Dual Banking System

A dual banking system is the system of banking that exists in the United States in which state banks and national banks are chartered and supervised at different levels. Under the dual banking system, national banks are chartered and regulated under federal law and standards, and supervised by a federal agency. State banks are chartered and regulated under state laws and standards, which includes supervision by a state supervisor.

The dual banking system in the U.S. was born during the Civil War period. President Abraham Lincoln's Treasury Secretary, Salmon Chase, led the effort to create the National Bank Act of 1863, whose main objective was to raise money for the North to defeat the South. This had to be done via the issuance of a common currency at the national level. Up to that point, state bank notes were in circulation. The 1863 Act created competition to state banks, and the legislators went a step further the next year by passing an amendment to tax the issuance of state bank notes. The number of state banks dropped dramatically, but a key innovation by state banks — demand deposits — in response to that existential threat led to a strong comeback in the number of state banks, so much so that within 10 years of the 1864 amendment to tax state bank notes, state banks claimed more customer deposits than national banks.

Today, the dual banking system allows for the co-existence of two different regulatory structures for state and national banks. This translates into differences in how credit is regulated, legal lending limits and variations of regulations from state to state. The dual structure has withstood the test of time and most economists agree that it is necessary for a sound and vibrant banking system. National banks offer efficiencies that come from economies of scale and product and service innovations derived from the application of greater resources. State banks, on the other hand, are more nimble and flexible to respond to the unique needs of customers in their own states. Their product and service advancements, subject to approval in a more timely manner by state regulators who have the interests of their residents in mind, could find their way to other states if they are value-added for bank customers.