Wednesday, January 11, 2006

Dual banking

Who uses it: Regulators and lawyers who work with banks in the United States
What it means: The ability under the U.S. legal system for both states and the federal government to charter, regulate and supervise banks.
How you can use it: When someone asks you what the initials "N.A." after your bank's name means.

For the record, the initials "N.A." stand for "national association," which means that the bank is chartered, regulated and supervised by the Office of the Comptroller of the Currency, an agency of the U.S. Department of the Treasury. If your bank's name has the word "State" in it, it is regulated by a state agency and by either the FDIC or the Federal Reserve.

The U.S. banking system is an accident of history that comes out of the conflict between two provisions of our Constitution: the elastic clause, which grants Congress the power "To make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers," and the tenth amendment, which says, "The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people."

The Constitution doesn't say anything about banking, and the states developed their own systems in the absence of a federal one. Our current system looks absurdly complicated to outsiders -- and to be honest, sometimes it's absurdly complicated to insiders -- but it's had the effect of making the U.S. banking system the most open and competitive one in the world. Within reasonable limits, anyone who wants to can put a group of investors together and open a bank, and that's not really true anywhere else in the world.

I'm doing a lot of banking-related work this week, if you couldn't guess, and it's humbling. At one time, six or seven years ago, I probably knew more about our bank regulatory system than all but a handful of people in the country, and that's not an exaggeration. The fundamental dynamics haven't changed much, but many of the rules have, and I have to re-educate myself every time I take on a new banking-related project. It's like coming back to a language I used to be fluent in, but haven't spoken in years. I am no longer a subject matter expert; I'm just someone who knows enough of the words to be able to fake it.


Anna said...

I practically had a coronary this afternoon when I logged on to your blog and saw "Dual banking" staring me in the face. It's a term that's taken years to erase from my vernacular. In fact, I think it was dual banking that drove James Frey over the edge in the first place. If I tune in tomorrow and the term is "shell branch" I may have to stop reading!

AnswerGirl said...

Shell branch! That's a phrase I haven't heard in years... but this is what I mean about how things have changed. Shell branches were a loophole created by restrictive branching laws, and most states now allow de novo branching -- so there's no longer much point to shell branches or dormant charters.