Pennsylvania Association of Community Bankers
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  • Home
  • About PACB
    • Board of Directors
    • PACB Services, Inc.
    • Hall of Fame
    • Contact
  • Membership
    • Become A Member!
    • Benefits of Associate Membership
    • Member Listing
    • Member Login
    • PACB Board Portal
    • PACB Job Board
  • Advocacy
    • Advocacy Issues
    • Advocacy Events
    • Action Center
    • FirstPAC
    • Legislative Briefing Calls
    • Ways to Engage
  • Education
    • Be a Speaker
    • CBWN Webinars
    • NextGen"U"
    • ICBA Education
    • PACB Foundation Scholarships
    • SBS Institute Certification Programs
  • Events
    • 2025 Convention
    • PACB INSPIRE Awards
    • Educational Events
  • Communications
    • News
    • Consumer Services
    • Hometown Banker Website
    • SUBSCRIBE TO HOMETOWN BANKER
    • Social Media
    • Photo Galleries
  • Advertising Opportunities

Consumer Services

Information About Community Banks

Who Does the Community Bank Serve?
Community banks serve friends, neighbors, local business owners and those who work to make your community a great place to be. Because community banks are locally owned and operated, they do well when their communities thrive. Your community bank owes its success–and its allegiance–to local customers, and the community they serve . To the community banker, business isn’t just credit lines and good collateral; it’s the people and their future. In hundreds of towns and municipalities across the state, the hometown community bank serves as the economic focal point. These communities are able to maintain and guide their own destinies through the support and dedication of their own community banks.

What’s So Special About a Community Bank?
You know the owners and shareholders of your community bank. You know the lenders, managers and tellers in the branches. You know them because they live, volunteer, coach, mentor and support your community. They are accessible to you and want to connect with their local customers. Decisions and policies are not made by a nameless “board” or handed down by bank officers hundreds or thousands of miles away; decisions are made by your neighbors, friends and local business owners. Community banker evaluate decisions based on what he/she sees happening to the people they knows and care about, not solely on computer printouts, credit scores and trends reported in financial news.

​Community banks keep dollars earned at home, spent at home, and banked at home into investments which nourish the community and improve the lives of its people.

Banks and Banking FAQs and Glossary

Overview
"Bank" is a term people use broadly to refer to many different businesses. What you think of as your "bank" may be a commercial bank, a savings and loan association, a savings bank, or a credit union.

When people discuss the financial services industry, however, bank means "commercial bank", and a commercial bank is a specific, unique institution.

The Commercial Bank
The official definition of a commercial bank is a privately-owned institution that accepts demand deposits and makes commercial loans. Demand deposits are money people leave in an institution with the understanding that they can get it back at any time. Commercial loans are simply loans to businesses. This action of taking deposits and making loans is called financial intermediation. A bank's business, however, does not end there.

Banks, as the robber Willie Sutton pointed out, are where the money is. Banks hold approximately two-fifths of all assets in American financial institutions. Most people and businesses pay their bills with bank checking accounts, placing banks at the center of our payments systems. Banks are the major source of consumer loans -- loans for cars, houses, education -- as well as main lenders to businesses, especially small businesses.

Banks are often described as the engines of an economy, in part because of these functions, but also because of the major role banks play as instruments of the government's monetary policy. Unlike non-depository institutions, banks actually create money.

How Banks Create Money
Banks can't lend out all the deposits they collect, or they wouldn't have funds to pay out to depositors. Therefore, they keep primary and secondary reserves. Primary reserves are cash, deposits due from other banks, and the reserves required by the Federal Reserve System. Secondary reserves are securities banks purchase on the open market, which may be sold to meet short-term cash needs. These securities are usually government bonds of some kind. Federal law sets requirements for the percentage of deposits a bank must keep on reserve, either at the local Federal Reserve Bank or in its own vault. Any money a bank has on hand after it meets its reserve requirement is its excess reserves.

It is the excess reserves that create money. This is how it works (using a theoretical 20% reserve requirement): You deposit $500 in YourBank. YourBank keeps $100 of it to meet its reserve requirement, but lends $400 to Ms. Smith. She uses the money to buy a car. The Sav-U-Mor Car Dealership deposits $400 in its account at TheirBank. TheirBank keeps $80 of it on reserve, but can lend out the other $320 as its own excess reserves. When that money is lent out, it becomes a deposit in a third institution, and the cycle continues. Thus, in this example, your original $500 becomes $1,220 on deposits in three different institutions. This phenomenon is called the multiplier effect. The size of the multiplier depends on the amount of money banks must keep on reserve.

