foreign bank 
operating in the United States.
    We therefore strongly urge the committee, Mr. Chairman, to 
recognize the SEC as a consolidated regulator along with the 
Federal Reserve and the OTS in H.R. 698. The SEC is recognized 
worldwide as a consolidated regulator and its regulatory 
requirements and procedures were very carefully designed to 
comply with all standards for effective consolidated regulation 
in the United States and abroad. That stature should be 
reflected in this bill, in order to ensure that global 
securities firms are not damaged inadvertently.
    Over the last 2 decades, capital markets and the financial 
services industry have become truly global, integrated, and 
interconnected. As capital markets and financial products 
continue to evolve, so too must our Nation's regulatory 
structure. We need a regulatory regime that is capable of 
keeping pace with rapid globalization, technological 
transformations, and dynamic market changes. That is why our 
new board of directors unanimously agreed that we will develop 
a long term strategy of seeking to modernize financial services 
regulation and deal with inconsistencies in the current 
regulatory system.
    We look forward to working with financial market 
participants, regulators, and legislators, and you, Mr. 
Chairman, to ensure that our financial services industry 
retains its preeminent status in the world. Thank you very 
much, Mr. Chairman.
    [The prepared statement of Mr. Lackritz can be found on 
page 138 of the appendix.]
    The Chairman. Thank you. And next is Mr. Thomas Stevens, 
who is the immediate past president of the National Association 
of Realtors.

STATEMENT OF THOMAS M. STEVENS, IMMEDIATE PAST PRESIDENT OF THE 
                NATIONAL ASSOCIATION OF REALTORS

    Mr. Stevens. Thank you, Mr. Chairman, and committee 
members. Thanks for allowing us to do the soft shoe there.
    My name is Tom Stevens. As the 2007 immediate past 
president of the National Association of Realtors, and former 
president of Coldwell Banker Stevens, I am here today on behalf 
of the more than 1.3 million Realtors who work in all fields of 
commercial and residential real estate.
    The National Association of Realtors wholeheartedly 
supports H.R. 698 as it closes a loophole that allows 
commercial companies such as Home Depot to own state-chartered, 
federally insured banks. Perhaps more importantly, the 
Industrial Bank Holding Company Act of 2007 would restore one 
of our Nation's most fundamental economic principles, the 
separation of banking and commerce.
    I also thank Representative Gillmor for his dedication to 
pursuing a legislative solution to this important issue, which 
was raised more than 4 years ago.
    Let me be clear. Realtors have long supported the national 
policy against the mixing of banking and commerce. We oppose 
any efforts to weaken this policy, either by allowing 
commercial firms to engage in banking, or by permitting large 
national banks to engage in commercial activities, such as real 
estate brokerage and management.
    Realtors believe banking and commerce should remain 
separate for three key reasons. First, we strongly believe that 
allowing commercial firms to engage in banking would create 
inherent and irreconcilable conflicts of interest.
    Second, Realtors believe that giving large commercial firms 
the benefits associated with owning a federally insured bank 
would stifle competition in the marketplace. For example, if an 
ILC owned by a commercial firm provided loans on more favorable 
terms to suppliers or customers of its parent, it could put 
other commercial firms at a disadvantage. Likewise, allowing 
national banks to engage in commercial activities such as real 
estate would stifle competition from nonbank firms that do not 
share such benefits.
    Third, we believe that mixing banking and commerce poses 
substantial risks to the financial system. Over the last few 
years, regulators at the Federal Reserve, the OCC, and the FDIC 
have considered giving banks the green light to engage in 
commercial activities. We believe such activities markedly 
increase the risk exposure of national banks and could threaten 
the safety and soundness of the entire banking system.
    Banks should be in the business of banking, not selling 
cars, home improvement supplies, or real estate brokerage. When 
banking activities and commercial activities and commercial 
activities mix, it can be a recipe for disaster, bad for the 
economy, bad for businesses, and bad for consumers.
    Realtors applaud Representative Gillmor and Chairman Frank 
for taking the lead in this important issue. And we urge the 
House Financial Services Committee to pass H.R. 698, the 
Industrial Bank Holding Company Act of 2007.
