U.S. should let more companies offer bank services: regulator

WASHINGTON/NEW YORK (Reuters) - U.S. regulations that bar companies such as Wal-Mart Stores Inc WMT.N from providing banking services should be reviewed as they reduce competition and concentrate more risk among a smaller number of banks, a U.S. banking regulator said on Wednesday.

At a banking conference in New York, acting Comptroller of the Currency (OCC) Keith Noreika urged resumption of debate over whether to allow other types of businesses to engage in traditional banking.

Noreika’s comments could stoke tensions between his agency and the Federal Deposit Insurance Corp (FDIC), which insures customer deposits at traditional banks and has put the brakes on moves by Wal-Mart and others to get into banking.

Taking questions after his speech, Noreika said his office was working on tweaks to its enforcement of current regulations, for instance being more flexible in scoring bank managements for compliance.

The scoring, he said, “hasn’t been applied, I think, in a sensible way.” He questioned whether it made sense to stop banks from mergers and branch expansions in the United States just because they violated anti-money laundering rules in Africa or Asia.

Compliance issues with strict procedures to thwart money laundering earlier this decade stalled a merger of M&T Bank Corp. MTB.N and Hudson City Cancorp Inc. The deal was approved by the Federal Reserve three years after it was first proposed.

Noreika is expected to leave the post in coming weeks to make way for Joseph Otting, President Donald Trump’s pick for the OCC. Otting, a former banker, is expected to favor a similar approach.

Noreika’s speech challenged traditional U.S. thinking that frowns upon mixing banking and other commercial activities because of fears that customer deposits would fund or subsidize risky non-banking business.

Additional restrictions were imposed in the 2010 Dodd Frank Act after some banks’ risky bets during the global financial crisis brought government bailouts to protect customer deposits.

“Unfortunately, the crisis has been used as an excuse to silence that discussion, even though the evidence and data show that combining banking and commerce had little to do with the cause of the crisis,” Noreika said. “We need to restart that dialogue.”

Noreika said allowing non-financial companies to run banks could strengthen the banking system by boosting competition and increasing diversity. The OCC is exploring providing a charter for financial technology providers such as payment processor Square Inc SQ.N.

He cited academic research that showed many banks including Wachovia and IndyMac faltered during the crisis even though they had no “exotic” commercial operations.

One of a handful of exceptions to the current restrictions allows non-financial firms to apply for an industrial loan company (ILC) license. Such licenses are overseen by the FDIC, which imposed a moratorium on commercial entities seeking these licenses after Wal-Mart applied for one in 2005.

Community banks opposed the Wal-Mart application, claiming the world’s largest retail chain might use the license to expand into other financial services. Community banks also opposed Square Inc’s attempt to secure ILC licenses.

Reporting by Michelle Price. Additional reporting by David Henry in New York.; Editing by Lisa Shumaker and David Gregorio