Key Points
A chartered bank is a financial institution regulated by a state or national charter that conducts monetary transactions such as lending or safeguarding deposits. Chartered banks can be issued by either state or federal governments and are required to maintain deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC). Some chartered banks offer online banking services along with physical branches, while others are solely online-based.
Definition and Instances of a Chartered Bank
A chartered bank refers to any financial institution that operates under a state or national charter, dictating its activities and ensuring adherence to specific banking guidelines. The concept of chartered banks was established in 1863 by President Abraham Lincoln and Salmon P. Chase, his Treasury Secretary. This led to the enactment of the National Currency Act, which created the Office of the Comptroller of the Currency (OCC) and granted it authority to charter national banks. By 1864, the National Currency Act was renamed the National Bank Act, which established a national banking system.
As of October 31, 2021, there were 779 active banks with a national charter, including institutions like Capital One, JPMorgan Chase, PNC Bank, Santander Bank, and TD Bank.
Functions of a Chartered Bank
In the United States, chartered banks are subject to regulation either by state agencies or federal entities. State-chartered banks operate under state oversight, while federal-charted banks adhere to regulations set by the OCC, a branch of the Treasury Department. Banks can choose between state or federal charters and may switch from one to the other after operating for some time. Chartered banks must maintain deposit insurance provided by the FDIC, which covers various accounts up to $250,000.
To confirm FDIC insurance, look for the FDIC logo at your bank, consult a bank representative, or contact the FDIC directly. An online search tool is also available on the FDIC website.
Starting a Chartered Bank
A bank must apply for either a federal or state charter, demonstrating a feasible business plan and financial stability. Adequate capital to sustain operations and growth is crucial, along with approval for deposit insurance from the FDIC. Banks seeking membership in the Federal Reserve need further approval. State-specific prerequisites exist for launching a chartered bank; for instance, in New Jersey, a Certificate of Incorporation is required, along with financial statements projecting three years of activity, a filing fee, and a business plan.
Chartered Banks vs. Online Banks
While chartered banks offer online banking capabilities and physical branches, online-only banks operate solely through digital platforms without physical locations. Online banks can also be chartered banks, like Varo Bank, Ally Bank, and Discover Bank, providing perks such as higher interest rates and lower fees due to reduced overhead costs. Most banks now offer online banking, ensuring accessibility through internet connectivity. Overseas online banks may not adhere to U.S. regulations like FDIC protection, emphasizing the importance of ensuring equivalent deposit security. FDIC insurance guarantees the availability of deposits, regardless of bank or economic conditions.
