Definition of the dual banking system

What is a dual banking system?

A dual banking system is the type that exists in the United States, in which state banks and national banks are licensed and supervised at different levels of government. Under the US dual banking system, domestic banks are licensed and regulated by federal law and supervised by federal agencies. State banks are licensed and regulated under state laws and supervised by their respective state banking departments. The dual system is not entirely clear, however, with some state banks responding to regulators at both levels.

Key points to remember

  • The United States has a dual banking system, with federally regulated national banks and state banks regulated by each state.
  • There is some overlap between the two systems, with some state banks subject to regulation at both levels.
  • Proponents of dual banking argue that national banks benefit from their greater scale, while state banks can be more innovative and responsive to the needs of their communities, and that the two types complement each other.

History of the dual banking system

The dual banking system in the United States was born during the Civil War era. President Abraham Lincoln’s Secretary of the Treasury, Salmon P. Chase, led efforts to create the National Bank Act of 1863, the main purpose of which was to raise funds for the North to defeat the South. This was to be done through the issuance of a common currency at the national level. Until then, state notes were in circulation. The 1863 Act created competition for state banks, and lawmakers went further the following year by passing an amendment to tax the issuance of state notes.

The number of state banks fell dramatically, but a key innovation of state banks – demand deposits, which allowed depositors to withdraw their money at any time – led to a strong comeback in the number of banks. of state. In the 10 years following the 1864 amendment to the taxation of state notes, state banks claimed more customer deposits than national banks.

The law that started the modern dual banking system is generally considered to be the Federal Reserve Act of 1913, in which Congress created the Federal Reserve System to serve as the central bank of the United States and guide the nation’s monetary policy.

The dual banking system today

Today, all 50 states, plus the District of Columbia, have their own banking regulators.

National banks are regulated by the Federal Reserve System or the Office of the Comptroller of the Currency, depending on their structure. The Federal Reserve also has some regulatory authority over some state chartered banks, as does the Federal Deposit Insurance Corporation.

Additionally, the Consumer Financial Protection Bureau (CFPB), established in 2010, regulates state and national banks with assets of $10 billion or more to ensure compliance with consumer laws.

To note

A dual banking system can mean different things in different countries. In some Muslim countries, for example, it refers to a system with both Islamic and conventional banks.

Advantages and disadvantages of the dual banking system

The dual banking system allows the coexistence of two different regulatory structures for state and national banks. This results in differences in how credit is regulated, including legal lending limits, as well as variations in rules from state to state. On the negative side, it adds a level of complexity for bankers and consumers that would not be present in a single banking system.

However, the dual structure seems to have stood the test of time, and many economists argue that it encourages a healthy and vibrant banking system. National banks can offer efficiencies from economies of scale and product and service innovations arising from the use of their greatest resources.

State banks, on the other hand, can be more nimble and flexible to meet the unique needs of customers in their own state or even city. Their innovations, when successful, can then be taken up by other states. Proponents of state charter argue that state regulators better understand the communities they serve. As the State Banking Department of Arkansas puts it, “As the primary regulator of a state bank, the Commissioner of the Bank of Arkansas and the State Banking Department are not little more than a short drive or phone call from the banking institutions they regulate.”

The dual banking system also allows banks to choose how they wish to be licensed, and they can switch from national charter to state charter, or vice versa, with government approval.

What is the Dual Banking System in the United States?

In the United States, dual banking refers to a system in which banks can be licensed (or licensed) at the national or state level. Banks are subject to different sets of laws and supervised by different regulatory bodies depending on their choice.

How do I know if a bank has a state or federal charter?

A national bank will have the word “National” in its name or the initials “NA” after it.

Who charters and regulates credit unions?

Like banks, credit unions can be licensed and regulated at the state or federal level. The National Credit Union Administration (NCUA) supervises and insures federal credit unions and insures participating state-chartered ones, just as the Federal Deposit Insurance Corporation (FDIC) insures participating banks of both types.

Who charters and regulates savings and loans?

Savings and loans, also known as S&L or savings, may also be licensed and regulated at the state or federal level. The Office of the Comptroller of the Currency is the primary regulator of federally chartered savings and loans, while the Federal Deposit Insurance Corporation (FDIC) regulates state-chartered savings and loans, in coordination with their respective states.

The essential

For historical reasons, the United States has a dual banking system in which banks are licensed and regulated at the state or federal level, and sometimes both. Proponents of the dual banking system argue that each type of bank, national or state, has certain advantages and that the two complement each other and create a more dynamic and innovative banking system.

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