Implications of the Dual Banking System in the US

Atl Econ J (2016) 44:91103

DOI 10.1007/s11293-016-9487-5

Nilufer Ozdemir1

Published online: 22 March 2016# International Atlantic Economic Society 2016

Abstract This paper examines the differences in characteristics of federal and state chartered banks by using individual commercial banks data sets from 1984 to 2006. The findings indicate significant differences between these two groups of banks in terms of their asset and liability management strategies. In line with these differences, credit channel of monetary policy is found to work differently for state and federal banks. Federal banks are found to be more responsive to monetary policy changes.

Keywords Dual banking system . credit channel . investment banking . commercial banking . monetary policy

Jel G21 . G24 . G28 . E51

Introduction

Prior to the National Bank Act of 1864, commercial banks were organized under charters granted by state legislatures. With the National Bank Act, federally chartered banks were introduced. Since then, banks in the U.S. have two charter options. The first option is to get a federal charter. A federally chartered bank is regulated by the Office of the Comptroller of the Currency (OCC) and complies with federal laws. The second option is to get a state charter. A state-chartered bank obeys state laws and is regulated by state supervisors. It may choose to be a member of the Fed or the Federal Deposit Insurance Corporation (FDIC), which would become its primary federal regulator. The dual banking system refers to these parallel state and federal banking systems that co-exist in the U.S.

In the beginning, there were significant regulatory differences between state and federal banks such as differences in their lending limits, their ability to branch interstate and the list of activities that they were permitted to take. Over time, these regulatory

* Nilufer Ozdemir [email protected]

1 University of Mississippi, 367 Holman Hall University, MS 38677, USA

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92 N. Ozdemir

differences have mostly disappeared with two exceptions. First, national banks are held exempt from certain state laws to establish uniform national standards. For instance, until the 1994 Riegle-Neal Act, a national bank...