Dual Banking System

Comptroller of the Currency Administrator of National Banks

National Banks and

The Dual

Banking System
SEPTEMBER 2003

National Banks and The Dual Banking System

S E P T E M B E R 2 0 0 3

T

oday, the dual banking system, which has been a hallmark of banking in the United States for nearly 200 years, is under attack, as many states have attempted to assert legislative and enforcement authority over national banks in a way that contradicts constitutional principles that have been well-settled since the early nineteenth century. This paper explains the history and features of the “dual banking system” and discusses the judicial and legislative precedents establishing the constitutional limits on the ability of states
In an effort to stabilize credit and currency, the Bank had begun calling in its loans and tightening its credit policies. This action triggered an intense economic depression, known as the Panic of 1819. States reacted with different measures, including taxation, designed to drive the branches of the Second Bank from their jurisdictions. (States rankled particularly at the fact that, with a charter from the federal government, the Second Bank was able to open branches and operate its business where it pleased, without state permissions.) The Bank resisted the attack from Maryland, and the issue ultimately was resolved by the landmark Supreme Court decision on federal preemption, M’Culloch v. Maryland,3 in which the Court declared that “states have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control” the operations of a federally created entity, such as the Second Bank.4 During this early period, banks were chartered at the state level, generally through special acts of the state legislatures. Following the demise of the Second Bank, however, the states began to enact “free banking” laws, which permitted organizers to incorporate banks without going through a legislative process, provided they met specified conditions. These free banking laws encouraged the chartering of new state
banking system, and efforts to dilute the unique characteristics of one component of the system undermine the collective strength that comes from the diverse contributions of the two systems. Commentators and state bank supervisors rightly assert, for example, that a separate system of state banks “allows the states to serve as laboratories for innovation and change, not only in bank powers and structures, but also in the area of consumer protection.”9 State supervisors also make what is, in effect, a “smaller is better” argument in favor of the attributes of state systems, lauding the physical proximity of state bank regulators to the institutions they supervise, suggesting that state banks have greater access to state regulators and that geographic proximity gives state regulators greater familiarity with the banks they oversee. On the other hand, the national banking system is the venue for testing and evaluating the efficiencies and benefits that flow from uniform national standards. This takes on a new value as the banking and financial marketplace evolves, increasingly oblivious to state boundaries, as a result of enhanced technology and the growth of national markets for loans, deposits and other financial products. In other words, the national banking system is a laboratory, too, but what it demonstrates is the value of applying uniform national