What Is a State Bank?

A state bank is a financial institution that a state has chartered primarily to provide commercial banking services. A state bank is not the same as a central or reserve bank; these institutions are primarily concerned with influencing a government's monetary policy.

Key Takeaways

  • State banks are financial institutions chartered by a state to provide commercial banking services.
  • Unlike the Federal Reserve, they are not responsible for monetary policy and are restricted to providing banking and, in some cases, wealth management and insurance services.
  • State banks can still be large financial institutions; however, they are not permitted to expand nationwide since they do not have a federal charter.

Understanding State Banks

State banks were championed by economists, such as Arthur Lewis and Gunnar Myrdal, who were proponents of greater participation by the public sector in financial markets. Their argument was that government role smoothed out the imperfections and crises that the financial markets were prone to. As a result, state banks dominated Western economies up until the 1970s. They comprised as much as 40% of overall market share of the banking sector.

The emergence of neoliberal economists and policy makers led to a rethinking of the state's role in an economy in the 1980s. Several state banks were privatized, leading to a reduction in their market share. In some regions of the world, such as Eastern Europe and South Asia, state banks are still among the biggest government institutions. For example, the State Bank of India is the biggest bank in India and is ranked 236th in the world's 500 biggest organizations.

In the United States, the Office of the Comptroller of the Currency (OCC) does not regulate state banks. The OCC is a federal agency that oversees banks operating nationally. The Federal Reserve (the Fed) does regulate some state banks, along with those that are not under the jurisdiction of the Federal Deposit Insurance Corporation (FDIC).

State banks can still be large financial institutions; however, they are not permitted to expand nationwide since they do not have a federal charter. State banks may be able to provide more nationwide services, such as automated teller machines (ATMs), by partnering with banks that have a broader presence around the country. In certain states, state banks have more authority than national banks in providing insurance solutions and private banking services.

State Bank Services: Commercial, Insurance, and Private Banking Offerings

Most state banks focus on personal banking services. These generally include accepting deposits, offering checking accounts, as well as business, personal, and mortgage loans. Additionally, many state banks will provide basic financial products (e.g. certificates of deposit (CDs)) and savings accounts to individuals and small businesses.

The Jonesburg State Bank in Jonesburg, MO, for example, highlights these services above, along with mobile banking options for its retail and business customers.

Some state banks will also provide some insurance solutions. Common personal insurance policies include auto, health, homeowners, and life insurance contracts. Special business insurance policies may protect against specific damages or injuries to employees, medical malpractice, and professional liability insurance, among others.

State banks also expand into private banking and wealth management services. The Iowa State Bank, for example, offers individuals tailored financial plans, along with fee-based management services, business retirement plans, and IRAs and retirement planning, in addition to several insurance options. The team is headed by two financial advisors.

For wealthier individuals, private banking options can be extensive. In addition to more exclusive advice, services can cover protecting and growing assets, more specialized financing solutions, and passing wealth on to future generations. High levels of assets allow some individuals to participate in alternative investments, such as hedge funds and real estate. UBS, Merrill Lynch, Morgan Stanley, and Credit Suisse are examples of private banks.