America's Community Bankers Urges FDIC to Disapprove Wal-Mart Application

America’s Community Bankers urged the FDIC at an agency hearing today to disapprove the application of Wal-Mart Bank for FDIC deposit insurance at this time.

Kenneth J. Redding, a member of ACB’s Government Affairs Steering Committee, said ACB’s opposition is based on congressional concerns, the threat to the viability of community banks, the negative impact on local businesses and the risks to the payments system and the federal deposit insurance fund. Redding is also president and CEO, UniBank for Savings, Whitinsville, Mass.

“The FDIC should not act until Congress fully considers the issue,” Redding said. Now-pending legislative restrictions on ILCs similar to those imposed on commercial companies in 1999 clearly indicate that Congress recognizes public policy concerns, he said.

Wal-Mart’s application lays the groundwork for Wal-Mart Bank to expand into full retail banking without additional regulatory approval, thereby “further threatening the viability of community banks,” Redding said.

He said Wal-Mart’s move to withdraw its request for an exemption from the requirements of the Community Reinvestment Act “strongly suggests an intended retail strategy that would pit Wal-Mart Bank against thousands of community banks, magnifying all of the inherent conflict of interest, competitive advantage and systemic risk concerns that we raise today.”

“If the Wal-Mart Bank expands unchecked,” Redding said, “the competitive advantages of the company will diminish competition in markets now served by community banks, thereby leaving local businesses that compete commercially with Wal-Mart with no community based banking alternative.”

Redding also said the leased-space agreements that hundreds of community banks have with Wal-Mart could be jeopardized. “These community banks’ business strategy is clearly at risk if their branches inside Wal-Mart were eventually displaced by Wal-Mart banks,” he added.

“We believe that the size and concentration of a Wal-Mart Bank in the payments system, and deposit insurance fund more generally, present serious questions of systemic risk,” Redding added.

As an example, he said that Wal-Mart Bank’s intent to process billions of credit and debit card transactions originated at Wal-Mart stores would make it challenging, and potentially impossible, to ensure effective firewalls against financial problems in the commercial stores spreading to the Wal-Mart Bank.

“With hundreds of billions of dollars passing through the Wal-Mart bank system, the risk of disruption stemming from financial problems at Wal-Mart would be great,” he added.

Redding recognized that the FDIC is a “strong, effective and diligent regulator,” but allowing Wal-Mart to operate outside of statutory requirements carefully crafted for other institutions “is a risk in and of itself due to the extraordinary size of the company.”

“This is a risk that the FDIC should avoid at all costs,” he emphasized.

The size of deposits generated by Wal-Mart would also pose a threat of dilution of the deposit insurance fund. “This so-called ‘free-rider’ problem cannot be permitted to continue, particularly with the size and scope of Wal- Mart’s operations,” Redding said.