What Is a Chartered Bank?
A chartered bank is a financial institution (FI) whose primary roles are to accept and safeguard monetary deposits from individuals and organizations, as well as to lend money out. Chartered bank specifics vary from country to country. However, in general, a chartered bank in operation has obtained a form of government permission to do business in the financial services industry. A chartered bank is often associated with a commercial bank.
Key Takeaways
- A chartered bank is a financial institution engaged in the business of providing monetary transactions, such as safeguarding deposits and making loans.
- Most chartered banks have received their government's permission to operate in the financial services industry.
- In the United States, the Office of the Comptroller of the Currency (OCC) is responsible for overseeing chartered banks, federal savings associations, and federal branches and agencies of foreign banks.
- The OCC has the power to grant or deny applications for new charters for national banks and federal savings associations.
Understanding a Chartered Bank
Chartered banks provide core financial intermediary services necessary in today's economy. Individuals can easily deposit their funds into various types of accounts within a chartered bank, earning interest on their temporary savings. Chartered banks maintain a float of currency so they can process customers' daily transactions, but they lend out the majority of their deposits to individuals and commercial borrowers to stimulate economic growth.
Chartered Bank Oversight
A bank’s actual charter lays out operational guidelines for the bank, along with how it will comply with relevant regulations. This might include how the bank will maintain a certain minimum capital requirement. In the United States, a charter can be either state or federally issued and conform to either state agency regulations or federal-oversight regulations, respectively.
The Office of the Comptroller of the Currency (OCC) was created by Congress in 1863 as part of the National Currency Act. The OCC oversees all federal savings associations and national banks, along with all federal branches and agencies of foreign banks. The OCC is an independent bureau within the U.S. Department of the Treasury and is responsible for approving or denying applications for new charters for national banks and federal savings associations.
Examiners from the OCC conduct on-site reviews of banks to ensure the institutions operate in a safe and sound manner. The OCC is responsible for identifying risks to the banking structure and can take actions against chartered banks for noncompliance, including issuing cease and desist orders and imposing penalties. As of 2022, the OCC supervised 1,109 chartered banks, federal savings associations, and federal branches and agencies of foreign banks.
$15.4 trillion
The total value of bank assets held by OCC-regulated institutions, which comprise 65% of all commercial banking assets in the United States.
Chartered Banks vs. Online Banks
Certain online banks may contain overseas charters; these do not conform to either state or federal regulations. In these cases, the consumer must determine if the online bank might offer Federal Deposit Insurance Corporation (FDIC) protection. The FDIC, created in 1933 to maintain public confidence and mitigate bank failure in the United States, insures deposits of up to $250,000 per member institution.
Examples of online banks include Axos Bank, Ally Bank, EverBank (formerly TIAA Bank), Discover Bank, and Charles Schwab Bank. As online banks can cut costs via a primarily digital footprint,many can offer above-average deposit rates and high-quality digital offerings to customers.
State Chartered Banks vs. Federal Chartered Banks
State
Cost savings, higher revenues, access to local regulators and relationships, reduction of national bank powers
Could see an increase in legal lending limit, which will allow better competition for loans and reduce participations
Possible increase in potential earnings due to cost savings
Gain improved access to local primary regulators and banking commissioners
Federal
Ability to open branches in other states more easily
Reduce regulatory requirements over a number of varying state regulators for banks operating in multiple states
Why Banks Convert to State Charter
Some national banks have come to recognize the benefits of converting to a state bank charter. Usually, it's due to these three reasons: cost savings and higher revenues, access to local regulators and relationships, and the reduction of national bank powers.
Most national banks pay much higher regulatory and examination fees than state banks. Each bank has its own fees but, as an example, a national bank with $250 million in assets may save between $25,000 and $50,000 or more in annual supervisory assessment fees by converting. Also, many banks, depending on the state, may see an increase in their legal lending limit, which will allow them to compete for loans and reduce participations. The conversion process is not free. Each state requires filing fees and legal costs, a state regulatory exam, and the costs of rebranding the institution to remove its previous national brand identity. Even so, this conversion cost may prove to save on costs and increase potential earnings.
