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It could help the poorest Americans without bank accounts.

By Lawrence J. White
June 9, 2017

On a day in which many eyes were on Former FBI Director James Comey’s testimony before the Senate Intelligence Committee, the U.S. House of Representatives on Thursday quietly passed the Financial CHOICE Act, which is the Republicans’ proposed revision of the Dodd-Frank Act of 2010 and reform of financial regulation. It will next go to the Senate, which will surely get more attention as Senators on both sides consider major alterations to the CHOICE Act.

Although the CHOICE Act’s tagline reads, “Opportunity for All, Bailouts for None,” there is a large elephant that isn’t in the room when financial regulation is being discussed—but really should be: Walmart.

Starting in the mid 1990s, Walmart made two separate efforts to enter banking in the U.S., but legislators and regulators kept the door closed. After its second effort was rebuffed in 2007, Walmart gave up in the U.S., but has subsequently provided consumer-banking services in Canada and Mexico.

As the Senate begins its consideration of the CHOICE Act, there is a prime opportunity for lawmakers to revisit the question of allowing commercial firms—such as Walmart—to enter banking. Why?

U.S. economic policy has long held dear the notion of encouraging new business and innovations so that the benefits of entry into the marketplace can be enjoyed by consumers. Of course, American policy treats banking as special. And reconciling the specialness of banking and the presence of Walmart in banking is necessary.

We expect banks to be operated in a safe-and-sound manner, such that the likelihood that they would fail—and cause losses to their creditor-depositors (or to the deposit insurer that backs them)—should be quite small. And the system of prudential regulation for banks is a reflection of that expectation. So, how would a Walmart Bank fit into prudential regulation?

The crucial concept is that the Walmart Bank must be organized as a separate subsidiary of the parent Walmart; the latter would become a “bank holding company” (BHC). The Walmart Bank subsidiary would be expected to abide by all prudential regulations that apply to banks.

It makes good policy sense for the Walmart Bank to be a subsidiary. Bank regulators’ prudential tasks would be much harder if they had to assess the overall financial health of the Walmart company and its extensive retail operations alongside its banking activities, rather than focusing specifically on the financial services operations of the bank subsidiary.

Current U.S. banking policy has much of this story right. But where policy has gone wrong is the insistence that a bank holding company cannot be engaged in “commerce”—i.e., in non-financial services activities. This restriction was first embodied in 1956 legislation and remains established policy for banking in 2017. Its persistence is more a testament to the lobbying strength of incumbent bankers than to any concern about the economic welfare of consumers.

However, it’s equally important to consider the potential benefits from Walmart’s entry into banking: The retailer is well known for providing reasonably priced goods to low- and moderate-income households.

These households would also be ready recipients of reasonably priced financial services. The percentage of U.S. households that are unbanked (do not have a bank account) or underbanked (have an account but rely on non-bank providers for some financial services/products) has been a longstanding policy concern. Seven percent of all households were unbanked and an additional 20% of all households were underbanked, according to the most recent FDIC data for 2015. The percentages are substantially larger for low- and moderate-income households. Further, since 2009, the percentage of unbanked households has declined only modestly, while the percentage of underbanked households has actually increased.

Given Walmart’s general business strategy, the establishment of a “Walmart Bank” would likely lead it to extend more financial services to Walmart’s primary clientele—and thus make an appreciable dent in those percentages.

Financial reform advocates should see the benefits of a wider provision of banking services to businesses and to consumers from the elimination of this commerce-finance restriction. This would be a direct way to bring real financial benefits to low- and moderate-income households without any taxpayer subsidies.

A revisiting of the commerce-finance restriction should be on the agenda when the Senate begins its consideration of the Financial CHOICE Act if they truly want to make good on the Act’s promise of growth and opportunity for all.

Lawrence J. White is a professor of economics at the NYU Stern School of Business and an editor of Regulating Wall Street: CHOICE Act vs. Dodd-Frank, a recently published collection of essays.

 

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