November 21, 2003

IS WAL-MART A BANK YET?

A new twist in Wal-Mart's interest in entering the banking arena surfaced this week with a news report that the world's largest retailer is piloting a program with a national bank to feature "Wal-Mart Money Centers" in 16 of its stores in Tennessee and Georgia. The American Banker reported Tuesday that Wal-Mart, through new signage and a Wal-Mart Money Center website, will be marketing an array of financial services using the Wal-Mart Money Center brand, referring to the Money Center as a division of the national bank it's partnering with in this pilot program. According to the article, the Office of the Comptroller of the Currency issued a "nonobjection" letter to allow for the signage.

The Conference of State Bank Supervisors has been lambasted in the past by industry groups that are staunchly opposed to Wal-Mart getting into the banking business. In particular, critics believe that Wal-Mart, which is precluded from acquiring a commercial bank charter, could enter banking by obtaining an industrial loan company (ILC) charter from one of the states that allow for the ILC charter.

CSBS President and CEO Neil Milner says the industry groups have misconstrued the CSBS position as being in favor of Wal-Mart using the ILC charter as a way to set up retail banking operations nationwide to the detriment of local banks.

"Nothing could be further from the truth," Milner said. "We are very sensitive to the competitive pressures that would come about if Wal-Mart acquired a commercial bank, and we have a long tradition of supporting community banking."

Milner noted, however, that the lines of distinction between banking and commerce have continued to blur, as banks and nonbank financial service providers have entered into agency and marketing arrangements with commercial firms. Wal-Mart already offers store credit cards, international money transfers, money orders, ATMs, etc., and the company reportedly rents space for some 800 in-store bank branches, operated by both national and state-chartered banks. But until now, the banks' signage was predominant, and customers were not confused about who was operating the branch.

Milner questioned whether it was appropriate to allow Wal-Mart to use signage implying that the in-store bank branch was a Wal-Mart operation and whether the OCC should have allowed for the national bank's role to be deemphasized through the use of small type in contrast to the size of the lettering referencing Wal-Mart Money Center.

It brings to mind the old "if it walks like a duck, quacks like a duck" argument. Pretty soon, people will think it's a duck. Will people think that Wal-Mart is also a bank?

SENATE BANKING COMMITTEE APPROVES TOM CURRY FOR FDIC BOARD

This just in: The Senate Banking Committee this morning approved the nomination of Thomas J. Curry to serve on the Federal Deposit Insurance Corporation's board of directors. The nomination now goes to the full Senate for a vote before becoming official. It is expected that Curry's nomination will go before the Senate on its consent calendar, clearing the way for a potential vote on the Senate Floor before they adjourn for the year. President George W. Bush nominated Curry for the position on June 12. Curry currently serves as Massachusetts Commissioner of Banks and was chairman of the Conference of State Bank Supervisors in 2000-2001. If confirmed, Curry's appointment will run for a full six years from the time of his confirmation.

HOUSE OKAYS MUTUAL FUND REFORM BILL; STATE ROLE LAUDED DURING DEBATE

The House approved a mutual fund reform bill on Wednesday by a vote of 418-2. The legislation (H.R. 2420) is sponsored by Rep. Richard Baker (R-La.) and would increase the transparency of fund fees and costs, strengthen corporate governance and management integrity, and help prevent trading fraud.

Some of the provisions in the bill include disclosing soft dollar arrangements, requiring funds to disclose their portfolio manager compensation, requiring two-thirds of all board directors to be independent, banning short-term trading by insiders, and prohibiting a single person from managing both mutual funds and hedge funds. Read more...

Meanwhile, the Senate Banking Committee held two days of hearings this week to review current investigations and regulatory actions regarding the mutual fund industry. Committee Chairman Richard Shelby (R-Ala.) said the questionable funding practices that have surfaced in the mutual fund industry appear not to be the result of a few bad apples, "but are long-standing industry practices that have largely gone unregulated and are not well disclosed to, or understood by, most investors." The committee heard testimony from SEC Chairman William H. Donaldson, Investment Company Institute President Matthew P. Fink and Securities Industry Association President Marc Lackritz, National Association of Securities Dealers Chairman and CEO Robert Glauber, and SEC Director of Enforcement Stephen M. Cutler, and New York Attorney General Eliot Spitzer.

Spitzer's office is credited with much of the legwork that unveiled recent scandals in the mutual fund business. During the hearing, several Committee members commented on how important it is to have state regulators involved in financial regulation.

Prior to the hearings, Donaldson and Snow sent a letter to Shelby and Housing Financial Services Committee Chairman Michael Oxley (R-Ohio) applauding efforts to protect the integrity of mutual funds, but also seeking caution in developing remedies. The letter said mutual funds play a major role in the national economy and "information and disclosure requirements should be designed to provide investors with real value rather than serve mainly to increase costs and decrease returns."

CSBS TO PRESENT WEBCAST ON RISING INTEREST RATES

After experiencing interest rates that would never seem to stop falling, there are signs that rates may soon be on the upswing, posing challenges of a different nature to bankers and customers, too. To help prepare you for a rising interest rate environment, CSBS will present a 90-minute live Webcast which will help you to chart a path through this new environment. You will hear the latest on the economy, see the potential impact of rising rates on a bank's financial condition, and learn the latest strategies for managing in this changing environment. This informative and timely program is a collaboration of CSBS, Olson Research, Graduate School of Banking at Colorado, and School of Community Bank Management at Texas Tech University. Mark your calendar for 3 p.m. eastern, Thursday, December 18. To participate, all you need is a computer with Internet access and a telephone. Registration for this program is $245. Click here to learn more and register.

