Lawmakers: Wal-Mart Bank a Threat

A group of lawmakers on Friday said an industrial bank owned by Wal-Mart (WMT), 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.

Wal-Mart is trying to open an industrial bank to handle electronic payment processing.

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

But as "industrial loan companies" owned by non-financial companies, they escape a level of federal bank regulation.

Wal-Mart's application has attracted heightened attention in Washington from some members of Congress, consumer groups and banks that fear competing with the retail giant.

Some lobbyists and analysts, however, say the opposition is not surprising, given's Wal-Mart's size and the criticism it regularly receives from labor unions and other groups. Those sources say that if the FDIC follows statute, there is little reason why Wal-Mart's application should be denied when rival Target Corp. (TGT) succeeded.

The Wal-Mart bid generated a record number of public comments and calls from Capitol Hill for the regulator to slow down its review. The FDIC, under Acting Chairman Martin Gruenberg, has agreed to hold public hearings on the application — the agency's first formal public hearings on a bank application ever.

Wal-Mart has said it welcomes the public hearings.

Some groups, particularly banks, fear Wal-Mart will use its industrial bank as a base to offer a wider array of services in its branches.

Others who oppose Wal-Mart's application say the bank would violate the historic separation in the United States between banks and enterprises that do not engage primarily in finance. Still, other corporations have already set up industrial banks, such as General Electric (GE) and General Motors (GM).