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April 22, 2015 News » Cover Story

Bank On It 

Thanks to luck and a loophole, Utah is an unlikely hub for the nation's industrial banks

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While Alvarez and other regulators raised concerns over the perception that a parent company could, through poor lending practices to itself or its affiliates, undermine a federally insured bank, Headlee says these scenarios were unlikely, and remain so. He says the flow of capital from a bank to its parent company would run afoul of a pair of long-established FDIC rules pertaining to industrial banks.

And, rather than weaken the bank, Headlee says the close relationship that an industrial bank has with its parent company can come in handy in times of distress. "The positive thing about it that people overlook is that these parents—like General Electric, CMS Energy, Pitney Bowes, United Health Group—they can recapitalize these banks overnight," Headlee says.

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Indeed, many of the fears surrounding Walmart's banking bid appear to have been unfounded. Like other industrial banks, Walmart would have been prohibited from opening branches in its stores. Its primary function would most likely have been similar to that of Utah-based Target Bank, which issues and processes credit-card transactions.

Nevertheless, Walmart's application sparked massive interest in Washington, D.C. Hearings were held, and thousands of comments poured in to the FDIC, most critical of Walmart's plan. In 2006, in the midst of this controversy, the FDIC placed a moratorium on the issuance of new industrial-bank charters.

As the Walmart controversy worked itself out (the retailer eventually forfeited its application in 2007), the tidal wave that became the Great Recession was just about to sweep the nation. Many states, wary of Walmart's bid for a bank, passed tighter restrictions on banking charters, and industrial banks became further entrenched in Utah.

The Walmart controversy kicked up enough dust in Congress that even after Walmart gave up its quest for an industrial-bank charter, the FDIC extended the moratorium on new industrial banks through early 2008.

By then, the country was being strangled by the Great Recession, and new industrial bank charters, and all other state banking charters, were put on hold. This state of affairs continues across the nation to this day, Pignanelli says.

But while the rest of the banking industry was mired in controversy during the Great Recession, Headlee says Utah's industrial banks were some of the strongest in the banking sector.

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One example of this was Lehman Brothers, which up until 2011, operated a Utah industrial bank called Woodlands Commercial bank. Even as Lehman Brothers went belly up, Woodlands slowly self-liquidated, inching down from a 2008 peak of $6.8 billion in assets to $1.6 billion before closing for good in 2011.

"Industrial banks are the safest and soundest institutions in the country. In terms of capital and everything else, they are safe and sound," Pignanelli says. "Lehman burned to the ground. What was the one asset left standing? Their industrial bank."

One industrial bank, though, did fail. Advanta Bank Corp.—which, at the time of its closing, had $1.5 billion in assets—was shuttered in 2009. The bank, located in Draper, issued credit cards to small businesses. Its closure cost the FDIC, and taxpayers, $635.6 million.

Even though Utah's industrial banks remained on relatively sturdy ground during the Great Recession, the state still saw shrinkage in the industry. Some of the state's largest industrial banks, including Goldman Sachs and Morgan Stanley, elected to shutter their industrial bank charters in favor of a national charter. This allowed these banks to more easily receive Troubled Asset Relief Program (TARP) funding.

"I think Walmart really put a blanket over the industry for a while," Sutton says, referring to the political dissonance the retailer sparked in Washington, D.C., which led to the moratoriums being placed on new industrial bank charters. "And then the recession came along, and that's the problem we've got right now."

An Attack From Washington
In the wake of the Great Recession, the federal government went to work trying to identify exactly what had occured in order to prevent it from happening again. These efforts were spun into the hulking Dodd-Frank Act, a 2,000-page document that implemented a wealth of new banking laws.

One of the laws that Pignanelli says nearly found its way into the document would have placed an outright prohibition on the charter, driving a stake through industrial banking's heart. Sutton was one of those lobbying on behalf of industrial banks. "We were able to head off all of the legislation that would have permanently eliminated the charter," he says.

Rather than kill industrial banking, the Dodd-Frank Act directed the Government Accountability Office to conduct a study on the banks, the exception they operate under and the strength of the regulatory system.

But instead of waiting around for the GAO study, Pignanelli says he urged Utah to conduct its own study to show just how sweet industrial banking is to the state's economy.

To accomplish this, Pignanelli's National Association of Industrial Bankers reached out to the Governor's Office of Economic Development (GOED), which lures business to Utah primarily by granting hundreds of millions of dollars in corporate tax breaks. In September 2009, the GOED board considered spending $100,000 of taxpayer money on a study, but balked. According to the minutes from the meeting, board members were concerned that they would toss public money away, only to have the federal government turn around and alter the laws anyway.

