What Is a Federally Chartered Bank?
Unpack the essence of federally chartered banks: understanding their federal authorization, regulatory framework, and distinct operational reach.
The U.S. operates under a dual banking system, allowing financial institutions to obtain their operating authority, or charter, from either a federal or a state government. Understanding this structure is important for comprehending how banks operate and are overseen. This article will explore what defines a federally chartered bank, the federal agency responsible for its oversight, and the operational scope and powers that come with a federal charter.
Defining a Federally Chartered Bank
A federally chartered bank is a financial institution that has obtained its charter directly from the federal government. A charter serves as a legal document that grants a bank permission to operate and outlines the specific rules governing its activities. This federal charter authorizes the bank to engage in core banking functions, such as accepting deposits from the public and extending loans. The nature of a bank’s charter determines the specific regulatory framework under which it must operate. Federally chartered banks are often referred to as “national banks.” Their federal origin establishes them as unique entities within the broader U.S. financial system.
The Office of the Comptroller of the Currency
The Office of the Comptroller of the Currency (OCC) is an independent bureau within the U.S. Department of the Treasury. This agency holds the responsibility for chartering, regulating, and supervising all national banks and federal savings associations. The OCC ensures that the banks under its supervision operate in a safe and sound manner, provide fair access to financial services, and adhere to applicable laws and regulations.
The OCC fulfills its mandate through functions that include the issuance of charters, conducting examinations, and enforcing banking laws. Its examiners evaluate bank activities, management processes, financial health, and risk management systems to ensure compliance and stability. The agency also possesses the authority to approve or deny applications for new charters, branches, and other structural changes within banks. In instances of violations, unsafe practices, or breaches of fiduciary duty, the OCC can take enforcement actions, such as issuing cease and desist orders or imposing monetary penalties.
Operational Scope and Powers
A federal charter grants banks operational scope and powers, primarily by subjecting them to federal laws and standards. This enables federally chartered banks to conduct business across the nation. Federal banks possess a broader geographic reach than state-chartered banks.
The application of federal banking laws can preempt certain state laws that might otherwise apply to these institutions. This preemption occurs when a state law prevents or significantly interferes with a national bank’s exercise of its federally granted powers. For instance, federal law generally preempts state laws concerning interest rate limits, account charges, and branching regulations for national banks. The extensive reach of federally chartered banks is evident in the fact that the six largest U.S. banks are national banks, collectively holding a substantial portion of the banking system’s assets.