The Dual Chartering System and the Benefits of the State Charter

Banks and Credit Unions have the choice of being chartered by the state or federal government. The United States has the strongest and most innovative banking system in the world, in large part because of this choice. It creates a healthy dynamic tension among regulators, resulting in a wider range of products and services available to consumers, lower regulatory costs, and more effective, more responsive supervision.

A dual chartering system has existed in this country since the enactment of the National Banking Act in 1863. Prior to that time, other than the First and Second Banks of the United States, only state-chartered banks existed. State regulators are the guardians of state-chartered banks and credit unions and help ensure the public’s confidence in the financial services system that is vital to any state’s economic destiny.

The current regulatory structure includes a state agency from each state that serves as the chartering authority and primary regulator for state licensees. The California Department of Financial Protection and Innovation’s (the “Department”) Division of Financial Institutions serves in that capacity for both banks and credit unions. The Office of the Comptroller of the Currency serves as the chartering authority and primary regulator for national banks. The National Credit Union Administration serves as the chartering authority, primary regulator and insurer for national credit unions. In addition, virtually all state banks in California and all national banks are insured by the Federal Deposit Insurance Corporation (“FDIC”), resulting in an additional regulator for most state banks, and in some instances, for national banks. Further, all national banks and many state banks are members of the Federal Reserve System or have adopted a bank holding company structure, which results in additional regulation and an additional regulator; the Board of Governors of the Federal Reserve System (“FRB”). While the regulatory presence of the FDIC and FRB are not considered a part of the dual chartering phenomena, the existence of this multitude of regulators, together with their respective regulations, can complicate the regulatory process for both bankers and regulators. Some perceive this structure as a redundant regulatory system and have forecasted the “death” of the dual chartering system; yet dual chartering continues to thrive.

The dual chartering system provides a charter choice for bank and credit union management to exercise based on available powers, geographic concerns, accessibility of regulators, regulatory philosophy, and costs. Generally speaking, the larger interstate or international companies have tended to hold national charters, while smaller community bankers often choose to operate under the more local regulatory environment provided by the state regulator. Nevertheless, the appeal of the state charter is quite strong. As of June 30, 2023, there were 3,632 state banks with total assets of $8.0 trillion, versus 756 national banks with total assets of $14.9 trillion.

The competitive nature of the dual chartering system has prompted individual states to be responsive to the needs of their constituent bankers and citizens, thereby resulting in new products and powers. Innovations like branching, deposit insurance, trust services, variable rate mortgages, home equity loans, interest-bearing transaction accounts, and checking accounts first appeared in state chartered banks. A choice of charter forces regulators to update and improve examination techniques and examiner training, maximize efficiency and control costs for fear that supervised institutions might abandon them out of frustration. Moreover, regulatory authorities are encouraged to take a healthier, more positive posture on financial innovation and risk-taking when there are charter alternatives. Studies have actually argued that not having both federal and state charters would inhibit financial services competition and its benefits for consumers. A 1986 study, Perspectives on Safe and Sound Banking, for instance, concluded that the dual chartering system has mitigated the tendency of regulators to stifle innovation and restrict new entrants. It is that competitive and innovative nature that benefits California’s citizens, businesses and economy.

State regulators provide a “local” perspective and tend to keep a “state” focus on financial issues that impact the state’s economy. Whereas, the “Washington DC” perspective, by its nature, does not always consider individual state needs. States have a unique perspective that is not always shared at the federal level. The smallest bank or credit union failure in the smallest town may not drive policy in Washington, DC or impact Wall Street, but may have a devastating impact upon the community the institution serves. Safety and soundness supervision is about local economies and communities. By ensuring the success of local institutions, state regulators are also strengthening local economies. Therefore, state regulators must have an equal voice with the federal regulators in the development of regulatory policy and supervision decisions that affect banks and credit unions. The dual chartering system enables state governments to apply state laws and regulations that ensure consumer protection, that serve the needs of local economies and that respond to the values and concerns of local citizens, thus, encouraging diversity and innovation. It is the state regulator that answers to and carries out the mandates of state government.

While overlapping federal and state regulators can appear to the uninformed to constitute duplication; the dual system actually provides checks and balances between two levels of government and helps to ensure the decentralization of decision-making power. It serves as a safety valve against concentration of power in the hands of a few decision-makers, who can become imperceptive or complacent, and against the potential for abusive or simply unwise actions or oppressive regulation. The decentralization of decision-making in regulation has created an environment where state and federal legislative bodies and regulators must work together on regulatory and other policy matters that enhance financial services and supervision. There are many examples of state-federal cooperation. State and federal legislative bodies worked together to form the basis for first regional and then nationwide interstate banking. State-federal regulatory working groups operate across the nation on an ongoing basis to detect and deter fraud and share regulatory findings. Often, state regulators are made aware of troubling practices, trends, or warning signs before the federal regulators can identify these emerging issues. State regulators and legislatures then respond quickly, which enables federal regulators and Congress to learn from the state experience to develop uniform and nationwide standards or best practices. Other examples include the development of consistent supervisory examination reports across state and federal regulatory agencies. State and federal regulatory agencies also accept each other’s examination reports as if they were their own, and share examination report software and other technology, reducing the potential duplication of effort that could occur if there was not a high level of cooperation between them. The dual chartering system is not unlike the vision of our country’s founders, who established a system of government that divides power and responsibilities between the state governments and the central government.

CONCLUSION – The dual chartering system works.

The Department’s Division of Financial Institutions plays an important role in the success of California’s financial services system and its economy. As a state regulator, we promote competition and innovation. Our local presence provides local understanding and guidance that is California focused. Because of our focus, we are first to identify and respond to California’s issues and provide the checks and balances needed to ensure that the “State’s Rights” are upheld.

The alternative is potentially poorer services and less financial support for California’s citizens, businesses, and, ultimately, its economy. In other words, without the Department’s Division of Financial Institutions coordinating with federal regulators, financial security and opportunities for Californians would be inadequate, and in effect, California would be ceding considerable control to the federal government.

The Department’s Division of Financial Institutions must exist and continue to be intimately involved with all aspects of bank and credit union supervision and regulation. While some may call the dual chartering system redundant; “redundancy” in this sense makes the protection of the interests of Californians a priority!


  • John J. Schroeder, “Duel” Banking System? State Bank Parity Laws: An Examination of Regulatory Practice, Constitutional Issues, and Philosophical Questions, Indiana University, 36 Ind. L. Rev. 197, 2003
  • Federal Deposit Insurance Corporation, FDIC – Quarterly Banking Profile,
  • William M. Isaac, Director, FDIC, Address to the 79th Annual Convention of the Conference of State Bank Supervisors, April 28, 1980
  • American Bankers Association and Conference of State Bank Supervisors, The Benefits of Charter Choice, The Dual Banking System As A Case Study, June 24, 2005
  • U.S. Department of the Treasury, Modernizing the Financial System, February 1991, page XIX-6
  • E.g., George Benston, Robert Eisenbeis, Paul Horvitz, Edward Kane and George Kaufman, Perspectives on Safe and Sound Banking, 1986, page 277
  • John L. Bley, Supporting State Banking Systems – A Dedicated Approach to Economic Vitality, IntegraAdvisor, February 2003
  • Conference of State Bank Supervisors, response to Treasury Department’s Review of the Regulatory Structure Associated with Financial Institutions, November 30, 2007