Banks ‘R’ Us

Nevada law permits some banks to operate without federal regulation —and Greenspan wants it stopped

Motorcycle corporation Harley-Davidson operates this Carson City bank. It is  regulated mostly under state, not federal, law.

Motorcycle corporation Harley-Davidson operates this Carson City bank. It is regulated mostly under state, not federal, law.

Photo By David Robert

Laws in Nevada and a few other states that allow corporate giants to go into banking while escaping federal regulation are a target of concern in Washington, D.C.

Nevada, Utah, Colorado and California have loose financial services laws permitting state-chartered and state-regulated banks owned by non-banking companies. They are called industrial loan corporations (ILC), and critics say they put depositors—and eventually taxpayers—at risk.

Keeping commerce and banking apart has been a national economic policy since the 1930s, when it was put in place as protection against business activities that helped trigger the Great Depression. The state laws allow retail businesses like Toyota and Harley-Davidson to get around that policy.

Wal-Mart has already applied to operate as a banker in Utah. General Electric is also planning to move into banking, and so are stock brokerage firms.

U.S. Rep. Jim Leach, an Iowa Republican who chairs the House banking committee, has introduced legislation to subject ILCs to Federal Reserve regulation. He said the measure is intended “to protect taxpayers from unwarranted risk, to hold the line separating commerce and banking, and to preserve competitive equity in financial services.”

Wal-Mart argues that operating without its own bank is burdensome because of its large traffic in debit, credit and cash transactions. Opponents say the behemoth corporation will never be satisfied to restrict its activities to that, in spite of its current pledges, and eventually would move into other financial fields. That could one day put smaller businesses in the position of seeking a loan from their competitor.

Leach said, “Without these safeguards, it may be impossible for problems to be identified and managed in time to prevent deficiencies and damage to the federal safety net.”

Federal Reserve Board chair Alan Greenspan wrote a letter to Leach on Jan. 27 supporting the legislation. (Greenspan retired on Jan. 31 after 18 years as chairman of the Reserve.)

“These are crucial decisions that should be made in the public interest after full deliberation by the Congress,” Greenspan said in the letter. “They should not be made through the expansion and exploitation of a loophole that is available to only one type of institution chartered by a handful of states.”

The Nevada Legislature considered a measure in 2003 to deal with the matter at the state level. At the time, Toyota was applying in Nevada for an ILC. Assembly Bill 389 was introduced by Clark County Assemblymember Jerry Claborn. He said, “It closes a loophole on our state law, which allows the mixing of banking and commerce. It brings our state law into conformity with the federal law.” The measure would have prevented anyone whose principal business was not banking from owning a thrift institution (ILCs are governed in Nevada under state thrift law).

In a committee hearing on the bill, Independent Community Bankers of America lobbyist Craig Hudson said, “This is a national issue that you will be deciding, and the eyes of the nation are [watching] as you make this decision. The historic issue that you will decide is whether you are going to allow the hundred-billion-dollar Toyota Corporation, a commercial firm, [to] slip through a loophole in the law and buy an industrial loan bank and thereby breach the wall that has been long established in this country between banking and commerce.

“This wall has been in place since the Great Depression. It is in place to protect depositors’ money. Or, are you going to vote for A.B. 389 and close this loophole in the law, which will preserve the safety and soundness of our diverse national banking system? It will bring your state law into conformity with federal law. … Would Toyota’s bank make a loan to a person buying a Chevrolet or Buick? That is the kind of conflict of interest that we would like to avoid.”

Lobbyist Donal Hummer, representing Harley-Davidson Financial Services, Nevada Thrift, and Eaglemark Savings Bank, disagreed.

“The major misconception is that thrifts hurt community banks. That statement could not be farther from the truth. Harley-Davidson Financial Services makes 99.95 percent of its revenue from loans outside the state of Nevada. This means that the money we pay in salaries and benefits to Nevadans is from income imported into this state. Last year alone, HDFS paid in salaries and benefits to those constituents, just in Carson City, $19.96 million. HDFS, like so many other thrifts, is not in competition with community banks at all, and it never will be.”

Hummer’s firm, Harley-Davidson Financial Services, was the subject of an amendment to the bill that protected existing firms from the bill’s provisions. HDFS, headquartered in Chicago, has major offices in Carson City and Plano, Texas. This makes it unusual among firms registered in Nevada, most of which are technically Nevada corporations but operate elsewhere—a fact Hummer used in making his case to the lawmakers.

Labor union lobbyist and former legislator Danny Thompson tried to focus legislators’ thoughts on the mammoth power that would be created by allowing conglomerates to combine their commercial influence with raw economic muscle.

“Imagine if Enron had bought a bank, and they were able to reach across that fence and drag those depositors’ monies into their venture and spend it. Believe me, based on everything that happened with Enron, I believe that they would have done that. This loophole has to be closed. … Last year in California, Wal-Mart tried to purchase one of these banks because they want to get into the banking business for a lot of reasons. … Did you know that Wal-Mart, last year, had more sales than the top three American financial corporations, CitiGroup, American National Group, and Bank of America combined? Do you really want a company like that in the banking business?”

Nevada banking commissioner Scott Walshaw took no position on the issue. The bill failed to pass.

Hummer’s firm, Harley-Davidson, is relatively small, which limits its impact on the economy. That would not be true of firms like Wal-Mart, but even they aren’t any kind of threat to consumers, Hummer believes. He said this week that, because Wal-Mart has committed itself to a limited model of banking, the huge retailer would always stay within that model, particularly since Wal-Mart has long-term contracts allowing other banks to operate inside its stores.

“I just don’t see the threat, especially if you look at their past history on how they have partnered with community and independent banks.”

A year after state legislators killed the Nevada bill, federal auditors swept through Nevada investigating thrifts at Leach’s request. Among the institutions the General Accounting Office agents examined were Toyota Financial, Beal Savings Bank, USAA Savings Bank and Harley Davidson’s Eaglemark Bank.