TAILIEUCHUNG - Industrial Loan Companies: A Growing Industry Sparks a Public Policy Debate

Japan is well behind other countries in addressing this need for change. The United States and Canada abolished their postal savings systems over thirty years ago, New Zealand and a number of European countries have privatized theirs starting in the 1980s and most other European countries have taken at least some steps to privatize or streamline their postal banks in recent years. Being a laggard gives Japan the advantage of relevant experience that it can use to inform its own future choices, but so far the discussion of Japanese postal savings reform has made little reference to foreign examples | Industrial Loan Companies A Growing Industry Sparks a Public Policy Debate By Kenneth Spong and Eric Robbins Industrial loan companies or ILCs are a small but rapidly growing part of the financial industry. These state-chartered institutions operate in seven states and have nearly all of the same powers as commercial banks. However ILCs differ greatly from banks in one characteristic the type of companies that may own them. ILCs meeting certain conditions may be owned and operated by firms engaged in commercial activities thus skirting the prohibitions on mixing banking and commerce that apply to virtually all other depository institutions. Commercial ownership is now a prominent topic in banking with Wal-Mart s recent attempt to open an ILC and Home Depot s efforts to acquire an existing ILC. At the center of this controversy are such questions as whether commercial firms retailers manufacturers and others should be allowed to use ILCs to get into banking and what would be the public policy implications of such entry. Those opposing the Wal-Mart and Home Depot proposals for instance contend that ILCs owned by commercial entities would face significant conflicts of interest. Such ILCs it is argued would have strong incentives to lend to customers of the parent company on a Kenneth Spong is a senior policy economist at the Federal Reserve Bank of Kansas City. Eric Robbins is a policy economist at the bank. This article is on the bank s website at . 41 42 FEDERAL RESERVE BANK OF KANSAS CITY favorable basis and without due regard for standards of creditworthiness. These conflicts might thus be resolved to the detriment of the ILC its customers or the deposit insurance system and other elements of the federal safety net. Another common argument is that Wal-Mart and others might be able to exploit their size and existing customer relationships in a manner that would give them a dominant role in banking markets thereby reducing financial competition.

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