State-chartered banks that are not members of the Federal Reserve System are generally not subject to Glass-Steagall restrictions. Many states allow their state-chartered banks to offer nonbank products and services to their customers beyond the “incidental” powers of national banks.
The 1991 Federal Deposit Insurance Corporation Improvements Act (FDICIA) generally prohibits state-chartered banks from engaging as principal in activities not permitted for national banks, unless the FDIC determines that the activity poses no risk to the deposit insurance fund. A bank acts as principal when it takes an action on its own behalf, such as investing or underwriting. FDICIA does not restrict state-authorized bank agency activities, in which a bank acts on behalf of a customer (e.g., insurance or real estate sales). FDICIA allowed certain insurance underwriting activities to continue under a grandfather provision, but required divestiture of other activities over a five-year period.
Forty-three states allow their state-chartered banks to offer full or discount brokerage services. Seventeen allow banks to sell real estate, and thirty allow their banks to sell insurance. FDIC approval is not necessary for these activities. Seventeen states allow banks to underwrite securities, which does require FDIC approval, as do real estate equity and development activities, which 27 states permit. Banks in eight states continue to underwrite insurance under FDICIA’s grandfather provisions. Thirty-eight states have “wild card” laws, that grant state-chartered banks parity with the powers of national banks.
Many states require or encourage their banks to conduct their nonbank activities through operating subsidiaries, a structure that is available to national banks as well. State supervisors examine and regulate these subsidiaries as parts of their parent banks.