WASHINGTON — Federal Reserve Board Chairman Paul A. Volcker on Wednesday urged Congress to quickly restrict so-called "non-bank banks," the banking subsidiaries of commercial corporations, before it is too late to ever control them.
Testifying before the Senate Banking Committee, Volcker said the non-bank banks, which resemble banks in every function except accepting demand deposits, are threatening to break down the wall between banking and commercial activity--an erosion, he warned, that could lead to excessive control of credit by commercial firms.
"Suppose the local appliance dealer comes in and asks for a loan from a financial institution run by a large retail store," Volcker explained, arguing that it would be unfair for that dealer to have to try to get a loan from a competitor.
Volcker said the time is ripe for action because only 13 "non-bank banks" with $1.7 billion in assets exist that are affiliated directly or indirectly with commercial firms. Action now would allow Congress to "grandfather" the more innocuous of these institutions while drawing strict new rules to clearly define banking and commercial activity.