The Impact of Technological Development to Banking

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Comptroller of the Currency Administrator of National Banks

National Banks and

The Dual

Banking System
SEPTEMBER 2003

National Banks and
The Dual Banking System

S E P T E M B E R 2 0 0 3

T

oday, the dual banking system, which has been a hallmark of banking in the United States for nearly 200 years, is under attack, as many states have attempted to assert legislative and enforcement authority over national banks in a way that contradicts constitutional principles that have been well-settled since the early nineteenth century. This paper explains the history and features of the “dual banking system” and discusses the judicial and legislative precedents establishing the constitutional limits on the ability of states to control or direct national bank powers conferred under federal law.

The “dual banking system” refers to the parallel state and federal banking systems that co-exist in the United States. The federal system is based on a federal bank charter, powers defined under federal law, operation under federal standards, and oversight by a federal supervisor. The state system is characterized by state chartering, bank powers established under state law, and operation under state standards, including oversight by state supervisors. It has been a bedrock precept of our constitutional law for more than 180 years, since the Supreme Courtʼs decision in M’Culloch v. Maryland in 1819, that states cannot constitutionally control the powers of entities created under federal law. Courts have consistently applied this principle over the years to national banks, holding a variety of state laws inapplicable to national banks, and finding that the federally authorized powers of national banks are not subject to state supervision and regulation.

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Against this background, it is quite surprising to hear supporters of the dual banking system criticizing national banks for utilizing — and the OCC for asserting and defending — the very characteristics of the national bank charter that distinguish national banks from state banks and make the system “dual.” Itʼs as if they were saying “We think the dual banking system is great, except for the features that make it dual.” As this paper explains, the OCCʼs positions on national bank powers and preemption and the OCCʼs exclusive regulatory authority over national banks are not new. They are deeply rooted in constitutional principles and the history of the national banking system. Preemption of state laws that retard, impede, or obstruct national banks’ ability to exercise powers authorized under federal law, and the OCCʼs extensive, virtually exclusive “visitorial powers” over national banks, are differences in national and state bank powers and supervisory implementation that are not inconsistent with the dual banking system; they are the defining characteristics of it.

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Early History of the Dual Federal/State Banking System

T

he banking system in the United States is described as “dual” because it is made up of separate federal and state component systems. This duality has existed in various forms since the earliest years of our nation, and while the federal and state components of the system have evolved in structure over the years, the essential characteristics of the system’s duality have not. The federal system is based on a federal bank charter, powers defined under federal law, operation under federal standards, and oversight by a federal supervisor. The state system is characterized by state chartering, bank powers established under state law, and operation under state standards, subject to state supervision. As Professor Kenneth Scott wrote in his landmark analysis of the dual banking system, the “very core of the dual banking system is the simultaneous existence of different regulatory options that are not alike in terms of statutory provisions, regulatory implementation and administrative policy.”1

Although a system of national...
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