BANK: A financial organization that accepts deposits, makes loans, and directly controls a significant portion of the nation's money supply. In the olden days of the economy (before 1980), a bank was easy to identify because it had the word "bank" in it's name -- such as "First National Bank", "Second National Bank", etc. However, after several laws were passed in the early 1980s to reform and deregulate the banking industry, the term bank has come to functionally include other financial institutions that previously went by the titles of "Savings and Loan," "Credit Union," and "Mutual Savings Banks." These institutions are operationally considered banks because they all perform "banking" functions -- especially accepting checking account deposits and making loans.
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Traditional banks that are chartered by a government of one of the fifty states and which are not automatically members of the Federal Reserve System. The contrast to state banks are national banks, which are chartered by Comptroller of the Currency. State banks tend to smaller than national banks and whether justified or not tend to be slightly less prestigious. In the modern economy this distinction is less important than it was a few decades bank when state banks were subject to lesser state regulations than national banks. State banks are traditional banks that are charted at the "state" level by a banking authority in one of the fifty state governments, such as the state Corporation Commission or the Secretary of State. State chartered banks tend to be smaller than the alternative, national chartered banks, and have historically been subjected to less regulatory oversight. And unlike national banks, state banks are not automatically members of the Federal Reserve System, but can choose whether or not to join. Some join. Some do not.
In modern times the difference between state and national banks is not quite as in once was. While state banks do tend to be smaller, they can also be major players in the baking industry. In fact, one of the five largest banks in the United States and three of the ten largest banks are state banks.
State CharteringState banks are chartered according to state laws, rules, and regulations, which are often less restrictive than federal rules. This state chartering is handled through the same state agencies that handle other state corporations, the state Corporation Commission or the Secretary of State.
While state banking regulations tend to be less than federal regulations, the rules for starting up a state bank are still relatively restrictive. Anyone with a dream and a few dollars of extra cash can start a retail store, business consulting firm, or manufacturing company. Aspiring bankers, in contrast, must jump through a few more hoops, such as verifying that they have sufficient up front investment and that the banking market has need for another bank.
The FedState banks are NOT automatically members of the Federal Reserve System (the Fed). The Fed is the economy's central banking authority that undertakes a great deal of bank regulation as well as setting the course of monetary policy.
The Fed contains of a number of different parts or components. The key ones are:
As the central bank for the U.S. economy, the Fed, among other things, provides banking services to commercial banks. If a regular, human being consumer, like Duncan Thurly seeks banking services, then he can amble down to his local branch of OmniBank. This commercial bank is in the business of providing banking services to people like Duncan. He can have checking or savings accounts with OmniBank, obtain an OmniBank credit card, and finance an automobile or home purchase with an OmniBank loan.
- Board of Governors: At the top of the Fed is the Board of Governors, seven members led by a Chairman, which establishes rules, regulations, procedures, and policies of the Fed.
- Federal Reserve Banks: Policies and regulations are carried out by Federal Reserve Banks dispersed throughout the economy. The primary work is undertaken by 12 Federal Reserve District Banks, with support provided by 25 Federal Reserve Branch Banks. These 37 Federal Reserve Banks interface and work directly with commercial banks.
- Federal Open Market Committee: The key policy-making arm of the Fed is the Federal Open Market Committee. It includes the seven members making up the Board of Governors plus five Presidents of Federal Reserve Banks. The primary task of the Federal Open Market Committee is to set the course of monetary policy and to control the amount of money in circulation.
If OmniBank is in need of similar banking services, which many banks are, then it can turn to its local Federal Reserve District or Branch Bank. If OmniBank seeks a short-term loan or wants a place to store reserves, then it can turn to its nearby Federal Reserve Bank. While the Federal Reserve System provides a few services to the public (such as buying U.S. Treasury securities), its primarily functions are directed to commercial banks. The Fed is the bank for banks.
State banks, if they choose, can become members of the Federal Reserve System. As a member it has access to Fed services, such as loans and check processing services, that are either not available or available at higher cost to nonmember banks.
The National Bank AlternativeThe alternative to state banks is national bank chartering by the Comptroller of the Currency. National banks are not automatically members of the Federal Reserve System, giving them accessing the Fed services as well as making them subject to Fed regulation.
In decades past, national banks were the "big boys" in the banking industry. They were the "movers and shakers." They were THE key commercial banks that played a big role the Federal Reserve System. Some national banks truly had a "national" reach, while others were national only in name, offering their banking wares to local communities. But even then they tended to be the larger banks in a city.
In modern times the relevance of national bank designation is not quite as in once was. True that four of the five largest U.S. banks and seven of the ten largest banks are national banks. However, of some note, one of the five largest and three of the ten largest are NOT national banks. Big banking is no longer the exclusive domain of national banks.
In the past, banks choose state a charter over a federal charter and choose not to join the Fed because regulations were usually much less for nonmember state banks. While this remains true to some degree in modern times, changes in banking regulations have significantly lessened the distinction.
STATE BANKS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: February 24, 2024].
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