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Bernanke frets over industrial bank 'loophole'

A “loophole” that allows commercial firms to buy industrial banks undercuts efforts to keep banking and commerce separate and should be closed, Federal Reserve Chairman Ben Bernanke said Wednesday.
BERNANKE
Federal Reserve Chairman Ben Bernanke speaks to the Independent Community Bankers of America convention in Las Vegas Wednesday.Jae C. Hong / AP
/ Source: Reuters

A “loophole” that allows commercial firms to buy industrial banks undercuts efforts to keep banking and commerce separate and should be closed, Federal Reserve Chairman Ben Bernanke said Wednesday.

Bernanke told the Independent Community Bankers of America that the growth of industrial loan companies raised some “very significant public policy issues” that the central bank would like to see addressed.

“If Congress wants to revisit banking and commerce, that’s their prerogative, but it doesn’t seem to be a good approach to allow a loophole to be the way in which that distinction breaks down,” he said in answer to a question at the group's annual conference.

Industrial banks are state-chartered and state-regulated and fall under the supervision of the Federal Deposit Insurance Corp. Commercial companies may own them because federal laws that bar non-financial companies from engaging in banking activities do not classify them as banks.

Wal-Mart, the world’s largest retailer, has applied to open an industrial bank in Utah, an application that faces opposition from some lawmakers.

The Fed chief said there was a question of “equity and parity” in the current regulatory framework, which subjects bank holding companies to greater scrutiny than commercial firms that own industrial banks.

“It would be a good idea to move toward policies that eliminate that problem and make sure that, if there is ownership of an ILC, that there be consolidated supervision so that the owner, as well as the ILC itself, fall under the ... supervisory requirements that other owners of banks face,” Bernanke said.

Bernanke’s comments expanded on remarks he made in congressional testimony last month in which he declined to comment directly on the Wal-Mart bid.

He noted that Fed Gov. Donald Kohn had testified to Congress on the issue March 1 and added: “We hope that Congress will listen.”

His remarks were well received by the banking group.

In only his second public foray outside of Washington since taking office Feb. 1, Bernanke offered no comments on the outlook for the U.S. economy or interest-rate policy.

Instead, he used his formal remarks to reiterate concerns U.S. bank regulators have on commercial real estate lending.

Bernanke said community banks should improve their risk-management practices given their growing reliance on commercial real estate lending and some erosion in standards for those loans.

“The rapid growth in commercial real estate exposures relative to capital and assets raises the possibility that risk-management practices in community banks may not have kept pace,” he said.

He also raised a flag over a “small number” of institutions with concentrations in longer-term assets.

“In these cases, our examiners encourage banks to gauge risks of new yield-enhancing strategies over the intermediate and longer-terms,” Bernanke said.

While he focused his remarks on areas in which regulators had concerns, Bernanke said that for the most part U.S. community banks were in good shape and had handled a rising interest rate environment well.