Dual Banking System
A dual banking system is the system of banking that exists in the United States in which state banks and national banks are chartered and supervised at different levels. The number of state banks dropped dramatically, but a key innovation by state banks — demand deposits — in response to that existential threat led to a strong comeback in the number of state banks, so much so that within 10 years of the 1864 amendment to tax state banknotes, state banks claimed more customer deposits than national banks. A dual banking system requires national banks to be regulated on the federal level while state banks are regulated according to state laws under a dual banking system. A dual banking system is the system of banking that exists in the United States in which state banks and national banks are chartered and supervised at different levels. Most economists agree that a dual banking system is necessary to maintain balance, with both national and state banks having benefits.
What Is a Dual Banking System?
A dual banking system is the system of banking that exists in the United States in which state banks and national banks are chartered and supervised at different levels. Under the dual banking system, national banks are chartered and regulated under federal law and standards and supervised by a federal agency. State banks are chartered and regulated under state laws and standards, which includes supervision by a state supervisor. The law that created the modern banking system is believed to be the Federal Reserve Act in 1913, which President Wilson signed. With this law, Congress established 12 District Banks to cover the country's banking needs.
Understanding a Dual Banking System
The dual banking system in the U.S. was born during the Civil War period. President Abraham Lincoln's Treasury Secretary, Salmon Chase, led the effort to create the National Bank Act of 1863, whose main objective was to raise money for the North to defeat the South. This had to be done via the issuance of a common currency at the national level. Up to that point, state banknotes were in circulation. The 1863 Act created competition to state banks, and the legislators went a step further the next year by passing an amendment to tax the issuance of state banknotes.
The number of state banks dropped dramatically, but a key innovation by state banks — demand deposits — in response to that existential threat led to a strong comeback in the number of state banks, so much so that within 10 years of the 1864 amendment to tax state banknotes, state banks claimed more customer deposits than national banks.
The Dual Banking System Today
Today, the dual banking system allows for the co-existence of two different regulatory structures for state and national banks. This translates into differences in how credit is regulated, legal lending limits and variations of regulations from state to state. The dual structure has withstood the test of time, and most economists agree that it is necessary for a sound and vibrant banking system.
National banks offer efficiencies that come from economies of scale and product and service innovations derived from the application of greater resources. State banks, on the other hand, are more nimble and flexible in responding to the unique needs of customers in their own states. Their product and service advancements, subject to approval in a more timely manner by state regulators who have the interests of their residents in mind, could find their way to other states if they are value-added for bank customers.
Related terms:
1913 Federal Reserve Act
The 1913 Federal Reserve Act created the current Federal Reserve System and introduced a central bank to oversee U.S. monetary policy. read more
Bank Panic of 1907
The Bank Panic of 1907 was a set of bank runs and bankruptcies that led industry leaders to draft the first version of the Federal Reserve System. read more
State Banking Department
A state banking department is a state-specific regulatory body that oversees the operations of financial institutions within its jurisdiction. read more
Bank of England (BoE)
The Bank of England (BoE) is the United Kingdom's central bank. It has a similar role as the Federal Reserve in the United States. read more
Federal Reserve Regulations
Federal Reserve regulations are rules put in place by the Federal Reserve Board to regulate the practices of banking and lending institutions, usually in response to laws enacted by the Congress. read more
Federal Reserve System (FRS)
The Federal Reserve System is the central bank of the United States and provides the nation with a safe, flexible, and stable financial system. read more
Legal Lending Limit
'Legal lending limit' is the maximum dollar amount a single bank can lend to a borrower based on a percentage of an institution's capital and surplus. read more
State Bank
A state bank is a financial institution that a state has chartered primarily to provide commercial banking services. read more
U.S. Treasury
Created in 1789, the U.S. Treasury is the government (Cabinet) department responsible for issuing all Treasury bonds, notes, and bills. Discover more here. read more