Volcker Urges Restrictions on Growth of ‘Non-Banks’

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.

Timing Factor

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.

“I don’t think the market is the proper judicial body to decide this,” Volcker said, thereby rejecting one of the Reagan Administration’s pet arguments.

“If you don’t act promptly, the question will only get worse, and you’ll be faced with a fait accompli. . . . The time has come for Congress to set out the rules of the game clearly and specifically, before a reasonable case can be made that, de facto, the issue is moot.”

Another View

Treasury Undersecretary George D. Gould, testifying before the same committee, disagreed. Gould pointed to a future of untrammeled financial growth, with expanded banking and financial services offered by mortgage companies, auto manufacturers, insurance companies and department stores.

“The Norman Rockwell picture of financial services that some individuals would like to paint is a thing of the past,” Gould said. “Families all across America are seeking, and will continue to pursue, a financial system that serves their economic needs and meets their requirements for safety, convenience and diversification. These demands for service, competition and the best price and product ring loud and clear.”