Industrial banks get support in report

Nevada economic development officials who desperately want to attract industrial loan companies recently got some ammunition for the cause.

The Milken Institute, an independent economic think tank based in Santa Monica, Calif., produced a 169-page study that supports arguments for chartering industrial loan companies, also known as industrial banks.

The Nevada Development Authority and the Development Corporation of Utah commissioned the study.

The problem is that the government cannot charter new industrial banks because the Dodd-Frank financial reform law extended a moratorium on charters until July 2013 to determine whether industrial banks create any special threat to financial-system stability.

Congress instituted the moratorium in 2006, out of concern that industrial banks would be unduly influenced by the unregulated companies that own them, opening the possibility of future financial collapse.

Industrial banks can offer any kind of banking service, except commercial checking accounts. They may provide interest-bearing consumer checking accounts, certificates of deposit and other depositary products.

The Milken study gives industrial bank advocates hope that they may win some support in Congress when the moratorium ends. Southern Nevada business leaders say industrial banks would help Nevada recover from the economic train wreck that happened a few years ago.

"This is a great opportunity for job growth and economic diversification for our state," said Ray Specht, vice chairman of Toyota Financial Services, a Henderson industrial bank owned by the auto company.

At their peak, industrial banks and affiliated companies employed 30,000 workers in Utah, the only other state with an active industrial banking sector, he said.

Somer Hollingsworth, chief executive officer of the Nevada Development Authority, said he recently entertained representatives of eight different companies interested in establishing industrial banks in Southern Nevada.

Nevada already has several industrial banks. USAA Savings Bank, part of the San Antonio-based United Services Automobile Association, serves armed forces personnel, their families and veterans.

Beal Bank Nevada, controlled by Andy Beal of Plano, Texas, offers federally insured certificates of deposit to the public at its Las Vegas office. It also buys loans in the secondary market, according to the Milken study.

EagleMark Savings Bank, operating out of Carson City, provides financial services for Harley-Davidson customers.

Toyota Financial Services offers credit cards to Toyota and Lexus owners and gives points that can be used to buy a car or get car serviced. It also serves as a private bank for Toyota dealers around the country, Specht said.

"What's here now is pretty good, but it could be really big," Hollingsworth said.

While Nevada business leaders are in love with industrial banks, the nation's commercial banks are not.

In 2005, Wal-Mart Stores stirred up a regulatory war when it applied for an industrial bank charter.

The banking industry feared Wal-Mart would establish competing branches in its stores around the country, Specht said.

The Federal Deposit Insurance Corp. held two public hearings on Wal-Mart's application, the first such proceedings in the agency's 78-year history, according to the Milken study. The FDIC also placed a moratorium on new industrial bank applications in 2006, and Wal-Mart withdrew its application in March 2007.

The Milken report counts 13 states that imposed restrictions on industrial banks by 2007. Federal laws, while permitting industrial banks, have restrictions on bank ownership by commercial companies. The Milken study, however, said the World Bank found that only four of 142 countries restrict commercial companies from owning banks.

Parent companies "serve as a source of strength" for industrial banks, according to the study. The study found that industrial banks didn't cause the financial crisis a few years ago and weathered the recession better than conventional commercial banks.

"This is the strongest banking sector of the whole banking industry before, during and after the banking crisis," Specht said.

To convince Congress of the merits of industrial banks, advocates can only hope the General Accountability Office reaches a favorable conclusion in a study it's doing on the new charter moratorium.

The Nevada Development Authority is counting on support from Gov. Brian Sandoval, Senate Majority Leader Harry Reid, D-Nev., and Sen. Dean Heller, R-Nev., to pick up the industrial bank cause when the moratorium ends.

"Senator Reid is looking forward to the completion of the GAO study as soon as possible, which we expect will show that these banks are important to Nevada's economy," a spokesman for Reid said.

Contact reporter John G. Edwards at
jedwards@reviewjournal.com or 702-383-0420.