But five months later, the board took up the matter again, voting unanimously to give a $100,000 "economic opportunity" grant to the Economic Development Corporation of Utah to petition a study. At this meeting, board members heard first-hand from Louise Kelly, president of the Utah Association of Financial Services and president of EnerBank USA, about the impacts industrial banks have on the local economy.

According to minutes from the meeting, Kelly told the board that industrial banks provided 1,000 local jobs, some with salaries that reach $400,000.

The presentation, according to the minutes, was summed up this way: "If the ILC charter can be protected and expanded nationally, Utah will benefit. Utah has positioned itself as the leader of the ILC industry. Utah has a competitive advantage in securing a portion of the estimated $1 trillion in unused private capital due to our state's past experience with the industry."

This $100,000 was put to use, and in April 2011, the Milken Institute, a nonpartisan think tank in California, delivered a 169-page study that told the nation exactly what Utah wanted it to hear about its industrial banks.

"There is simply no evidence that the U.S. financial system and the economy would be on sounder footing if diversified firms were prohibited from owning ILCs, and this kind of empirical evidence should be required before acting on calls for change in the ILC industry (especially its abolition through repeal of the current exemptions for ILC owners ...)" the report concludes.

Pignanelli puts it this way: "We were able to use the study not only to deflect any negative things, but we were also able to use it to tell our story in Washington," he says. "Now we've gone from playing defense. We're now playing offense."

Community Benefits
Like commercial banks, industrial banks must contribute the equivalent of 1 percent of their total assets to the Community Reinvestment Act, which pumps some of that money back into the communities where the banks are based.

Over the years, Pignanelli says, industrial banks have given vast sums of money to Utah's nonprofit community, primarily through investments in affordable-housing projects.

The Community Development Corporation of Utah is one of the recipients of industrial banking money. Darin Brush, the CDC's executive director, says that over the past decade the CDC has built or remodeled 300 single-family homes, nearly all of which have been touched by money from the industrial banking sector.

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In addition to outright grants from industrial banks, which Brush says total hundreds of thousands of dollars, CDC receives low-interest loans from various industrial banks, including a revolving $15 million line of credit.

"I've got to tell you," Brush says. "We couldn't do our work without them. We just couldn't."

Kathy Ricci, executive director of the Utah Microenterprise Loan Fund, tells a similar story. In the past two decades, her organization has given more than 800 loans to small-business owners that, because of bad credit or other circumstances, wouldn't qualify for regular bank loans.

Although Ricci says she receives funding from Salt Lake City and Salt Lake County, the majority of the $13 million in loans she's divvied out have been contributed by banks.

"If it were not for CRA, I doubt that we would exist," Ricci says. "And that would be 800-plus businesses that would not have gotten start-up or growth funding, many of which are still out there doing business and hiring people. Utah is actually very lucky to have the industrial banks."

Banks, Ricci says, have significant leeway in how to allocate CRA funds, and are also bound by strict federal guidelines. As a result, quantifying and tracing the dollars into local arteries is an opaque process. But looking at each of the banks individually provides a picture of how much money is flowing into the communities that host these banks.

Julie Buchholz, GE Capital Bank's CRA officer, said through a spokesperson that GE would contribute more than $100 million in loans, investments, grants and technical assistance to Utahns in 2015. Between 2009 and 2014, Buchholz says GE issued $156.9 million in community-redevelopment loans, gave $2.6 million in grants and invested $165.1 million in securities and funds targeting in Utah.

In January 2014, Buchholz says GE gave the CDC a $2 million revolving line of credit, which she says has provided housing for 15 families.

But more than anything, industrial banks offer their services nationwide, exporting credit and Utah's unique banking laws to other states.

A bank's assets are primarily its loans, and its liabilities are deposits. This means that Utah is home to $143 billion in consumer loans and credit-card debt.

That Restoration Hardware credit card you maxed out last Christmas buying ornate candle holders for your cousins, and the Ann Taylor, J-Jill and Pier 1 Imports cards that fatten your wallet are all made possible by Comenity Capital Bank, located at 2855 E. Cottonwood Parkway, Suite 100.

That metered postage on the bills you receive in the mail was probably printed by a postage machine made by Pitney Bowes, which, thanks to Utah's industrial bank charter, offers postage on credit (City Weekly's credit account with Pitney Bowes is assessed at a 22-percent interest charge).

And that time you visited New York City and took a yellow cab? Well, chances are, the driver took out a substantial loan from Medallion Bank just to be able to drive you to the bar.

"They're chartered in Utah. Their assets are parked here, but they're serving millions of Americans elsewhere," Pignanelli says. "It's a great economic model for Utah."

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