The Federal Reserve can contract or expand the money supply by raising or lowering banks' reserve requirements. Banks themselves can contract the money supply by increasing their own reserves to guard against loan losses or meet sudden cash demands. A sharp increase in bank reserves, for any reason, can create a "credit crunch" by reducing the amount of money a bank has to lend.

How Banks Make Money
Although banks are important tools of public policy, they are privately-owned, for-profit institutions. Banks are owned by stockholders. The stockholders' stake in the bank forms most of its equity capital, a bank's ultimate buffer against losses. At the end of the year, a bank pays some or all of its profits to its shareholders in the form of dividends. The bank may retain some of its profits to add to its capital. Stockholders may also choose to reinvest their dividends in the bank.

Banks earn money in three ways:
  • They make money from what they call the spread, the difference between the interest rate they pay for deposits and the interest rate they receive on the loans they make.
  • They earn interest on the securities they hold.
  • They earn fees for customer services, such as checking accounts, financial counseling, and loan servicing.

 Banks earn an average of just over 1% of their assets (loans and securities) every year.

A Short History of Banking
The first American banks appeared early in the 18th century to provide currency to colonists who needed a means of exchange. Originally, banks only made loans and issued noted for money deposited. Checking accounts appeared in the mid-19th century, the first of many new bank products and services. These now include credit cards, automatic teller machines, NOW accounts, individual retirement accounts, home equity loans, and a host of other financial services.

Many financial institutions can now perform some banking functions. Banks compete with savings and loans, savings banks, credit unions, financing companies, investment banks, insurance companies and many other financial services providers. Some experts claim that banks are becoming obsolete, but banks still serve vital economic goals. They continue to evolve to meet the changing needs of their customers, as they have for the past two hundred years. If banks did not exist, we would have to invent them.

Banks and Public Policy
Our government's earliest leaders struggled over the shape of our banking system. They knew that banks have considerable financial power. Should this power be concentrated in a few institutions, they asked, or shared by many? Alexander Hamilton argued strongly for one central bank; that idea horrified Thomas Jefferson, who believed that local control was the only way to restrain banks from becoming financial monsters.

We've tried both ways, and our current system seems to be a compromise. It allows for a multitude of banks, both large and small. Both federal and state governments issue bank charters for "public need and convenience," and regulate banks to ensure that they meet those needs. The Federal Reserve controls the money supply at a national level; the nation's 10,715 banks control the flow of money in their respective communities.

Because banks hold government-issue charters and generally belong to the federal Bank Insurance Fund, state and federal governments use banks as instruments of broad financial policy, beyond money supply. Governments encourage or require different types of lending; for instance, they enforce nondiscrimination policies by requiring equal opportunity lending. They promote economic development by requiring lending or investment in banks' local communities, and by deciding where to issue new bank charters. Using banks as tools of economic policy requires a constant balancing of banks' needs against the needs of the community. Banks must be profitable to stay in business, and a failed bank doesn't meet anyone's needs.

Overview
There are three major types of deposit-taking institutions in the United States: banks, thrifts (which include savings and loan associations and savings banks), and credit unions. These types of institutions have become more like each other in recent decades, and their unique identities have become less distinct. They still differ, however, in specialization and emphasis, and in their regulatory and supervisory structures. Commercial banks are the "department stores" of the financial services world. The thrift institutions and credit unions are more like specialty shops that, over time, have expanded their lines of business to better compete for market shares.

Commercial Banks
Commercial banks are stock corporations that make loans to businesses and offer checking and other deposit accounts. Basically, banks receive deposits, and hold them in a variety of different accounts, extend credit through loans and other instruments and facilitate the movement of funds. While commercial banks generally specialize in short-term business credit, they also make consumer loans and mortgages, and have a broad range of financial powers. Their corporate charters and the powers granted to them under state and federal law determine the range of their activities.

States and the federal government each issue bank charters. State-chartered banks operate under state supervision, and if they fail, are closed under the provisions of state law. National banks are chartered and regulated by the Office of the Comptroller of the Currency, a division of the U.S. Treasury Department. Banks can choose between a state and a federal charter when starting their business, and can also convert from one charter to another. Commercial banks receive deposit insurance from the Federal Deposit Insurance Corporation's Bank Insurance Fund (BIF). All national banks, and some state-chartered banks, are members of the Federal Reserve System. Commercial banks maintain a preeminent role in the U.S. financial system. Today, there are 7,524 state-chartered and 3,191 federally-chartered commercial banks. Commercial banks hold approximately $3.9 trillion in assets, and approximately $2.8 trillion in deposits.