    We also encourage Congress to pass H.R. 111, the Community 
Choice in Real Estate Act, which would similarly prevent large 
banks from entering the real estate business.
    And I want to thank you for your time and would be more 
than happy to answer any questions.
    [The prepared statement of Mr. Stevens can be found on page 
200 of the appendix.]
    The Chairman. Thank you, Mr. Stevens.
    I am not, myself, going to ask questions. I want to assure 
the panel it is not for lack of interest in what they say. Some 
of us have been working on this for some time. There are newer 
members who have concerns. I think we have had some serious 
conversations.
    So with that, I am going to turn to the gentleman from 
Illinois, Mr. Manzullo.
    Mr. Manzullo. Thank you. I--maybe the arguments here should 
be centered not on safety and soundness which, Mr. Douglas, you 
were talking about and Mr. Ghiglieri, among others. The issue 
here is how big are you going to get before you smash the 
little guys?
    Mr. Ghiglieri, do you want to take a stab at that question? 
Isn't that the issue?
    Mr. Ghiglieri. This is not an issue of competition. We are 
not and never have been afraid of competition. We compete with 
every financial services provider out there, from the big banks 
to the ILCs to credit unions to payday lenders.
    This is really about two issues, and that is maintaining 
the separation of banking and commerce, and providing a 
consolidated regulator at the holding company level for ILCs. 
But it is not about competition; we are not afraid of 
competition.
    Mr. Manzullo. Okay. Some have called this the bank of Wal-
Mart. And some of the bankers that I have talked to have 
expressed a concern that when you get commerce on that level, 
that indeed will hurt competition, or if not competition, the 
ability to discern on the type of loan that should be given. 
Anybody want to take a stab at that?
    Mr. McVicker. It is really not about competition; it is 
about the issue that has been addressed from numerous panelists 
and the concern there is some safety and soundness risk, we 
believe, to the industry and to the FDIC fund.
    What Wal-Mart would be doing if they were approved remains 
to be seen. But our position was the same before Wal-Mart filed 
their application and remains the same after it has been 
withdrawn. And that is the concerns, the safety and soundness 
both of the regulatory system and the deposit insurance fund.
    Mr. Manzullo. Mr. Douglas?
    Mr. Douglas. I would say that if we're concerned about 
threats to the deposit insurance fund, there is certainly no 
evidence that industrial banks pose that threat. And if we look 
historically back the same 20-year period we've been looking at 
for commercial banks, one would say that consolidated 
supervision might pose a greater threat to our safety and 
soundness than an industrial bank.
    Virtually every financial institution that has failed in 
the last 20 years has been subject to consolidated supervision. 
The point is not that the Fed is a bad regulator or that the 
FDIC is a better regulator. The point here with industrial 
banks is that the FDIC and the States with their bank centric 
level of supervision has proven to be a pretty effective way of 
protecting our financial system.
    Mr. Manzullo. Do you agree with that Mr. Ghiglieri?
    Mr. Ghiglieri. Yes. I just think that it is a mistake to 
look backwards at the ILC industry and say that the system is 
necessarily sound because there have been no failures. I think 
we can all shudder to think what would have happened if 
WorldCom or Enron would have had an ILC. Or, going forward, if 
the ILC industry continues to expand like I think all of us 
think would happen. And I think that is where the threat to the 
deposit insurance comes in.
    Mr. Manzullo. Give us the worst possible scenario, if ILCs 
were allowed. I mean, it is obvious that you oppose them. 
Obviously, you oppose them.
    Mr. Ghiglieri. Well, I think you can look at the Japanese 
or the German model. In Japan, I remember as a young banker 
back in the 1970's listening to expert after expert and report 
after report talking about this wonderful Japanese economic 
model in this, you know, incredible Japanese banking model that 
was really built on commercial firms owning banks. It was 
projected to be the greatest economy the world would ever know 
and they were going to come to the United States and buy New 
York City brick-by-brick.
    And as we reflect back on that model, I think we can all 
agree that it has been a complete disaster. They've been stuck 
in a 20-year recession and really have no hope of getting out 
of it. The banking system is, in effect, insolvent. And I 
just--I can't imagine that is the system that we want for this 
industry that I love and am so passionate about.
