Chartered Banks: Definition, Functions, and Oversight


Chartered banks are essential financial institutions that play a pivotal role in safeguarding deposits and providing loans. This article explores the definition of chartered banks, their regulatory oversight, the advantages they offer, and the evolving landscape of banking with a focus on Fintech charters. Dive into the world of chartered banks and understand their significance in the financial industry.

Understanding chartered banks

A chartered bank is a cornerstone of the financial services industry, serving as a vital intermediary between individuals and organizations. Its primary functions encompass receiving and securing monetary deposits and extending loans to stimulate economic growth. While specific details may vary from country to country, a chartered bank fundamentally operates under government permission to engage in financial activities.

Chartered banks offer crucial financial intermediary services required in today’s economy. They allow individuals to deposit funds into various account types, earning interest on their savings. While chartered banks maintain a reserve of currency for daily transactions, they predominantly lend out deposits to individuals and commercial borrowers, fostering economic growth.

Chartered bank oversight

A bank’s charter outlines operational guidelines and compliance with relevant regulations. Charters can be state or federally issued in the United States, adhering to state agency or federal oversight regulations, respectively.

The Office of the Comptroller of the Currency (OCC), an independent bureau within the U.S. Department of the Treasury, plays a pivotal role in overseeing chartered banks. OCC examiners conduct on-site reviews to ensure safe and sound operations. They identify risks and can take actions against noncompliant banks, including issuing cease and desist orders and imposing penalties.

As of 2022, the OCC supervised 1,109 chartered banks, federal savings associations, and federal branches and agencies of foreign banks.

Chartered banks vs. online banks

Some online banks may hold overseas charters, which do not conform to state or federal regulations. In such cases, consumers must assess if these online banks offer Federal Deposit Insurance Corporation (FDIC) protection, which insures deposits up to $250,000 per member institution.

Online banks, benefiting from a digital footprint, often provide competitive deposit rates and high-quality digital services. Notable examples include Axos Bank, Ally Bank, EverBank (formerly TIAA Bank), Discover Bank, and Charles Schwab Bank.

State chartered banks vs. federal chartered banks

State-chartered banks may enjoy advantages like cost savings, higher revenues, access to local regulators, and reduced national bank powers. This can result in increased legal lending limits, promoting competition for loans and reducing participations.

On the other hand, federal chartered banks find it easier to open branches across states and face fewer regulatory requirements when operating in multiple states.

Why banks convert to state charter

Some national banks opt to convert to a state bank charter due to cost savings, higher potential earnings, access to local regulators, and relationships. While conversion involves fees and regulatory exams, the long-term benefits often outweigh the initial costs.

However, the Dodd-Frank Act has reduced federal preemption, making national bank charters less advantageous for some banks, particularly community banks. Banks must weigh the advantages of federal preemption against other benefits when considering conversion.

The Dodd-Frank act restricts the charter conversion of troubled banks, requiring them to file conversion applications with their current and potential regulators.

Chartered banks play a crucial role in the financial industry, serving as secure custodians of deposits and drivers of economic growth. Understanding their functions, oversight, and the evolving banking landscape is essential in navigating the world of finance.

Examples of chartered banks

Here are some examples of chartered banks and their rankings:

  1. JP Morgan Chase – Ranked 1
  2. Bank of America – Ranked 2
  3. Wells Fargo – Ranked 3
  4. Citibank – Ranked 4
  5. U.S. Bank – Ranked 5
  6. PNC Bank – Ranked 6
  7. Truist Bank – Ranked 7
  8. Goldman Sachs – Ranked 8
  9. TD Bank – Ranked 9
  10. Capital One – Ranked 10

The U.S. commercial banking system operates under a dual banking system, with state and national banks chartered and supervised differently.

Advantages of chartered banks

Prior to 1863, banks operated under varying policies, causing a lack of public trust. Standardized rules for all banks were introduced to instill confidence in depositors.

All chartered banks, whether state or federal, undergo regular financial examinations to ensure they possess sufficient capital for daily transactions. Additionally, they may be subject to stress tests to model potential financial challenges. These standardized regulatory requirements and increased oversight provide depositors with a higher level of security.

New developments: Fintech charters

The Office of the Comptroller of the Currency (OCC) has introduced a new type of charter known as the Fintech charter. This charter is tailored to financial services companies specializing in limited financial activities such as payments or lending. It offers an alternative to navigating complex state regulations.

However, legal challenges have deterred some fintechs from applying for this charter, despite its potential benefits. Ongoing litigation may shape the future of Fintech charters.

Types of chartered banks

Chartered banks come in various forms to cater to different financial needs. Here are some common types:

  • Savings banks: These banks primarily focus on savings accounts and offer interest to depositors.
  • Commercial banks: As mentioned earlier, commercial banks provide a wide range of financial services to individuals and businesses, including checking accounts, loans, and investments.
  • Online banks: While discussed briefly, online banks deserve a closer look. These banks operate exclusively online, reducing overhead costs and often offering competitive interest rates on savings accounts.
  • Retail banks: These banks serve individual customers, offering services like personal loans, mortgages, and credit cards.
  • Investment banks: Unlike commercial banks, investment banks specialize in facilitating large financial transactions for corporations, governments, and institutions.

