The Banking System Could Use a “Threat” Like Wal-Mart

Hide the women and children — Wal-Mart wants its own bank.
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Looks like a number of Congressman have their knickers in a knot over the idea that (the greedy, evil, exploitive, freeloading — pick your adjective) Wal-Mart is trying to get into the banking business:

A group of lawmakers on Friday said an industrial bank owned by Wal-Mart, the world’s largest retailer, could threaten the stability of the U.S. financial system and drive community banks out of business.

In a highly critical letter to the acting chairman of the Federal Deposit Insurance Corp., obtained by Reuters, a group of more than 30 Congress members asked the bank regulator to reject Wal-Mart’s application to open a bank in Utah.

“Wal-Mart’s plan, to have its bank process hundreds of billions in transactions for its own stores, could threaten the stability of the nation’s payments system,” the lawmakers wrote.

“Given Wal-Mart’s massive scope and international dealings, it is not possible to rule out a financial crisis within the company that could damage the bank and severely disrupt the flow of payments throughout the financial system.”

The congressmen said the losses to the FDIC, which insures deposits at banks and thrift institutions, could be staggering if Wal-Mart begins to have financial troubles that bleed into its bank’s business.

“Consider the consequences if Enron or WorldCom had owned a bank,” the group said.

The group included Ohio Democrats Rep. Stephanie Tubbs Jones and Rep. Tim Ryan, Hawaii Democrat Rep. Neil Abercrombie and California Democrat Rep. Loretta Sanchez. A complete list of signatures was not immediately available.

The representatives are acting as if Wal-Mart is the first retailer to set up its own bank, and as if there would be no separation between retail and banking operations.

Far from it. Retailers have had their own banking and financial services operations for years. Target has its own financial services operation, as do most of the other major retailers. I have yet to hear concerns that problems at Target, a very large operation, might “disrupt” things. These financial services operations all have to comply with state and/or federal capital maintenance requirements.

Is their objection to Wal-Mart’s size? I have yet to hear any legislators demand that Ford, GM, or Toyota, all of which are big, and the first two of which are facing dire financial challenges, spin off their banking and credit operations (although Ford and GM may do so, it won’t be because of regulatory pressure).

Some of the tiniest retailers have their own banking and credit operations. In fact, here in Greater Cincinnati, Spirit of America National Bank, a captive bank owned by Charming Shoppes, which runs the Fashion Bug chain of women’s clothing stores, primarily handles customers who carry the store’s own credit card, and has quietly operated without visible incident for almost 15 years.

If a small outfit like Charming Shoppes can run its own bank, what in the world makes these illustrious legislators think that Wal-Mart can’t?

If the hidden fear is that over the long haul a “Wal-Mart Bank” might spread its wings and start competing with the big banks, what would be wrong with that? Maybe by entering the fray, an aggressive “lowest price always” bank owned by Wal-Mart might bring down some of the outrageous “mistake” fees, like those assessed for late payments, going over the credit limit, or having a one-time bank overdraft. Consumers would welcome “threats” like these.

From here, the effort to keep Wal-Mart out of the banking business looks like an attempt to pile on while the company’s reputation is under a relentless assault in a number of unrelated areas. I see no defensible reason to oppose Wal-Mart’s entry, and would in fact welcome it.
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UPDATE: And speaking of “big,” and the possibility of a “financial crisis” — It would be interesting to see where these illustrious representatives who signed the letter stand on reducing the mammoth mortgage portfolios of Fannie Mae and Freddie Mac that expose taxpayers to huge financial risk.