Industrial banks: Challenging the traditional separation of commerce and banking

Abstract

Most people may not be familiar with industrial banks (IBs). Yet these financial institutions have been around for more than a century and predate the establishment of the Federal Reserve in 1913. Throughout the industry’s history, the only way a non-financial firm could enter banking was through the establishment of an IB. The reason was that the Federal government over the years has enacted legislation to block the entry of commercial firms into banking. By 1999, commercial firms had just one remaining point of entry: the acquisition or formation of an IB. A few years later, a flurry of news stories occurred in 2005, when retail giant Wal-Mart filed an application for an IB. The Federal Deposit Insurance Corporation (FDIC) held public hearings on Wal-Mart’s application and declared moratorium on new IB insurance applications. The controversy was defused when Wal-Mart withdrew its application for federal deposit insurance before the FDIC made a ruling. We examine the evolving role of regulation designed to prevent non-financial firms from owning banks and demonstrate the performance and regulation of IBs over time challenge the justification and necessity of such a separation.