A group of community bankers is urging Congress to "close a loophole" in federal banking law, citing Wal-Mart's application to establish an industrial bank in Utah as proof that banks and businesses don't belong in the same bed.

In a statement released Wednesday, the Independent Community Bankers of America said it had sent a letter to members of the U.S. House of Representatives urging speedy passage of legislation addressing whether commercial firms should be allowed to own industrial banks.

Industrial banks function much like commercial banks in that they can offer commercial and consumer loans, issue credit cards and offer financing for auto purchases. They are not regulated by the Federal Reserve, as are consumer banks, and are exempt from the Bank Holding Act that governs other banks and financial institutions. Industrial banks are regulated by state regulators and the Federal Deposit Insurance Corp.

Most industrial banks are owned by financial services companies or other corporations. Target Corp. has one in Utah, for example.

As of Dec. 31, 2004, there were 29 chartered industrial banks in Utah with $120 billion in total assets.

According to Alan Whitchurch, who was named president of the would-be Wal-Mart Bank, the bank's sole function will be to process credit card, debit card and electronic check transactions from its retail locations. The bank does not intend to branch and has no intention to compete with local banks, Whitchurch told the Deseret Morning News when the application was filed.

But the ICBA worries that Wal-Mart will use its industrial bank charter to launch a banking enterprise in much the same way it has grown to dominate retail. Only in this instance, the products would be financial services, and community banks its most vulnerable competitors.

So the ICBA, as a founding member of a group called The Sound Banking Coalition, sent a letter urging Congress to pass the "Gillmor-Frank compromise," authored by Reps. Paul Gillmor, R-Ohio, and Barney Frank, D-Mass., which would prohibit industrial banks owned by commercial entities from branching. Commercial firms are defined as those in which 85 percent or more of revenue is derived from non-financial sources.

In a statement, the organization said it ultimately wants industrial banks to be included under the Bank Holding Act, but that the Gillmor-Frank language was an "important first step."

"Mixing banking and commerce would produce an excess concentration of economic power, jeopardize the impartial allocation of credit and inappropriately extend the federal safety net to commercial firms," the group said. "It also would pose serious competitive issues for local merchants, including community banks."

To date, the Utah Department of Financial Institutions confirmed it has not yet officially accepted Wal-Mart's industrial bank application as complete. Officials were therefore unable to comment on the ICBA's statement.

The Utah department also confirmed it has received one written comment from a group called Inner City Press/Fair Finance Watch protesting the application. But, because it has not yet accepted the application, department officials said Wednesday they have yet to open the public comment period.

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E-mail: jnii@desnews.com