Banking and Commerce: Tear Down This Wall?

M any U.S. firms include both commercial and nonbank financialunits. For example, General Motors Corporation encompassesnot only units that manufacture automobiles but also those, such as General Motors Acceptance Corporation, that gather funding and make loans to individuals and businesses. Firms that handle both commercial and financial activities appear to reap significant benefits that create the appeal of such combinations. One byproduct of a commercial firm’s activities may be information about its customers ’ financial situation. The financial affiliate might then use this information to inexpensively target products to particular customers, benefiting both the financial firm and its customers. While finance/commerce combinations are widespread, combinations be-tween banks and commercial firms are typically prohibited under various U.S. laws. Banks are distinguished from other financial firms by their ability to gather funding by issuing government-insured deposits such as checking and savings deposits. Despite prohibitions of banking/commerce combinations, firms have managed to find loopholes. Until recently the unitary thrift loop-hole was a popular means of circumventing the banking/commerce wall. The loophole allowed commercial companies to start or buy one, and only one, thrift (i.e., a savings bank or savings and loan association, both of which is-sue government-insured deposits), using the thrift as a conduit for providing financial services. The unitary thrift loophole was closed in 1999, but another loophole re-mains open. Federal banking law allows commercial firms to own industrial loan corporations—essentially banks with somewhat restricted deposit-taking powers. (For additional discussion of the unitary thrift and industrial loan cor-poration loopholes, see the Appendix.