A central plank of the Obama administration’s proposed financial overhaul — creating a single regulator to oversee diverse financial institutions — has pitted traditional banks against retailers and other commercial entities, which argue the regulations will hurt them.
Regulation critics object that companies such as Target could be forced by Obama’s proposals to eliminate their industrial loan companies, the financial institutions behind many store credit cards.
Target is resisting the push to regulate ILCs the same as ordinary banks, and the company has said it would “oppose any proposal that would eliminate our ability to operate our banks.”
While similar to a traditional bank in taking Federal Deposit Insurance Corp.-insured deposits, ILCs are not subject to the Bank Holding Company Act of 1956 with its stricter capitalization requirements and regulations. ILCs are also exempt from federal prohibitions on commercial ownership of banks. Only a handful of states offer an ILC charter, and they have become an important part of business for corporations that use them.
Traditional banks and Wall Street firms, on the other hand, have long lobbied for a consolidated regulatory structure, and they support this aspect of the Obama administration’s proposed reforms.
“The events of the last 18 months have made clear that we need systemic regulatory reform to fill the gaps in the system,” said Travis Larson of the Securities Industry and Financial Markets Association, while withholding comment directly on ILCs. “Some financial institutions, it seems, have made efforts to game the system and take advantage of these gaps. Broadly speaking, consolidation of regulatory agencies is appropriate.”
ILC defenders, such as Sen. Bob Bennett, R-Utah, argue that ILCs did not play any role in the financial meltdown and do not need new regulation. “The Obama financial overhaul plan would eliminate ILCs and therefore shut down a source of credit during a time when our country faces a credit crunch,” said a spokeswoman for Bennett, whose state charters many ILCs.
Businesses could have to sell or spin off their ILCs if the proposed regulations pass. Regulation supporters argue consumers will not see a difference. It will, however, pinch the profit margins of the ILCs such as GE Capital.
Breaking up commercial-owned ILCs has long been a lobbying priority of traditional banks. In 2007, the American Banking Association lobbied in support of a bill sponsored by Rep. Barney Frank, D-Mass., that would have limited commercial ownership of ILCs.