    Mr. Manzullo. What is the difference between an independent 
bank having a presence in a Wal-Mart store and, for example, 
the Wal-Mart store owning the bank itself?
    Mr. Ghiglieri. In a concept like that, it is--you know, a 
lot of us have members that lease out space in Wal-Mart--it 
doesn't have to be Wal-Mart, it is a grocery store. There are 
all kinds of those operations. But those are just strictly bank 
branches. They lease out space and they sell their products and 
services. So it is much different than those commercial firms 
owning those branches.
    Mr. Manzullo. Mr. Douglas? I am trying to get a fight going 
here, but you guys won't put the gloves on.
    Mr. Douglas. Well, the truth of the matter is, Wal-Mart is 
attempting to meet the needs of its customers, were Wal-Mart to 
do this, the same way a commercial bank is trying to meet the 
needs of its customers, by finding locations where people can 
access products and services in a way that is convenient to 
them.
    One might say that one is better or worse than the other, 
but they are both subject to the same framework of laws and 
regulations. I find no fundamental unfairness or difference 
associated with one over the other.
    Mr. Manzullo. Mr. Lackritz?
    Mr. Lackritz. I would just say that I think the challenge 
you have is, and I think someone said it earlier on the earlier 
panel, that this thing, it is getting big and business is 
getting larger daily and moving at a faster pace. And I think 
the challenge you have is when you have a Wal-Mart that now 
owns a bank and you have conflicting interests, everything is 
great when things are going along well. You know, so was the 
real estate industry last year when things were going along 
well, and now there are challenges. And then the little things, 
subprime lending, those kinds of things start to crop up.
    But when you start to have that major corporation have some 
challenges and conflict, then there is a conflict with its 
subsidiary company or the bank that it owns, and you could have 
diverse decisions being made or decisions being made that 
aren't in the best interests of the bank or the bank's 
customers, versus the consumer of the goods out there.
    So I think it is an inherent conflict that you face.
    Mr. Manzullo. Thank you.
    The Chairman. I am going to recognize Mr. Matheson. I would 
just say that, in response to what Mr. Douglas said, the 
difference to me is in the incentives to which the economic 
entity responds, and that is the question, whether or not the 
incentive is that you make money off the loan and also off the 
product that is going to be bought with the loan and the extent 
to which that is going to alter that decision. That is the 
difference. And obviously, people keep talking about Wal-Mart, 
and it is true that Wal-Mart has withdrawn its application, but 
that does not change our view.
    I would note, however, in legal terms, Wal-Mart has 
withdrawn its application without prejudice. I think it is very 
clear that the reason Wal-Mart withdrew its application is that 
friends of the ILC industry said to Wal-Mart, will you please 
stop screwing up our industry because you are making everybody 
mad and would you go away. And they have withdrawn but they 
have not disappeared. And if we were, in fact, I think, finally 
to announce that there would be no such legislation and no 
moratorium, Wal-Mart would have every right in the world to 
come back in again.
    Mr. Matheson.
    Mr. Matheson. Thank you, Mr. Chairman.
    I just wanted to clear up one issue that came up in the 
subcommittee hearing last year as well, and that was comparing 
the Japanese model to ILC regulation. And I asked the panel of 
regulators in the subcommittee hearing last year if it's 
comparable and they said, no. So it is not exactly the same 
type of regulation. Would you agree with that, Mr. Ghiglieri?
    Mr. Ghiglieri. That may be the case. I mean, I am not a 
regulator.
    One thing that I do take issue with is this concept that 
ILCs and all of the rest of us are regulated the same way. We 
are regulated the same way at the bank level. But we have 
tremendous regulation at the holding company level and for a 
bank our size, it is a tremendous cost.
    Mr. Matheson. I think everyone stipulates to that, that 
there is a different model of regulation. It is called bottom-
up for ILCs; it is top-down for other banks. And again, I don't 
think anybody on this committee disagrees with that. The 
question is, is one right and one wrong, or is there more than 
one right way to do something? And I think you know where I am 
coming from on that.
