Dual Banking System Has Stood Test of Time

Lincoln's Treasury Secretary Salmon P. Chase hated state-chartered banks. He knew that a strong economy needed a thriving banking industry, but he wanted to replace state banks with a system of national banks. Fortunately, he got only half his wish.

With the secretary's eager push, 150 years ago this week, the national banking system was born. It was a big hit. Within a year there were 467 national banks, holding a quarter of all bank assets; after two years, almost 1,300, holding seven-eighths of bank assets. Things seemed to be going as Chase wished. The national bank system was growing and replacing state banks.

To the benefit of the nation, however, Secretary Chase fell short of his effort to snuff out state charters, try as he might. His biggest stick was to tax their bank notes. That almost worked. Hundreds of banks gave up their state charters for national ones. By 1868, there were only 247 state banks left. That, though, was as far as the number dropped. The 1870s and 1880s witnessed a resurgence of interest in state banks. By 1893, the tally of national and state-chartered banks was equal at 3,807 each. Since then, the U.S. has had plenty of both.

Our strong and durable dual banking system developed by no one's design and in spite of Washington's best efforts. Banking customers have benefited.

The customer value is demonstrated in the way both charters survived and thrived. State banking commissioners, and bankers committed to state charters, would not fade quietly. Driven from offering notes, state banks developed the deposit and checking account services that have been a mainstay for over 100 years. National banks, subject to uniform standards, gave life to a solid, reliable national currency. From then until now, national banks and state banks have alternately developed new services embraced by bank customers, including credit cards, home equity loans, interest on checking accounts, ATMs and an efficient and reliable payments system, among many others.

Some criticize our dual banking system as allowing "regulatory competition" and a "race to the bottom." I have seen the regulatory competition. I even suppose that there may be instances of "race to the bottom," though I think that they are few and always self-defeating.

Regulatory competition only results in a race to the bottom if the regulation does not add value. Where it does add value, regulatory competition results in a race to optimize that value. In the end, the quality of all banking regulation in the land of We the People must be measured by the way it facilitates the ability of banks to serve their customers. That is how banks make money and stay in business providing more services. Promoting a banking industry that meets this national interest was the purpose for starting the national banking system 150 years ago, and how state banking commissioners were able to preserve the value of state charters.

When state or national regulatory programs saw customers migrating from one charter to the other, regulators responded with measures enhancing the ability of banks to provide services that customers wanted. That is no small reason why so many innovations in bank services in the last century were developed by U.S. banks.

It was that mission Tennessee Commissioner Greg Gonzales surely had in mind when he wrote last fall about the Basel III capital plan. Strong capital is good, but, "the proposed rules are highly reactionary to the most recent economic events and do not represent a thoughtful, long-term approach in the best interest of the U.S. banking system or the national economy."