Dugan sees about-face if FDIC denys ILC bids

By John Poirier

WASHINGTON (Reuters) - Blocking commercial companies such as world's largest retailer Wal-Mart Stores Inc. (WMT.N: Quote, Profile, Research, Stock Buzz) from owning their own banks under certain regulatory conditions would be an about-face, Comptroller of the Currency John Dugan told Reuters on Wednesday.

Several companies, including Wal-Mart and retailer Home Depot Inc. (HD.N: Quote, Profile, Research, Stock Buzz), have asked the government for permission to own banks under a legal structure known as an industrial loan company, or ILC. The Federal Deposit Insurance Corp., insurer of state-registered banks, is reviewing the applications.

"The FDIC has a long history of approving commercial firms owning these industrial loan companies," Dugan said at the Reuters Regulation Summit in Washington.

"And it would be a 180-degree change to stop doing that," said Dugan, one of five FDIC board members, who added that there has not been a record of safety and soundness issues concerning the existence of ILC banks.

The issue has created a firestorm within the banking industry, which opposes allowing retailers to enter the banking business because, they argue, it could strain the deposit insurance system and kill competition among community banks.

The FDIC in the meantime has imposed a six-month freeze on applications for such banks. That moratorium ends January 31, when Dugan said the FDIC is scheduled to meet to rule on the matter.

Dugan said the board members are likely to address a request from U.S. House lawmakers, including House Financial Services Committee Chairman Barney Frank, who want the moratorium extended so they can act legislatively.

FDIC Chairman Sheila Bair told Reuters that Congress is likely to get involved in the ILC matter anyway, no matter how the FDIC board votes in January.

"We haven't made a decision on ILCs. Whatever we do I think there's going to be a lot of congressional activity. There's a lot of interest in it," Bair said at the Reuters Summit.

U.S. banking laws traditionally wall off banking and commerce. But an exception allows nonfinancial firms to own ILCs, which are state-chartered and regulated by the FDIC. Many existing ILCs are chartered in Utah.

In existence since the early 1900s, ILCs have grown over the past two decades, with assets up to $155 billion in 2006 from $11.5 billion in 1995 and $4.2 billion in 1987.

Small and medium-sized banks fear competition from powerful retailers like Wal-Mart, which has said it has no plans to open branches. Rather, Wal-Mart says it wants a bank so that it can save money by internalizing credit card and check transactions -- a service it now pays third parties for.

Experts say big banks stand to lose money if Wal-Mart stops paying third parties to conduct such transactions and if Home Depot provides direct loans for home improvement projects.

Last year Wal-Mart got approval from Mexican authorities to launch its bank in the second half of 2007 and its services will be available to customers in all of its Mexican stores.