Savings and Loans / Savings Banks
Savings and loan associations and savings banks specialize in real estate lending, particularly loans for single-family homes and other residential properties. They can be owned by shareholders ("stock" ownership), or by their depositors and borrowers ("mutual" ownership). These institutions are referred to as "thrifts," because they originally offered only savings accounts, or time deposits. Over the past two decades, however, they have acquired a wide range of financial powers, and now offer checking accounts (demand deposits) and make business and consumer loans as well as mortgages.

Savings institutions must hold a certain percentage of their loan portfolio in housing-related assets to maintain their special tax status and their membership in the Federal Home Loan Bank System. This is called the "qualified thrift lender" (QTL) test. Savings institutions must maintain 65% of their portfolio in housing-related assets to maintain their membership in the Federal Home Loan Bank System and 60% to qualify for special tax treatment.

Both savings and loan associations and savings banks may be chartered by the Office of Thrift Supervision (OTS) or by the state savings and loan supervisor. Generally, savings and loan associations are insured by the Savings Association Insurance Fund (SAIF), and savings banks are insured by the Bank Insurance Fund (BIF).

The number of savings institutions has declined dramatically in the past decade as differences have narrowed between these institutions and commercial banks. The savings and loan crisis of the 1980s forced many thrifts to close or merge with other institutions. Today, 1,894 savings and loans and 323 savings banks continue to operate. Together, they hold $999 billion in assets and $756.9 billion in deposits.

Credit Unions
Credit unions are cooperative financial institutions, formed by groups of people with a common bond. These groups of people pool their funds to form the institution's deposit base; the group owns and controls the institution together. Membership in a credit union is not open to the general public, but is restricted to people who share the common bond of the group that created the credit union. Examples of this common bond are working for the same employer, belonging to the same church or social group, or living in the same community. Credit unions are nonprofit institutions that seek to encourage savings and make excess funds within a community available at low cost to their members.

Credit unions accept deposits in a variety of accounts. All credit unions offer savings accounts, or time deposits; the larger institutions also offer checking and money market accounts. Credit unions' financial powers have expanded to include almost anything a bank or savings association can do, including making home loans, issuing credit cards, and even making some commercial loans. Credit unions are exempt from federal taxation and sometimes receive subsidies, in the form of free space or supplies, from their sponsoring organizations.

Credit unions were first chartered in the U.S. in 1909 at the state level. The federal government began to charter credit unions in 1934 under the Farm Credit Association, and created the National Credit Union Administration (NCUA) in 1970. States and the federal government continue to charter credit unions. All credit unions are insured by the National Credit Union Share Insurance Fund, which is controlled by NCUA.

Today, there are more than 12,000 credit unions. These organizations hold $257.8 billion in deposits and $289.6 billion in assets.
​
Products and Services
All commercial banks accept deposits and make commercial loans. This intermediation function is a bank's core business. Beyond that, however, banks and bank holding companies may offer other products and services (so-called "nonbank activities"). "Products and services" are also referred to as "powers."

An institution's primary regulator determines what the institution can do. The Comptroller of the Currency makes these decisions for national banks, state bank supervisors decide appropriate activities for state-chartered banks, and the Federal Reserve System determines the activities of bank holding companies. The FDIC monitors state-authorized activities of state-chartered banks to protect insured deposits from unsafe and unsound activities, but has limited authority to intervene directly in the activities of national banks or holding companies.

National Banks
The National Bank Act limits the activities of national banks to those deemed "incidental to its organization." These activities include collecting deposits and making loans; buying, selling and circulating currency; holding real estate; providing fiduciary services; and trading certain securities for clients. The Comptroller of the Currency has discretion to allow other activities that may be considered "incidental" to banking.

Activities authorized by the OCC under this provision include selling credit life insurance; offering banking-related data processing services; issuing credit cards; acting as leasing agents for personal property; warehousing and servicing loans; assisting customers in tax preparation; operating postal substations; acting as payroll issuers; maintaining business records for customers; and providing consulting and auditing services for other banks. National banks can also verify and collect on checks and credit cards for third parties, provide bill payment services, offer economic analysis and forecasts to customers, and develop financial computer software for sale to other banks and customers. National banks in towns of fewer than 5,000 people may sell insurance, and the OCC has recently authorized national bank sales of other uninsured products (e.g., mutual funds and annuities) as well.

