Wal-Mart's application to establish or acquire an industrial loan corporation chartered by the state of Utah has thrust the hoary issue of separating banking and commerce back into the news.

An ILC is an unusual state-chartered financial institution--eligible for federal deposit insurance, but not defined as a bank for purposes of the Bank Holding Company Act, the federal law that prohibits affiliations between banks and enterprises that are not engaged solely in financial activities. Wal-Mart, as a retailer, would not be permitted to acquire a bank under the act, but argues that there is no bar to its acquiring an ILC.

The Federal Deposit Insurance Corp., which must approve Wal-Mart's application, is receiving lots of advice from interested parties that allowing Wal-Mart to acquire an ILC would violate the principle that banks should be separated from commercial activities. But most of those making this argument don't realize that in passing the Gramm-Leach-Bliley Act in 1999 Congress eviscerated any policy arguments that might be used to separate banking and commerce.

To see why this is true, let's look at the arguments that have been used traditionally to justify separating banking and commerce:

• A bank with a commercial affiliate will lend preferentially to its affiliate--either at a concessional interest rate or on terms that would not be offered at arms' length--whether willingly or under duress from its commercial parent.
  
• A bank with a commercial affiliate will not lend to competitors of its commercial affiliate, thus distorting competition.
  
• If a bank's commercial affiliate encounters financial difficulty, the bank's resources will be marshaled to bail it out, using insured deposits for this purpose and jeopardizing the health of the deposit insurance funds and its own safety and soundness.

Although all these actions would violate banking laws and regulations, it is not really necessary to question whether the officers of banking organizations will risk extensive personal liability in order to do these things. This is because in adopting Gramm-Leach-Bliley, Congress in effect determined that none of these dangers or abuses is a sound basis for prohibiting affiliation between banks and other kinds of enterprises that are major users of credit.

The law broadened the range of activities with which banks could be associated, permitting affiliations with securities firms and insurance companies and any other firm engaged solely in financial activities. This, however, was not a minor change; when considered in light of the policy reasons for separating banking and commerce, it is a major declaration by Congress that the policy reasons always cited for separating banking and commerce no longer have validity.

This can easily be seen by considering how these policy reasons would apply to an affiliation between a bank and, say, a securities firm. Assuming its management was willing to violate banking laws and regulations, could a bank lend preferentially to its securities affiliate? Of course. And could a bank refuse to lend to competitors of its securities affiliate? Again, certainly.

Indeed, securities firms use more bank credit than most commercial firms because they use bank loans to carry their inventories of securities. So if a securities firm controls or is under common control with a bank, that affiliation could affect the bank's lending policies, just as it might if the bank were controlled by, say, Wal-Mart.

And finally, if the securities firm that controls or is under common control with a bank got into financial difficulties, could the assets of its affiliated bank be marshaled to bail it out? Of course. And would the same thing be true in the case of the retailer? Again, yes.

So is there any difference--from the perspective of the harms or abuses that the separation of banking and commerce is intended to prevent - between a bank affiliating with a securities firm and the same bank affiliating with a retailer like Wal-Mart? It seems obvious that the answer is no.

If this is true, nothing is left of the rationale for separating banking and commerce. If every abuse or potential abuse that is supposed to provide the underlying rationale for the separation idea could occur if banks are affiliated with securities firms--which Congress permitted in Gramm-Leach-Bliley--the Wal-Mart application cannot be opposed on the ground that it violates the principle that banking and commerce should be separated.

Peter J. Wallison is a resident fellow at AEI.