As you may be aware, Wal-Mart wants to get into the banking business. They also want FDIC deposit insurance.

Rep. Barney Frank, Ranking Member of the House Committee on Financial Services, isn't a fan of the idea. In a recent letter to the FDIC Chairman (PDF format) Rep. Frank asked the FDIC to not approve any more "industrial loan company" applications for companies that derive less than 85% of their revenues from financial activities, saying:

I believe that this is necessary because of the importance of keeping the separation of banking and commerce, including industrial, commercial and retail activities.

Rep. Frank also notes that such applications are not consistent with FDIC regulations regarding adequacy of capital structure, risk to the FDIC insurance fund, and the proposed institution's corporate powers.

The Independent Community Banker's Association strongly opposes Wal-Mart's entry into the banking industry. In this summary of their testimony (PDF format) before the FDIC, the ICBA says:

Allowing Wal-Mart to own a bank would:

  • Jeopardize the stability of the payments system by providing Wal-Mart with the capability to exert undue influence over the payments system.
  • Raise safety and soundness concerns and pose a threat to the bank insurance fund and the banking system.
  • Irreversibly change the fundamental structure of the American financial system by allowing the world's largest corporation to violate our nation's long-standing policy against the mixing of banking and commerce.
  • Threaten to destabilize local communities through disinvestment, disintermediation and market domination.

Their testimony concludes:

In addition, the FDIC Board should weigh carefully whether the character and fitness of Wal-Mart's management is adequate to ensure the safe and sound operation of a financial institution under its control. Wal-Mart is one of the most frequently sued companies in history - reportedly, 4,851 times in 2000 alone. A group of investors stated that they were "deeply concerned about contingent liabilities and negative effects on the company's stock price and reputation." The investors added the frequency of "non-compliance with internal standards, as well as with laws and regulation, may be far too commonplace at Wal-Mart."

Conclusion. The application by Wal-Mart Bank for federal deposit insurance coverage fails to satisfy all the factors the FDIC Board must consider in evaluating the application. Therefore, the application should be denied. Moreover, there is a viable alternative to a Wal-Mart Bank, and that is partnering with local banks that lease space and operate branches within their stores. There is no clear public policy justification or increased social benefit to local businesses and consumers in allowing Wal-Mart to control banking establishments.

It's not every day that you hear bankers arguing for "social beneift." But community bankers are understandably concerned about Wal-Mart moving in on their turf, especially in smaller towns. Similar to how some locally owned and operated companies are run out of business when Wal-Mart comes to town, community bankers are worried the same thing could happen to them.

Unlike mom-and-pop hardware and sporting goods stores, though, this time Wal-Mart has picked a fight with a powerful and well-organized American institution in a highly regulated industry. It will be interesting to see how they fare.