Dual Banking System

What Is a Dual Banking System?

A dual banking system is the type that exists in the United States, in which state banks and national banks are chartered and supervised at different levels of government. Under the U.S. dual banking system, national banks are chartered and regulated under federal law and supervised by federal agencies. State banks are chartered and regulated under state laws and supervised by their respective states' banking departments. The dual system is not perfectly clear-cut, however, with some state banks answering to regulators on both levels.

Key Takeaways

  • The United States has a dual banking system, with national banks regulated on the federal level and state banks regulated by each state.
  • There is some overlap between the two systems, with certain state banks subject to regulation on both levels.
  • Proponents of the dual banking system maintain that national banks benefit from their greater scale, while state banks can be more innovative and attuned to the needs of their communities, and that the two types complement each other.

History of the Dual Banking System

The dual banking system in the U.S. was born during the Civil War era. President Abraham Lincoln's Treasury secretary, Salmon P. 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 banknotes 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 banknotes.

The number of state banks dropped dramatically, but a key innovation by state banks—demand deposits, which allowed depositors to withdraw their money at any time—led to a strong comeback in the number of state banks. Within 10 years of the 1864 amendment to tax state banknotes, state banks claimed more customer deposits than national banks.

The law that launched the modern dual banking system is generally considered to be the 1913 Federal Reserve Act, in which Congress created the Federal Reserve System to serve as the central bank of the United States and guide the nation's monetary policy.

The Dual Banking System Today

Today, all 50 states, plus the District of Columbia, have their own bank regulators.

National banks are regulated by the Federal Reserve System or the Office of the Comptroller of the Currency, depending on their structure. The Federal Reserve also has some regulatory authority over certain state-chartered banks, as does the Federal Deposit Insurance Corporation.

In addition, the Consumer Financial Protection Bureau (CFPB), created in 2010, regulates both state and national banks with assets of $10 billion or more to ensure their compliance with consumer laws.


A dual banking system can mean different things in different countries. In some Muslim countries, for example, it refers to a system with both Islamic and conventional banks.

Pros and Cons of the Dual Banking System

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, including legal lending limits, as well as variations in rules from state to state. On the negative side, that adds a certain level of complexity for both bankers and consumers that wouldn't be present in a single banking system.

However, the dual structure appears to have withstood the test of time, and many economists maintain that it encourages a sound and vibrant banking system. National banks can offer efficiencies that come from economies of scale and product and service innovations derived from the application of their greater resources.

State banks, on the other hand, can be more nimble and flexible in responding to the unique needs of customers in their own state or even town. Their innovations, when successful, can then be picked up by other states. Proponents of state chartering maintain that state regulators better understand the communities they serve. As the Arkansas State Bank Department puts it, "As the primary regulator of a state bank, the Arkansas Bank Commissioner and State Bank Department are little more than a short drive or brief telephone call away from the banking institutions they regulate." 

The dual banking system also allows banks to choose how they wish to be chartered, and they can switch from national to state chartering, or vice versa, with government approval.

What Is the Dual Banking System in the United States?

In the United States, dual banking refers to a system in which banks can be chartered (or licensed) on either the national or state level. Banks are subject to different sets of laws and overseen by different regulatory agencies depending on which they choose.

How You Tell if a Bank Has a State or Federal Charter?

A national bank will have the word "National" in its name or the initials "N.A." after it.

Who Charters and Regulates Credit Unions?

Like banks, credit unions can be chartered and regulated on either the state or federal level. The National Credit Union Administration (NCUA) supervises and insures federal credit unions and insures participating state-chartered ones, much like the Federal Deposit Insurance Corporation (FDIC) insures participating banks of both types.

Who Charters and Regulates Savings and Loans?

Savings and loans, also known as S&Ls or thrifts, can also be chartered and regulated on either the state or federal level. The Office of the Comptroller of the Currency is the primary regulator of federally chartered savings and loans, while the Federal Deposit Insurance Corporation (FDIC) regulates state-chartered savings and loans, in coordination with heir respective states.

The Bottom Line

For historical reasons, the United States has a dual banking system in which banks are chartered and regulated on either the state or federal level, and sometimes both. Proponents of the dual banking system maintain that each type of bank, national or state, has certain advantages and that the two complement each other and create a more vital and innovative banking system.

Article Sources
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  1. Office of the Comptroller of the Currency. "Who Regulates My Bank?"

  2. Office of the Comptroller of the Currency. "Founding of the OCC & the National Banking System."

  3. Board of Governors of the Federal Reserve System. "Federal Reserve Act."

  4. Consumer Financial Protection Bureau. "How Can I Find My State's Bank Regulator?"

  5. U.S. Securities and Exchange Commission. "Banking Regulators."

  6. Federal Reserve Bank of St. Louis. "Why Are There So Many Bank Regulators?"

  7. Springer Link. "Dual Banking System: Conventional and Islamic Banks."

  8. Arkansas State Bank Department. "Advantages of Being/Becoming a State-Charted Bank."

  9. Federal Reserve Bank of Dallas. "Community Banks are Flipping Over a State Charter."

  10. Congressional Research Service. "Who Regulates Whom? An Overview of the U.S. Financial Regulatory Framework," Page 8.