Spurred on by community bankers, the U.S. Senate Banking Committee is expected within the next few weeks to consider legislation that would prevent retailers and other commercial firms from owning such banks.

If the legislation passes, it could seriously impact the growth of Utah's financial services community by reducing the number of companies that are eligible to own industrial banks, which also are known as industrial loan corporations, or ILCs.

"If that legislation passes, it clearly would eliminate a segment of the market for industrial banks," said Ed Leary, commissioner of the Utah Department of Financial Institutions. He indicated that less than a third of the approximately 30 industrial banks operating in Utah are affiliated with commercial entities such as retailers and automobile manufacturers.

"I wouldn't be surprised to see legislation passed this year that will address the threat that was raised by the mixing of commerce and banking," said Camden Fine, CEO of the Independent Community Bankers of America. "For us, it is an important public policy issue that must be addressed."

Last week, Senate Banking Chairman Christopher Dodd, D-Conn., said it was his intent to move forward on industrial bank legislation in the next few weeks.

"During this time when the financial system is experiencing unprecedented volatility and instability, it is important to advance legislation that can help improve the safety, soundness, and competitiveness of the lending sector," Dodd said in a statement.

Countering that view, Utah Sen. Bob Bennett, who sits on the committee, said in a statement the record clearly shows that ILCs are a strong, responsible part of the nation's financial system.

"I believe restrictive legislation is unnecessary. However, if Senator Dodd and my fellow committee members decide the Congress should further define the role of these limited purpose charters, I plan to be an active player in that discussion," Bennett said.

Fine noted that in May the U.S. House of Representative approved legislation 371-16 that would prevent companies from owning industrial banks unless they generated at least 85 percent of their revenue from financial activities.

When Wal-Mart Stores and Home Depot filed their applications in 2006, they sparked a storm of activity and led Congress to quickly conduct a series of meetings to consider the impact that might result from those retailers' entry into the banking business.

Community bankers and other critics of Wal-Mart and Home Depot argued that the ability of such giant commercial firms to own federally insured industrial banks threatened the safety of the federal government's deposit insurance system should those companies or their banks fail.

Finance regulator Leary pointed out, however, that there never has been a failure of a Utah federally insured industrial bank.

"Given the current economic situation, where we're seeing some of the nation's largest financial and securities firms appear on the verge of melting down, it is only natural to question how much worse the situation might be if industrial banks also were involved," Fine counters.

Industrial banks were authorized under an exemption in federal banking laws in 1987. With the adoption, Utah jumped in to take advantage of what some critics disparagingly describe as a loophole because its gives retailers and other commercial companies a way to own a federally insured bank.

Utah is home to about 30 active ILCs, or about half of all industrial banks in operation.

The banking industry's opposition was one of the factors that led Wal-Mart early last year to withdraw its application.

With Wal-Mart's exit, bankers began to focus their attention on Home Depot, which proposed to enter the industrial banking industry by acquiring EnerBank, an existing ILC that provided home improvement loans to borrowers through contractors. Bankers argued that a Home Depot-owned ILC could enter into risky ventures, such as troubled subprime mortgages, to aid its home-improvement business.

Home Depot withdrew its application late last week.

"We withdrew our application because it no longer fit into our strategy as we moved forward into 2008," said Sarah Molinari, a spokeswoman for Home Depot.

Leary noted that the FDIC, which provides deposit insurance for industrial banks, is set on Friday to lift its moratorium on issuing deposit insurance to new industrial banks. "In the absence of legislation, the FDIC has indicated it will commence processing industrial bank applications" that were held up by the moratorium that put into place shortly after Wal-Mart filed its application.

steve@sltrib.com