What is a '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.

BREAKING DOWN 'Dual Banking System'

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.

The Dual Banking System Today

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.

RELATED TERMS
  1. State Bank

    A state bank is a financial institution that a state has chartered ...
  2. Chartered Bank

    A chartered bank is a financial institution, whose primary roles ...
  3. National Bank

    In the United States a national bank is a commercial bank, while ...
  4. Capital Share

    Capital shares are a share class offered by a dual purpose fund. ...
  5. Dual Currency Deposit

    A dual currency deposit is a fixed deposit made in one currency ...
  6. Dual Currency Swap

    A currency swap used to hedge the risk associated with the issuance ...
Related Articles
  1. Insights

    The World's Top 10 Banks

    Learn more about the world's largest banks and how more financial power shifts eastward as China is home to four of the world's largest banks.
  2. Financial Advisor

    Why Banks Don't Need Your Money to Make Loans

    Contrary to the story told in most economics textbooks, banks don't need your money to make loans, but they do want it to make those loans more profitable.
  3. Insights

    Central Bank

    They print money, they control inflation, they are known as the "lender of last resort". Check out the role of Central Bank nd how its role evolved overtime.
  4. Tech

    The Pros And Cons Of Internet Banks

    Learn how internet banking services stack up against their brick-and-mortar peers. Find out what internet banks have to offer and where they fall short.
RELATED FAQS
  1. What's the difference between investment banks and commercial banks?

    Understand the principal differences between investment banks and commercial banks, and the areas of banking services that ... Read Answer >>
  2. How does investment banking differ from commercial banking?

    Discover how investment banking differs from commercial banking, the responsibilities of each and how the two can be combined ... Read Answer >>
  3. Who decides to print money in Canada?

    Discover how the Bank of Canada and chartered banks in the country can create new money, and how creating new money causes ... Read Answer >>
Hot Definitions
  1. Gross Margin

    A company's total sales revenue minus its cost of goods sold, divided by the total sales revenue, expressed as a percentage. ...
  2. Inflation

    Inflation is the rate at which prices for goods and services is rising and the worth of currency is dropping.
  3. Discount Rate

    Discount rate is the interest rate charged to commercial banks and other depository institutions for loans received from ...
  4. Economies of Scale

    Economies of scale refer to reduced costs per unit that arise from increased total output of a product. For example, a larger ...
  5. Quick Ratio

    The quick ratio measures a company’s ability to meet its short-term obligations with its most liquid assets.
  6. Leverage

    Leverage results from using borrowed capital as a source of funding when investing to expand the firm's asset base and generate ...
Trading Center