What is a Dual Banking System?

A dual banking system is a type of banking structure that makes it possible to charter banks at both the state level and the national level. The system also allows for the supervision of those banks to occur at whatever level is associated with the original charter. This varying level of supervision can make a difference in how the banks regulate credit, establish legal lending limits, and in general provide services to consumers.

One of the earliest examples of a dual banking system developed in the United States during the middle of the 19th century. Federal banking laws provided states with the rights to establish and regulate banks within their borders, using their own rules and regulations to manage or supervise the operation of those banks. At the same time, the federal government retained the right to establish national banks and to regulate those banks in accordance with regulations developed at the national level. Today, the practice continues, with state chartered banks responsible for observing regulations that are held in common with federally chartered banks, but continuing to exercise latitude in any area of the banking process that is not specifically considered binding on state chartered banks.

State banks that operate under a dual banking system may or may not utilize the same standards for the extension of credit, either through the issuance of credit cards or loans to consumers. The mode of supervision may also vary somewhat from one state to another. One of the more common organizational structures for monitoring and supervising the operation of state chartered banks is to appoint a state supervisor, with that supervisor often connected with the state’s treasury department. The supervisor often is supported by a team of managers who conduct audits and in other ways ensure that the state banks are operating within the regulations currently in effect in that particular state.

A similar approach is used to manage the operation of federally chartered banks that are part of a dual banking system. In the United States, the Office of the Comptroller of the Currency regulates nationally chartered banks. Those nationally chartered banks are held accountable for complying with federal banking regulations, and are subject to fines or other courses of action should the Comptroller’s Office find those banks are in violation of any federal regulations.

One of the benefits of a dual banking system is the wide range of banking options provided to consumers. Both businesses and individual consumers can assess the merits of different federally and state chartered banks, and determine which bank or banks offer the most attractive range of services and fees. This ability to choose from so many different banking options is generally considered healthy for the economy, as it promotes competition within the standards established by federal and state laws.