    But I think it is just important that we note the ILC model 
and the way we regulate in this country, I would not say that 
is the Japanese model. I just think we ought to have that for 
the record.
    You mentioned in your written testimony and your verbal 
comments, Mr. Ghiglieri, imagine if WorldCom and Enron had 
banks. And I would submit that instead of coming up with 
imaginary scenarios that sound pretty bad, let us look at the 
real scenario of when Tyco and Conseco had banks, as Mr. Leary 
mentioned in the previous panel. Are you familiar with that 
experience, where the parent companies had financial 
difficulties, one went into bankruptcy, and in both cases the 
ILC was separated from all those financial troubles? Actually, 
one sold as a premium after the fact?
    Mr. Ghiglieri. Yes.
    Mr. Matheson. Okay, so that's a real world example, 
compared to imagining scenarios. And I think that's important 
to point out, that the bottom-up regulation worked in those 
circumstances.
    Are you familiar with regulations 23A and 23B?
    Mr. Ghiglieri. Yes, I am.
    Mr. Matheson. Because in your testimony where you talk 
about how Home Depot may pressure people and that, do you 
recognize that would be a violation of existing law?
    Mr. Ghiglieri. Correct.
    Mr. Matheson. Okay. I just wanted to confirm that.
    Mr. Ghiglieri. And if I could just add to that? I think it 
is one thing to have a corporate decision that there would be 
no violation of 23A. But, you know, I think when you get down 
to the store level, when you get an entity that has thousands 
of stores, and you have people within those stores who are paid 
on the volume of transactions that are processed, I think it is 
natural, and I am very dubious about the fact that they would 
comply with that. And there has to be someone who complains in 
order to have the issue raised.
    Mr. Matheson. I understand your concern.
    Mr. Ghiglieri. But you do acknowledge that the way you 
describe it would be in violation of law, what is in your 
testimony?
    Mr. Matheson. I want to make sure of that.
    Just one quick observation for Mr. Connelly and Mr. 
Ghiglieri. I have been in this job now for 6 years and 4 months 
and I have had Utah community bankers come and meet with me on 
a periodic basis. Not one has ever mentioned the ILC issue. 
They live in the State where ILCs are based, we have all heard 
that. And they have never expressed concern to me.
    I am sure you can probably find somebody in your membership 
who has written me a letter. That may be. I am just saying, in 
my face-to-face meetings, they are far more concerned about 
issues--and I am not getting into this issue, Mr. Chairman--
they are far more concerned about credit unions and whatnot 
than they are--
    The Chairman. If the gentleman would yield, we are very 
glad to accommodate the gentleman. But to have left the 
committee and then introduce the credit union issue is 
certainly a violation of the norm of--
    Mr. Matheson. That is the benefit of leaving the committee, 
Mr. Chairman.
    The Chairman. The gentleman, I assume, would like to be 
welcomed back?
    Mr. Matheson. I am done. And I just again want to 
reiterate, thank you for your generosity in letting me 
participate today, Mr. Frank.
    The Chairman. I am just going to recognize myself for 1 
minute, just to make a comment on the point we talked about, 
and it has to do with conflict of interest laws. And this is, 
in effect, the distinction between banking and commerce is a 
variant of a conflict of interest law.
    You do not pass conflict of interest laws to prohibit bad 
things. You pass substantive laws to prohibit bad things. The 
reason for laws prohibiting conflict of interest is that you 
want to reduce the number of occasions in which the temptation 
to do those things arises, in which incentives to violate the 
substantive laws are magnified, and in which the difficulty of 
enforcing the substantive law becomes more--greater. In other 
words, conflict of interest laws are to prevent you from--they 
are anti-temptation laws; they are not anti-act laws.
    Now that may or may not be right in this case, but that is 
the framework. So the fact that there are substantive laws that 
prevent things doesn't, in a number of other areas, tell us not 
to pass laws that diminish the incentive and opportunity for 
those things to happen.
    I thank the panel, I thank the members, and the hearing is 
concluded.
    [Whereupon, at 12:46 p.m., the hearing was adjourned.]
                            A P P E N D I X



                             April 25, 2007



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