When national banks convert to a state charter, they can also gain improved access to their local primary regulators. At the national level, the OCC has had substantial turnover, making it more difficult for some banks to maintain a close ongoing relationship with their regulatory connections. With a state charter, all decision-makers are local and should be more aware of issues affecting state banks. Also, a state charter will cause the bank to have two regulators: the state, along with the FDIC to provide federal deposit insurance. However, it can be useful when under a state charter, to be able to get a visit with the state's banking commissioner in person with relatively short notice to discuss any issues.
Impact of Dodd-Frank
Historically, a key benefit of a national bank charter was the widespread claim that federal laws took precedence over state laws by their charter. This was advantageous for banks with operations in multiple states, as the federal laws preempted the differences in state laws. However, the Dodd-Frank Act resulted in cutbacks and a reduction of federal preemption. Most national banks are community banks that are not operating nationally. That being said, national banks must consider whether federal preemption is truly beneficial and whether there are other benefits from the national charter. Each state has its own legal process for converting from a national bank to a state bank. The board and management group of a bank that is thinking about conversion must decide how best to meet its goals and purposes. If the state agency thinks that the bank is shopping around for regulators in order to avoid problems with the OCC, the state agency may be likely to decline the conversion request.
The Dodd-Frank act restricts the charter conversion of a troubled bank, particularly one with any formal enforcement order or memo of understanding. Dodd-Frank required a bank looking for a conversion to state charter to file the application with its current and potential regulator—so the OCC will know in advance of any conversion intention.
So, although the federal charter can reduce regulatory requirements over a number of state regulators for a bank operating in multiple states, there can be cost savings, increased earnings potential, and better relationships with regulators in a conversion to state.
| Examples of Chartered Banks | |
|---|---|
| Bank | Rank |
| JP Morgan Chase | 1 |
| Bank of America | 2 |
| Wells Fargo | 3 |
| Citibank | 4 |
| U.S. Bank | 5 |
| PNC Bank | 6 |
| Truist Bank | 7 |
| Goldman Sachs | 8 |
| TD Bank | 9 |
| Capital One | 10 |
The Dual Banking System
The U.S. commercial banking system is a dual banking system. This means that state banks and national banks are chartered and supervised at different levels. National banks are chartered and regulated under federal laws and are supervised by a central agency. State banks are chartered and regulated under state laws and are supervised by a state agency.
What Is the Advantage of Chartered Banks?
Prior to 1863, banks operated under different policies. Citizens did not entirely trust banks, and it was believed that having all banks operate under standard rules would make people feel safer when putting money into banks.
All chartered banks, whether state or federal, are subject to regular financial examinations of their managed accounts. These exams are done to ensure banks have the necessary capital to handle day-to-day transactions. Additionally, banks can be required to undergo stress tests to model scenarios that might occur and cause financial problems.
Due to their standardized regulatory requirements and increased oversight, chartered banks offer a higher level of security for depositors.
What New Chartered Bank Features Are Being Offered?
There is a new, non-depository, special purpose bank charter being advocated by the Office of the Comptroller of the Currency (OCC), known as the Fintech charter. This charter gives fintechs, or financial services companies that offer limited financial activities such as payments or lending services, but not both, the option to receive a national bank charter that is tailored to their needs, rather than having to steer through more complex state regulations. The OCC primarily designed the charter for fintech lenders, though it does cover both payments and lending firms.
However, legal challenges to this new charter have discouraged fintechs from applying for one. Although the case was dismissed, further litigation is expected.
The Bottom Line
Chartered banks are highly regulated by the OCC. which provides careful oversight and examination of these institutions, which includes penalties for non-compliance. The OCC certifies that the corporate structures of national banks and federal savings associations are established and maintained in accordance with the principles of a safe and sound banking system.