The 1933 Banking Acts also known as Glass-Steagall, prohibits national banks from affiliating with commercial firms or engaging in securities activities. Glass-Steagall permits three investment banking activities for national banks: agency activities, restricted purchases for the bank's own account, and free dealing in certain government securities.

State Banks
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.

Bank Holding Companies
A bank holding company (BHC) is a corporate structure that owns a bank as its primary business. It may own other subsidiaries (affiliates of the bank) that engage in activities other than banking. The Federal Reserve Board determines permissible activities of these non-banking subsidiaries based on the provisions of Section 4(c)(8) of the Bank Holding Company Act.

Section 4(c)(8) provides a "laundry list" of permissible nonbank activities for bank holding companies. These include providing services to the bank subsidiaries, such as accounting, advertising, data processing, courier services, personnel services, and underwriting blanket bond insurance for bank employees. Bank holding companies may hold shares of other companies as a fiduciary, and may own less than 5% of the shares of any other company. They may also own the shares of foreign companies that do most of their business abroad, and the shares of export trading companies.

A provision of 4(c)(8) allows the Federal Reserve to approve other nonbank activities that are "closely related to banking." The Fed's Regulation Y lists these activities. Permissible nonbank activities under Regulation Y include consumer finance, credit card, mortgage and commercial financial operations; industrial loan companies; trust companies; financial counseling services; leasing agencies; investment in community development corporations; financial data processing services; bank-related courier services; credit life and home mortgage insurance; money transmittal; management consulting for other financial institutions; collection agencies; tax preparation services; consumer credit bureaus; consumer financial counseling; securities brokerage; government securities underwriting; printing and selling checks; and operating an options trading system.

Bank holding companies with less than $50 million in assets, or operating in towns of fewer than 5,000 people, can sell insurance. The Federal Reserve has also approved bank holding company investments of 5-10% in subsidiaries that underwrite commercial paper, mortgage-backed securities, and municipal revenue bonds.

Trends in Products and Services
Bank products and services have cycled through expansions and contractions over the past century. Before 1933, banks' relationships with other businesses were largely unrestrained. When the Depression struck, many policymakers believed that expanded bank powers – especially bank securities activities – were directly responsible for the collapse of the banking system. Whether or not this was the case is still a matter of debate, but the result was Glass-Steagall, which severely restricted ties between banking and commerce.

Since then, state legislatures and federal regulators have gradually moved to broaden the range of permissible activities for banks. This movement has speeded up considerably over the past five or ten years, as the financial markets and customers' needs have changed dramatically. Several states have acted over the past five years to allow new bank insurance powers, and the Comptroller of the Currency continues to allow new activities under the "incidental powers" authority. Since the late 1980s, the Fed has steadily broadened its interpretation of permissible activities under Glass-Steagall to allow limited securities and commercial paper underwriting. This liberalizing trend is likely to continue, as competition within the financial services industry blurs traditional lines between banking and other financial services.

​Bank Geographic Structure
In banking, the term geography refers to the area in which banking activities are allowed to take place, such as interstate banking, and intrastate and interstate branching. While even banking experts often confuse the terms, they have distinctly different meanings.

Intrastate Branching
Intrastate branching means that a bank can have more than one office within its home state. Fifty years ago, few banks had more than one office. Today, most banks can open offices (branches) across their states. Bank branching originated at the state level, and the states have directed the expansion of banks' geographic boundaries. Forty states, the District of Columbia and Puerto Rico allow statewide branching, and ten states allow limited branching.

Today there are almost 50,000 bank branches open across the country, constituting approximately 80% of the nation's banking offices. More than 60% of banks today operate branches, commonly over broad areas within their home states. The proliferation of branches has reduced the number of banks in the United States, but perhaps not as much as you might expect while the U.S. had 147399 banks in 1940, the country has 10,715 banks today, a 25% decline over more than fifty years.

The 1927 McFadden Act sought to give national banks competitive equality with state-chartered banks by letting national banks branch to the extent permitted by state law. The McFadden Act specifically prohibited interstate branching by allowing national banks to branch only within the state in which it is situated. Although the Riegle-Neal Interstate Banking and Branching Efficiency Act repealed this provision of the McFadden Act, it specified that state law continues to control intrastate branching, or branching within a state's borders, for both state and national banks.

