Should Wal-Mart, Real Estate Brokers, and Banks be in Bed Together? A Principles-Based Approach to the Issues of the Separation of Banking and Commerce

Abstract

The application in July 2005 by Wal-Mart to obtain a specialized bank charter from the state of Utah and to obtain federal deposit insurance re-opened a national debate concerning the separation of banking and commerce. Simultaneously, bank regulators were considering the possibility of allowing banks to enter the area of residential real estate brokerage, which is another facet of the same set of issues. Though Wal-Mart withdrew its application in March 2007, the issues and the debate continue. This paper offers a principles-based approach to these issues that begins with the recognition that banks are special and that safety-and-soundness regulation of banks is therefore warranted. Building on that recognition, the paper lays out the principle that the "examinability and supervisability" of an activity should determine if it should be undertaken by a bank or by a bank's owners. Even if an otherwise legitimate activity is not suitable for a bank, it should be allowed for a bank's owners (whether the owners are individuals or a holding company), so long as the financial transactions between the bank and its owners are closely monitored by bank regulators. The implications of this set of ideas for the Wal-Mart case, for real estate brokerage, and for banking and commerce generally are then discussed.