The evolution of chartered banks

Over the years, chartered banks have evolved in response to changing economic landscapes and technological advancements. Here’s a glimpse into their transformation:

Historically, chartered banks operated as brick-and-mortar institutions, relying on physical branches to serve customers. However, with the advent of the internet and digital technologies, the banking industry witnessed a significant shift.

Online banking emerged as a disruptor, offering customers the convenience of managing their finances from anywhere. This evolution led to the rise of online-only banks, which operate without physical branches and focus on providing digital services.

Additionally, the concept of mobile banking became prominent, allowing customers to perform banking activities through mobile apps, further revolutionizing the way people interact with their banks.

Furthermore, the emergence of cryptocurrency and blockchain technology introduced the possibility of decentralized finance (DeFi), challenging traditional banking models. While DeFi is still in its infancy, it has the potential to reshape the financial industry in the coming years.

Chartered banks and economic stability

Chartered banks play a crucial role in maintaining economic stability. Here’s how they contribute:

1. Capital allocation: Chartered banks allocate capital to individuals and businesses, allowing them to invest in projects, expand operations, and create jobs. This capital allocation is vital for economic growth.

2. Monetary policy: Central banks often work closely with chartered banks to implement monetary policies. Banks’ lending and deposit activities influence interest rates, which, in turn, impact consumer spending and investment.

3. Financial intermediation: Chartered banks act as intermediaries between savers and borrowers. They facilitate the flow of funds from individuals who have excess capital to those who need it for various purposes, fostering economic activity.

The future of chartered banking

The banking landscape is continuously evolving, driven by technological advancements and changing consumer preferences. The future of chartered banking holds several possibilities:

1. Enhanced digital services: Chartered banks will likely continue to invest in digital technologies, offering more sophisticated online and mobile banking experiences to meet customer demands.

2. Blockchain and cryptocurrency integration: Some chartered banks may explore integrating blockchain and cryptocurrencies into their services, potentially offering crypto custody, trading, and investment products.

3. Environmental, social, and governance (ESG) focus: Chartered banks are increasingly considering ESG factors in their lending and investment decisions. This trend may lead to the development of more sustainable banking practices.

4. Competition from fintech: Fintech companies continue to disrupt the financial industry. Chartered banks may face increased competition from these agile and technology-driven startups.

As the banking sector adapts to these changes, chartered banks will remain at the forefront of financial services, ensuring the safekeeping of deposits and the facilitation of economic growth.

The bottom line

Chartered banks are subject to rigorous oversight by the OCC, ensuring their adherence to sound banking principles. They provide an essential function in the financial world, safeguarding deposits and supporting economic growth.

Frequently Asked Questions about charter banks

What is a charter bank?

A charter bank is a financial institution authorized by the government to accept deposits and provide loans. It serves as a key intermediary between individuals and organizations, playing a crucial role in the economy.

How does a charter bank differ from other types of banks?

A charter bank is typically associated with government authorization to operate in the financial services industry. It is subject to specific regulations and oversight. Other banks, such as online banks or savings banks, may have different charters or operate under different rules.

Who oversees charter banks in the United States?

In the United States, charter banks are overseen by the Office of the Comptroller of the Currency (OCC). The OCC ensures that charter banks comply with regulations, maintain sound financial practices, and safeguard customer deposits.

What services do charter banks offer?

Charter banks offer a range of financial services, including accepting deposits, providing loans to individuals and businesses, facilitating monetary transactions, and managing various types of accounts.

Are online banks considered charter banks?

Online banks can be charter banks if they have received government authorization to operate as such. However, some online banks may hold overseas charters that do not conform to U.S. state or federal regulations.

What are the advantages of converting to a state charter for banks?

Converting to a state charter can offer advantages such as cost savings, higher potential earnings, better access to local regulators, and a reduction in national bank powers. State-chartered banks may also see an increase in their legal lending limits.

How do charter banks contribute to economic stability?

Charter banks play a vital role in economic stability by allocating capital to individuals and businesses, influencing monetary policy through lending and deposit activities, and serving as intermediaries for the flow of funds between savers and borrowers.

Key takeaways

  • A chartered bank is a financial institution engaged in the business of providing monetary transactions, such as safeguarding deposits and making loans.
  • Most chartered banks have received their government’s permission to operate in the financial services industry.
  • In the United States, the Office of the Comptroller of the Currency (OCC) oversees chartered banks, federal savings associations, and federal branches and agencies of foreign banks.
View article sources
  1. Charters & Licensing –
  2. An Analysis of Bank Charters and Selected Policy Issues –
  3. First Bank of the United States Chartered – This Month in … – Library of Congress Research Guides