April 10 (Bloomberg) -- Community bankers urged regulators to block Wal-Mart Stores Inc.'s plan to open a bank at an unprecedented hearing in which the retailer defended the proposal and its record as a corporate citizen.

About 30 groups including the American Bankers Association and the Independent Community Bankers of America told the Federal Deposit Insurance Corp. that Wal-Mart will siphon business from local banks, hurt lending in communities and give the world's largest retailer a foothold to establish branches. A top Wal-Mart executive vowed not to open branches or make loans.

The hearings in Arlington, Virginia, are the first the agency has ever held on an application. The consumer groups and bankers testified that the company's reputation for wiping out competitors and its poor track record on pay and health benefits should convince the FDIC to reject Wal-Mart.

``Wal-Mart's application should be denied because the likelihood that the company will enter into retail banking poses an enormous unjustifiable threat to taxpayers, consumers, small communities, small business, FDIC insurance and the soundness of our banking system itself,'' said former Representative Thomas Bliley, who testified on behalf of the Sound Banking Coalition.

Third Attempt

Bliley is a former House Commerce Committee chairman who oversaw securities laws. The coalition is a group of community bankers, grocers and union workers who organized to oppose Wal- Mart's plan.

Jane Thompson, president of Wal-Mart's financial-services unit, said the Bentonville, Arkansas-based company will only use the bank to process debit, credit and electronic-check transactions rather than pay third parties for that service.

``Wal-Mart is absolutely and unequivocally committed not to engage in branch banking,'' Thompson said. ``The purpose of the proposed bank would be to sponsor credit-card, debit-card and electronic-check transactions -- nothing more.''

Wal-Mart has no interest in opening branches because it now leases space in many stores to community banks and is committed to continuing that strategy, she said.

``Independent banks in our stores is our preferred and highly visible strategy,'' Thompson said. These banks make Wal- Mart stores a destination and provide shoppers ``a reason to come to our stores,'' she said.

`A Little Bank'

Thompson said Wal-Mart's bank would have revenue of $10 million by the third year of operation. ``It's a little bank,'' she said.

Her comments were greeted with skepticism by Wal-Mart's opponents and members of the FDIC panel. FDIC Chief Operating Officer John Bovenzi and acting General Counsel Douglas Jones challenged Thompson to address critics' concerns about Wal- Mart's corporate conduct, character and past violations of law and ethics.

``We feel that we are outstanding citizens in the community,'' Thompson said.

Wal-Mart's promise not to open branches ``is going to go a long way toward mollifying concerns'' that the company is making ``a creeping entry into the financial services business,'' said Lawrence Kaplan, a former federal bank regulator who is now a partner at Nelson Mullins Riley & Scarborough LLP in Washington. ``Once you make a commitment to a bank regulator, they're going to hold you to that commitment.''

Target, General Electric

Wal-Mart in July applied in Utah for an industrial-bank charter to handle payment processing.

Industrial banks, also known as industrial loan corporations, were created at the turn of the last century to provide credit to low-income workers. They can offer loans and other banking services to their parent company's customers.

Target Corp., Toyota Motor Corp. and General Electric Co. are among non-financial companies that operate industrial banks.

Shares of Wal-Mart fell 32 cents to $45.70 at 4:18 p.m. in New York Stock Exchange composite trading.

Given Wal-Mart's unsuccessful attempts to enter banking in the past, including efforts to buy a California bank in 2002 and an Oklahoma thrift in 1999, critics are skeptical about its claims it doesn't plan to expand beyond payment processing.

``Wal-Mart has both a demonstrated appetite to engage in full-service banking and a recent and ongoing track record of expanding the retail banking services it can offer under current law,'' according to the prepared testimony of Arthur Johnson, chairman of the Washington-based ABA's government relations council.

Not Closely Regulated

Wal-Mart will benefit if it wins approval because industrial banks aren't as closely regulated as commercial ones, Terry Jorde, chairwoman of the Washington-based Independent Community Bankers of America, said in an interview last week.

In her prepared testimony, Jorde said Wal-Mart could engage in predatory pricing, siphon business from local banks and make credit decisions that favor its own interests.

``A Wal-Mart bank would have an incentive to favor Wal- Mart's suppliers and disfavor their competitors,'' according to her testimony.

Jorde is also president and chief executive officer of CountryBank USA, a bank with $40 million in assets based in Cando, North Dakota. She said last week that she feared a Wal- Mart bank might put small banks out of business.

``I think that the community would lose their local banks,'' said Jorde. ``They can afford to undercut us until we're gone, and then what?''

Wal-Mart Backers

Speakers in favor of Wal-Mart included the Salvation Army and Working Families for Wal-Mart, a group formed to counter criticism of the retailer that receives Wal-Mart funding.

``Wal-Mart has always been the first of our corporate partners to call with a very simple request: What do you need?'' said George Hood of the Salvation Army.

Industrial banks grew to more than $140 billion in assets in 2004 from $3.8 billion in 1987, according to a September 2005 report by the U.S. Government Accountability Office.

The FDIC hearings will run through tomorrow in Arlington and continue in Overland Park, Kansas, on April 25.

The FDIC's board hasn't set a deadline for deciding on Wal- Mart's application. Acting Chairman Martin Gruenberg said in a January letter to lawmakers that he didn't anticipate voting on the issue until a new chairman takes over, filling a vacancy on the five-member board.

The Wall Street Journal reported April 6 that President George W. Bush intended to nominate Sheila Bair, a former assistant Treasury secretary, as FDIC chairman. The appointment requires Senate confirmation.

To contact the reporter on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net.

Last Updated: April 10, 2006 16:36 EDT