AROUND THE STATES

Pennsylvania: The Pennsylvania Secretary of Banking closed Pulaski Savings Bank on Nov. 14, naming FDIC as the receiver. FDIC said Pulaski's only banking office will reopen today as a branch of Earthstar Bank with depositors of the failed bank automatically becoming depositors of Earthstar. Pulaski had approximately $10.2 million in assets and $9.2 million in deposits in 1,200 accounts. Earthstar paid FDIC a premium of $400,000 to purchase $8.9 million of Pulaski's assets. FDIC estimated that the failure will cost the Bank Insurance Fund $1.1 million. The failure was the first to occur in Pennsylvania since March 11, 1996, and the third failure this year of a BIF-insured bank. More information...

Texas: Texas banker Danny Payne will be the new Savings and Loan Commissioner starting in early January, said Texas Finance Commission Chairman Vernon Bryant on Nov. 17. Payne has 30 years' experience as a senior manager of state and federally chartered banks and thrifts in Texas. For the past three years, he has been president and chief executive officer of Community State Bank in Austin. Previously, he served as the first mortgage licensing director for the Texas Savings and Loan Department. The Texas Savings and Loan Department oversees and enforces regulations for 24 state savings banks and state savings and loan associations with combined assets of more than $18 billion, and approximately 30,000 licensed mortgage brokers and loan officers. In January 2004, an estimated 3,000 mortgage banking companies doing business in Texas will be required to register with the department. For more information, click here.

AROUND THE AGENCIES

FinCEN: Financial institutions are providing valuable information for investigating terrorist financing and money laundering, the Financial Crimes Enforcement Network said in publishing its latest review of suspicious activity reports released on Monday. From February through Oct. 20, 2003, FinCEN said it sent information requests on 962 subjects involved in 167 cases to financial institutions. In response, financial institutions provided 6,987 responses with 6,397 of the responses positive and 338 inconclusive. FinCEN said these responses were very helpful in speeding up investigations. The publication also described potential terrorist financing methods using cash letters, coupon redemption and informal value transfer systems. Read more...

FTC: The Federal Trade Commission charged Maryland-based AmeriDebt, Inc.; DebtWorks, Inc.; and two individuals with engaging in deceptive practices on Wednesday. FTC alleged that the non-profit credit counseling agency falsely claimed that it charged no up-front fee for its services; that it operated as a non-profit; and that it taught consumers how to handle their finances. FTC said the organization failed to provide the privacy notices required by the Gramm-Leach-Bliley Act. The agency also settled a related action against Ballenger Group, LLC, and its parent, Ballenger Holdings, which FTC alleged repeated some of AmeriDebt's misrepresentations in statements to consumers on the telephone. The individuals named in the case were Andris Pukke and Pamela Pukke. "We will not allow consumers to be duped into 'contributing' hundreds of dollars to these so-called 'non-profits,' that use the money to line their own pockets," said Howard Beales, director of the FTC's Bureau of Consumer Protection. More information about the case may be found at http://www.ftc.gov/opa/2003/11/ameridebt.htm.

NCUA: The National Federal Credit Union Administration issued an opinion letter on Nov. 10 that said the agency's regulations would preempt "any state law, including one affecting aspects of lending primarily regulated by the provisions of the Truth in Lending Act, that regulates the rates, terms of repayment and other conditions of loans and lines of credit." NCUA was responding to an opinion request on whether the Georgia Fair Lending Act would apply to a federal credit union. On the issue of the authority of the Georgia Attorney General and Georgia Commissioner of Banking and Finance to enforce the Georgia Fair Credit Lending Act against federal credit unions, NCUA said it has "sole authority" to take enforcement actions against federal credit unions. For additional information, go to http://www.ncua.gov/ref/opinion_letters/2003_letters/03-0412.htm.

OTS: The most profitable community thrifts were generally active lenders with a residential mortgage focus, but they also offered a broad array of community loan products, according to an analysis issued by the Office of Thrift Supervision on Tuesday. OTS examined the top performing thrift institutions with less than $1 billion in assets and looked for traits that contributed to their success. The study found that the top thrifts were more active portfolio lenders, held fewer wholesale assets, had better efficiency ratios and maintained good asset quality. Eighteen percent of the top institutions had assets of less than $50 million and 55 percent had assets between $50 million and $250 million. Sixty-one percent of the top performers were stock institutions. Some of their common management strengths included prompt resolution of significant regulatory concerns noted in prior exams, use of an effective risk-focused internal audit process and oversight by an active board that is fully informed by management. More information is available at http://www.ots.treas.gov/docs/48940.pdf.

THE WEEK AHEAD

November 27
Happy Thanksgiving.
CSBS office will be closed Thursday and Friday.

CLOSING COMMENTS

"The OCC knows the problem. Inaction on grievous bank behavior will provoke confrontations with the states. As Eliot Spitzer wrote in The New York Times this week, the public will rely on state regulators if the federal government won't protect their interests." - Duncan A. MacDonald, former general counsel of Citigroup Inc.'s Europe and North America card businesses, writing in a November 21 letter to the editor of the American Banker.