The Difference Between a Chartered Bank and a Commercial Bank

For a bank to legally operate, it needs a charter. The charter can be either state or federally issued to set up operational guidelines for the bank. Some online banks contain overseas charters, which do not conform to United States law. State-chartered banks are overseen by state agencies, while federally-chartered banks fall under federal-oversight regulations.

The concept of chartered banks originated with President Abraham Lincoln and Treasury Secretary Salmon P. Chase. In 1863, a law was passed requiring banks to become chartered to create uniform policies for the currencies used in the United States. Banks were not trusted completely by the citizens and it was felt that having all banks operate under the same rules would make people feel more secure to put their money into the banks.

There are two types of supervisory lines regarding chartered banks. One type oversees the smaller to mid-size banks throughout the United States and are under the jurisdiction of a deputy comptroller based out of Washington, D.C.and the other oversees the larger banks which fall under the purview of the large bank supervision department, also based out of Washington, D.C.

All banks, whether state or federally chartered, submit to regular financial examinations of its managed accounts. These examinations are used to ensure the banks have the capital necessary to handle day-to-day transactions. In addition, banks can be subjected to “stress tests” simulating scenarios which might occur and cause financial difficulties.

There are online banks operating overseas which are not subject to the same regulations as banks chartered in the United States. Because they are operating under charters given by other countries, the online banks might not offer any FDIC protection. For this reason, it’s important to know whether or not the bank you are doing business with online can offer you the same protection as a bank chartered within the United States.

State-chartered banks are approved by the banking commissioner of the state they operate within, such as Texas. The banking commission ensures state banks have the same rights as federally-chartered banks. In addition, some state-chartered banks have more flexibility than dealing with federal oversight. Moreover, a bank that obtains a state charter can also be less expensive than a bank obtaining a federal charter.