Why Not a Wal-Mart Bank?
Seems like every business these days is becoming what’s called a “bank holding company” — seeking the shelter of the federal government’s deposit insurance and the ability to balance risks with more diversified lending and consumer deposits. Firms quickly granted “bank holding company” approval from authorities over the past few months range from the brokerages Goldman Sachs and Morgan Stanley to credit card company American Express.
So many businesses are suddenly getting BHC approval that columnist and blogger Michelle Malkin has joked: “MichelleMalkin.com is no longer a blog. I am putting in an application to the Fed to become a bank holding company, too.”
But ironically, many barriers still exist to legitimate retailers starting their own banking operations. Ever since Wal-Mart Stores Inc. filed an application a few years back seeking approval to form a limited banking facility to process its own credit and debit card transactions, the anti-Wal-Mart forces and much of the established banking industry led a revolt against not just Wal-Mart but any retailer forming its own bank.
House Financial Services Committee Chairman Barney Frank sponsored a bill that would have curtailed the abiility of retailers to form industrial loan corporations (ILCs), specialized banks that had existed in the retail industry since the ’80s. The bill didn’t clear Congress but in reaction, The Federal Deposit Insurance corporation put a moratorium on new and pending ILC application for more than a year, and has been slow-walking ILC approvals ever since. Wal-Mart withdrew its application in 2007.
But the recent financial upheaval and lingering recession have thrown many of the arguments against a Wal-Mart bank — even a full-service one — out the window. In fact in his column today in the financial forum Minyanville, Jordan Stein predicts that “by 2018, we’ll be banking at Wal-Mart (WMT), investing with Wal-Mart financial advisors, and applying to Wal-Mart for our mortgages.”
There have been two main arguments against a Wal-Mart bank. One is that allowing retailers like Wal-Mart to have their own banking operations would greatly add systemic risk to the deposit insurance fund and financial system in general. The other is that allowing Wal-Mart to get into banking would mean ruinous competition for Mom-and-Pop community banks.
Let’s look at these arguments in the context of the financial crisis. It’s now kind of hard to argue that a Wal-Mart bank would add any significant systemic risk to the banking system, given the incredibly stupid risks that many of the biggest established banks have taken.
Wal-Mart, by contrast, looks like an especially prudent company. Not only are consumers flocking there for bargains, but so are investors, as the company’s stock price hasn’t tumbled nearly as much as other firms of its size. (Full disclosure, like millions of other Americans, I shop at Wal-Mart and also own shares of its stock). As Stein writes in Minyanville, “as we enter the Age of Austerity, where prudent spending replaces conspicuous consumption, Wal-Mart’s latest slogan — ‘Save money. Live better.’ — will be adopted in practice by vast swaths of the population.”
As an industrial loan corporation, Wal-Mart would be covered by deposit insurance, and the deposit insurance system, as CEI has long argued, needs overall reform. But retailer-owned banks would be paying premiums that would shore up the insurance fund and, according to experts, would not be adding any significant risk.
As American Enterprise Institute scholar Peter Wallison has written: “If there is any risk to a bank’s solvency, it is greater when a bank is affiliated with a securities firm–a permitted affiliation under GLBA [the Gramm-Leach-Bliley Act passed in 1999]–than when it is affiliated with nonfinancial firms such as retailers or manufacturers. … They are subject to the risk of loss, of course, but in the absence of fraud, they are not subject to the kinds of quick implosions that occur in the financial industry when there is a loss of market confidence.”
As for the populist argument, would allowing a Wal-Mart bank any more of a threat to community banks than allowing Wall Street behemoths Goldman and Morgan to open branches and take deposits, as the Federal Reserve recently did when it granted them BHC status? And the most important populist argument for policy makers should be the consumers and small businesses that would benefit from the choice and competition in banks for their saving and borrowing.
As MSN money coumnist Liz Pulliam Weston wrote a few years back: “Imagine for a moment if the world’s biggest retailer put the pricing squeeze on one of the world’s more profitable businesses: financial services. Who would pay the price? Perhaps: Mortgage lenders who surprise their borrowers with last-minute junk fees. Banks that nickel and dime their small account holders to death.”
Over the years, CEI certainly hasn’t been crazy about everything Wal-Mart has done, particularly some of its so-called green initiaives. But there’s no doubt that a Wal-Mart bank would make the open market that much more “open.”