Firms that sell push to join bank business

WASHINGTON -- John Deere & Co., the Moline, Ill., farm-equipment maker, wanted to add something to its line of tractors, backhoes, and excavators.

It wanted to own a bank.

In the spring, John Deere, Target department stores, Toyota, and other nonfinancial companies lobbied the House of Representatives to allow them to offer lending services nationwide through so-called industrial banks -- government-insured lending operations that could provide new revenue streams to corporations. A banking bill with that proposal has passed the House and is now in the Senate.

Now, as the fate of industrial banks sits in the hands of a Congress eager for deregulation, the push to mix banking with unrelated companies has alarmed some lawmakers and financial officials, who say the mix blurs the line between commerce and industry and could destabilize the country's financial system.

''It is my concern that these institutions may not be sufficiently supervised or regulated," wrote Representative Jim Leach, Republican of Iowa, in a March request to the General Accounting Office for a review of industrial banks.

While federal agencies would be able to monitor the standards of lending, they wouldn't be able to supervise the overall health of the parent company. Opponents like Leach worry that if the whole corporation went under, it could expose the federal government to billions of dollars in liability.

Industrial banks are backed by an alliance of manufacturing companies like John Deere and retail giants such as Wal-Mart Stores and Target that want credit agencies to help consumers buy their products. They have won the support of representatives from the seven states that already allow local versions of the banks: Utah, Colorado, Nevada, Minnesota, Hawaii, Indiana, and California.

Opponents, however, say granting national charters to industrial banks could seed the next generation of Enron-like financial crises.

''This is a very dangerous thing," said Randall Dodd, director of the Financial Policy Forum, a Washington think tank. Industrial banks ''are like dune buggies on the roads with no seat belts, shatterproof windshields, rear caution lights, or auto insurance. They can offer cheaper loans because they don't have to abide by soundness and safety standards that everyone else knows is a smart thing, which could lead to a major collision."

The current dispute stems from a 1987 exemption to federal law that allows the seven states to issue banking charters to nonfinancial companies. In March, the House of Representatives approved a bill that placed restrictions on the banks' ability to open branches nationwide while requiring that any company wishing to own such a bank be primarily financial in nature. That would exclude corporate giants such as Target and John Deere.

The restrictions were part of a compromise forged out of concerns that a company like Wal-Mart could install credit windows in its stores and devastate community banks the way it has some local retailers.

But the restrictions have gone nowhere in the Senate, according to some lawmakers, because Senator Robert Bennett of Utah, a senior Republican on the Senate banking committee, wants to allow the industrial banks to expand across the country.

Bennett did not return calls for comment.

''Bennett is holding it up because he wants to tamper with the compromise," said US Representative Barney Frank, a Newton Democrat. Frank and Representative Paul E. Gillmor, Republican of Ohio, worked on the restrictions.

A spokesperson for John Deere said the company withdrew its bid to open an industrial bank after concluding that such an operation ''did not fit with our long-term plans," although some congressional aides say the withdrawal was in response to the restrictions.

Daryl Rude, supervisor of industrial banks at Utah's Department of Financial Institutions, said the state opposes the restrictions but will leave the legislative debate to lawmakers and the lobbyists.

Although funds invested in industrial banks represent a fraction of the country's total bank-deposit base, they are growing fast. Since 1995, the deposits owned by nonfinancial companies have grown from $2.9 billion to an estimated $120 billion today. The owners of the banks range from the auto manufacturers BMW and Volvo to a firm that finances taxi companies.

Proponents of the banks say they offer niche products that larger, more diversified commercial banks have no interest in providing. ''If you look at what [industrial banks] do" -- loans, credit cards -- ''they don't compete with community banks, but with other captive banks," said Thomas Billings, who represents a number of industrial banks as an attorney at Van Cott, Bagley, Cornwall & McCarthy, a Salt Lake City law firm.

Take EnerBank, a Salt Lake City-based industrial bank that is owned by CMS Energy, an electrical power company based in Michigan. EnerBank sells home-improvement loans in partnership with construction companies and materials makers. Although the industry generates some $200 billion a year, industrial bankers say home-improvement loans tend to be too low-margin to attract the attention of anything but specialty banks -- an assertion challenged by some community bankers.

While EnerBank is supervised by state and federal banking authorities, companies like CMS Energy are not. That's the kind of blind spot, some lawmakers say, that could prevent regulators from detecting balance-sheet manipulation. Federal officials, including the FDIC's inspector general, have suggested such discrepancies may have led to the collapse last year of Southern Pacific Bank, a California industrial bank.

In a letter to the House of Representatives' Financial Services Committee a year ago, Federal Reserve Chairman Alan Greenspan made clear his opposition to industrial banks. In particular, he warned against any move to allowing existing industrial banks to set up branches nationwide, which would effectively repeal the separation of commerce and industry as established by the Bank Holding Company Act of 1956.

''History demonstrates that financial trouble in one part of a business organization can spread rapidly to other parts of the organization," Greenspan wrote. ''This is particularly true if the parent holding company has weak financial or capital resources because the parent may well seek, or be required, to divert financial resources from a healthy subsidiary to aid either the parent or an ailing subsidiary."

The FDIC disagrees.

Its chairman, Donald Powell, the chief executive officer of the First National Bank of Armarillo, Texas, before he was brought to Washington by President Bush, said in March that industrial banks ''can provide efficient combinations of banking and commerce that deliver results for the consumer."

George French, the FDIC's deputy director of supervision, told reporters late last month that he resented the suggestion that the agency was ill-equipped to properly supervise industrial banks.

''We find that as something of a slight, to be honest," French said at a press breakfast.

Susan Milligan of the Globe staff contributed to this report. Stephen J. Glain can be reached at glain@globe.com.