Interstate Banking
Interstate banking refers to the ability of a bank holding company to own and operate banks in more than one state. Under the Douglas Amendment to the Bank Holding Company Act of 1956, states controlled whether, and under what circumstances, out-of-state bank holding companies could own and operate banks within their borders. This right was upheld in the 1985 Northeast Bancorp v. Board of Governors decision, which determined that states could establish and enforce regional interstate banking compacts.

The need for the Douglas Amendment grew from the concern that bank holding companies were evading the McFadden Act and state branching laws by acquiring numerous subsidiary banks in various states, and then operating these banks as if they were branches. The development of these interstate bank networks was a significant factor leading to Congress' passage of the Banking Holding Company Act of 1956. Senator Douglas emphasized that a primary purpose of his amendment was "to prevent an undue concentration of banking and financial power, and instead keep the private control of credit diffused as much as possible."

Regional compacts were reciprocal legislative agreements between states in a specific geographic area. For example, six New England states adopted legislation in the mid-1980s allowing interstate acquisitions by banks in the New England region. Banks in other regions, in the southeastern United States and the Midwest, soon followed with regional banking arrangements.

Thirty-five states currently allow bank holding companies from anywhere in the country to establish or acquire a bank within their borders, referred to as "full nationwide banking." Fourteen states and the District of Columbia allow only regional interstate banking, and only one state, Hawaii, has no interstate banking statute.

The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 repealed the Douglas Amendment. As of September 29, 1995, federal law allows full nationwide banking across the country, regardless of state law. Another provision of the Riegle-Neal Act allows affiliate banks within bank holding companies to effectively act as branches for each other, accepting deposits, collecting payments, and providing other customer services.

Interstate Branching
Interstate branching means that a single bank may operate branches in more than one state without requiring separate capital and corporate structures for each state. The state of New York approved the first interstate branching statute in June, 1992. This law set several requirements and conditions on New York branches of out-of-state banks. It also required reciprocity, that is, that New York banks be allowed to branch into the home states of banks that branch into New York. North Carolina, Oregon, and Alaska passed similar laws in 1992 and 1993.

The Riegle-Neal Interstate Banking and Branching Efficiency Act allows national banks to operate branches across state lines after June 1, 1997. The federal law allows branching through acquisition only, which means that a bank holding company must acquire a bank and merge it into another bank in order to operate it as a branch.

The Riegle-Neal Act allows states to "opt out" of interstate branching by passing a law to prohibit it before June 1, 1997. A state that "opts out" of interstate branching prevents both state and national banks from branching into or out of its borders. If a state opts out, it may opt back in at any time by repealing its prohibition on interstate branching.

States may also "opt in" before the nationwide trigger date by passing a law to allow interstate branching for both state and national banks. States that do not wish to "opt out" must enact some form of legislation to allow state-chartered banks to operate branches across state lines, because the Riegle-Neal Act addresses branching rights for national banks only. States also have the power to authorize de novo branching across state lines, which means that a bank could simply open a branch in another state instead of having to acquire an entire bank.

Interstate branching will require many changes in the current system of bank supervision. Generally, state and federal regulators examine only a bank's headquarters, not its branches. While this will probably continue to be the case in a system of interstate branching, state and federal regulators are working now on ways to collect and share the information they need about banks' operations in multiple states and federal supervisory districts.

Who Regulates What?
Commercial bank regulation involves three federal agencies and fifty state agencies. At first glance it seems hopelessly complicated, but it's not that hard to understand once you know what each agency does.

State and Federal Charters
You may have seen or heard the term "dual banking system." This refers to the fact that both state and federal governments issue bank charters for the need and convenience of their citizens. The Office of the Comptroller of the Currency (OCC) charters national banks; the state banking departments charter state banks. "National" or "state" in a bank's name has nothing to do with where it operates; it refers to the kind of charter the bank has.

Chartering agencies ensure that new banks have the necessary capital and management expertise to meet the public's financial needs. The charterer is an institution's primary regulator, with front-line duty to protect the public from unsafe and unsound banking practices. Charterers conduct on-site examinations to assess bank condition and monitor compliance with banking laws. They issue regulations, take enforcement actions, and close banks if they fail.

The Comptroller of the Currency supervises approximately 3,191 national banks. State bank supervisors oversee about 7,524 commercial banks.

