What is a Chartered Bank?

In general terms, a chartered bank is any financial institution that has received specific permission from its government, in the form of a charter, to conduct business and perform monetary transactions. Chartered banks provide retail and commercial financial services, as opposed to the more systemic ones carried out by central banks. Chartered banks are considered the backbone of the developed world's financial infrastructure, moving money, extending credit, and providing the liquidity that fuels day-to-day commercial activity.

There are numerous adjectives attached to banks that mean different things in different countries, and can be easily confused. In the U.S., the term chartered bank is applicable to both state and national banks. Almost all state banks in the U.S. are chartered by their state governments, with the backing of the Federal Deposit Insurance Corporation (FDIC), a body that guarantees the availability of deposited money. National banks are chartered by the federal Office of the Comptroller of the Currency. Either a state or nationally-chartered bank, in turn, can operate as either a commercial bank or a reserve bank.

Virtually unique in the world, in the U.S. some state banks may be reserve banks, meaning they are part of the Federal Reserve system, which is the country's central bank. This means these banks are involved with monetary policy and loaning money to commercial banks and the government itself, instead of simply having retail customers. In most other countries, a reserve bank is a distinct entity from a state-chartered bank. Most other countries, however, do have roughly similar chartering and deposit insurance institutions to the U.S.

A chartered bank makes the bulk of its revenues by investing and earning interest on the money that people deposit with it. This goes for a reserve or commercial chartered bank. In most countries, there are laws in place that require a bank to keep a particular percentage of deposited money on hand at all times. This is to prevent what is known as a run on a bank, in which a natural disaster or other unforeseen situation arises that causes a bulk of investors to withdraw their money all at once.

One of the causes of the Great Depression was, in fact, that many U.S. banks ran out of cash to fulfill withdrawals following the stock market cash on Black Friday in 1929. With literally no money available to be given, many bank patrons were left with no savings, and no way of getting it. This was a primary factor leading to the creation of the FDIC, which insures the money invested in a participating bank. There are only a handful of banks in the U.S. that are not members of the FDIC.

A credit union may also be considered a type of chartered bank. Though not a bank in the strictest technical sense, a credit union must obtain a state or federal charter to be able to conduct operations. In the U.S., these organizations have a similar institution to the FDIC, known as the National Credit Union Share Insurance Fund.