Bankers press Senate panel for ILC restrictions

Northwestern Financial Review, Nov 1-Nov 14, 2007

Bankers urged a U.S. Senate panel to maintain the historic separation of banking and commerce by passing legislation that would restrict commercial firms' ownership of industrial loan companies.

The Senate Banking, Housing and Urban Affairs Committee heard testimony on Oct. 4 in Washington, D.C., by banking industry representatives and a Federal Reserve Board official calling on senators to close a loophole in federal banking law that allows commercial companies to own ILCs.

Many financial services groups want to see Congress pass restrictive ILC legislation before a Federal Deposit Insurance Corp. moratorium on ILC applications expires Jan. 31.

"The ILC loophole threatens our nation's historic separation of banking and commerce, weakens our local communities and undermines our system of holding company supervision," said James P. Ghilieri Jr., chairman of the Independent Community Bankers of America and president of Alpha Financial Group of Toluca, Ill.

Scott G. Alvarez, Federal Reserve Board general counsel, told the committee closing the ILC loophole would require companies acquiring an ILC after a specific date to operate under "the same activity restrictions, regulatory requirements and supervisory framework that apply to the corporate owners of other insured banks."

"This approach builds on and utilizes the existing regulatory and supervisory framework that Congress has established, and repeatedly reaffirmed, for corporate owners of banks and creates a level playing field for all firms that acquire an insured bank in the future," Alvarez said.

American Bankers Association President Ed Yingling testified that recent economic troubles in Japan, where commercial companies were closely affiliated with banks, showed the dangers of such close ties.

"By placing relationships ahead of sound business practices that rely on credit risk analysis, Japanese banks engaged in lending policies that resulted in bank failures and massive loan charge-offs," he said. "For Japanese banks, the consequences have been severe. Consider that in 1989, all of the top 10 largest global banks were head-quartered in Japan. In 2006, only two Japanese banks were on that list."

Yingling also told the committee the ILC industry has grown to $225 billion in assets today compared to $43 billion in 1999, when the Gramm-Leach-Bliley Act stopped commercial firms from using a unitary thrift charter to engage in banking activities.

"Clearly with the closure of one avenue into the banking world, nonfinancial commercial entities rushed to exploit another," Yingling said. "It is fair to assume that Congress did not anticipate that the ILC exemption would be used for that purpose."

The Fed's Alvarez said a limited number of existing ILCs should be "grandfathered" in any new law so those firms could continue engaging in activities not allowed for bank holding companies.

"This type of coordinated and comprehensive solution, closing the loophole and grandfathering existing owners, is precisely the type of approach that Congress took in 1970, 1987 and 1999 in closing previous exceptions in the banking laws that were undermining the separation of banking and commerce and other important policy objectives," Alvarez said. "It is the right approach to fix the ILC loophole."