The Deposit Insurer
The Federal Deposit Insurance Corporation (FDIC) administers the Bank Insurance Fund, which insures the deposits of member banks up to $100,000 per account. All states now require newly-chartered state banks to join the FDIC before they can accept deposits from the public. Under the 1991 Federal Deposit Insurance Corporation Improvement Act (FDICIA), both state-chartered and national banks must apply to the FDIC for deposit insurance; previously, national banks had received insurance automatically with their new charters.

The FDIC is the federal regulator of the approximately 6,548 state-chartered banks that do not belong to the Federal Reserve System. It cooperates with the state banking departments to supervise and examine these banks, and has considerable authority to intervene to prevent unsafe and unsound banking practices. Under FDICIA, the FDIC also has backup examination and regulatory authority over national and Fed-member banks.

The FDIC receives failed institutions from the chartering agencies, and either liquidates them or sells the institutions to redeem insured deposits.

The Central Bank
The Federal Reserve System controls the flow of money in and out of banks by raising or lowering its requirements for bank reserves and buying and selling federal securities. It lends money to banks at low interest rates (the "discount rate") to help banks meet their short-term liquidity needs, and is known as the "lender of last resort" for banks experiencing liquidity crises. Together, the FDIC and the Federal Reserve form the federal safety net that protects depositors when banks fail.

Membership in the Federal Reserve System is required for national banks, optional for state banks. While many large state banks have become Fed members, most state banks have chosen not to join. The Federal Reserve is the federal regulator of the 976 state-chartered member banks, and cooperates with state bank regulators to supervise these institutions.

The Federal Reserve also regulates all bank holding companies. Its regulatory focus is not so much on the banks within a holding company as on the umbrella structure of the holding company itself. Holding companies must apply to the Federal Reserve to acquire new subsidiaries or engage in new activities. The Fed monitors the capital condition and general financial health of holding companies, and may take enforcement actions against them. The Federal Reserve is also responsible for federal oversight of state-chartered and -licensed offices of foreign banks in the United States.

How Did We Get So Many Regulators?
Many people have said that we would never design our current regulatory system as it is if we were starting from scratch. But our current system has evolved with the country, and changed with the country’s needs.
​
The states were the first governments to charter banks in the United States. The federal government chartered the First and Second Banks of the United States in the early 19th century. These were the first national banks, and performed functions similar to today’s Federal Reserve System. From 1837, when the Second Bank’s charter expired, to 1863, there were no national banks and no federal regulators.

The National Bank Act of 1863 created the Office of the Comptroller of the Currency, and authorized it to charter national banks. The original purpose of both the OCC and national banks was to circulate a universal currency, thus making tax collection easier and helping to finance the Civil War. The dual banking system took shape in the late 19th century, as states reformed their chartering policies and regulatory systems in response to the National Bank Act.

A series of money shortages early in the 20th century made it clear that the country needed some central authority to monitor and control the money supply. The Federal Reserve Act of 1913 established this authority through a network of twelve Federal Reserve Banks, overseen by a Board of Governors. The Federal Reserve System had regulatory authority over all its member banks; this was the first time a federal agency had direct authority over state-chartered banks, although state bank membership in the Federal Reserve was voluntary.

The FDIC was created by the Banking Act of 1933, in response to the avalanche of bank failures that followed the stock market crash of 1929. The FDIC originally insured deposits up to $5,000. The 1933 Banking Act required all state-chartered banks to join the Federal Reserve within a certain period of time or lose their deposit insurance, but this requirement was eventually repealed. The FDIC established its own standards for state nonmember bank acceptance into the fund.

Bank holding companies were new corporate entities that began appearing in the 1940s. The banks were all regulated, but no one regulated the holding company subsidiaries that weren’t banks, and no one watched the flow of resources among affiliates within the holding company. The Bank Holding Company Act of 1956 gave the Federal Reserve regulatory responsibility for these companies, while leaving the supervision of banks within holding companies in the hands of their traditional regulators.

In 1989, the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) expanded the FDIC’s supervisory and enforcement authority, and extended its responsibilities to include savings and loans as the administrator of the new Savings Association Insurance Fund (SAIF).

Most recently, 1991’s FDICIA expanded the authority of federal regulators to intervene in troubled institutions. FDICIA also mandated specific enforcement actions for unhealthy institutions, the first time such provisions had been included in federal statutes.

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