National bank

The term “national bank” has been used to denote several different arrangements for financial institutions in the United States and elsewhere. Regardless of the terminology, however, national banks typically serve people in a wide geographic area. Economists have, at times, referred to financial institutions in developing countries as national banks or central banks. In such instances, the respective country’s government typically owns the particular financial institution and, as such, oversees its various operations and procedures.

In the United States, the US Department of the Treasury’s Office of the Comptroller of the Currency designates certain privatized financial institutions as national banks. But the phrase also is used colloquially at times to refer to a private financial institution that operates with a scale of regional, national, or international proportions.

Background

The concept of a bank of nationwide scale is believed to have started in the United States when the first Bank of the United States was established in 1791 by the US Congress. This first American national bank lasted twenty years. During this period, the United States also had privatized financial institutions, as well as operations run by individual states. After a five-year period of dormancy, the Bank of the United States was revived in 1816 for another twenty-year run. In the second instance, the federalized financial institution ceased at the insistence of President Andrew Jackson. In 1836, he declined to renew the charter agreement that established the Bank of the United States in the first place. The first and second iterations of the Bank of the United States had critics beyond Jackson because of perceived operational deficiencies and a vulnerable currency system.

Nearly three decades later, the US banking system was overhauled with the passage of the National Bank Acts of 1863 and 1864. The pivotal legislation resulted in the creation of a federal charter that was tasked with supervising a system of different banks. Each held the distinction of a national bank and was empowered with circulating a uniform type of currency that could be used throughout the country. The federal government secured the currency by way of bonds that were deposited into each specially designated financial institution.

During that period of time, national banks in the United States were held to specific standards, and limitations were placed on such operations as the types of loans administered. Other standards included a firm threshold on how much reserve money could be applied toward notes and deposits. The National Bank Acts did not preclude state-run financial institutions from remaining independent and issuing their own forms of currency. There was a caveat, however, that all but eliminated the competing currency. When the act was passed into law, Congress made the decision to impose a 10 percent tax on banknotes that were issued by the state. Gradually, the United States began to have one uniform system of currency from one state to the next.

Overview

The role of national banks was revised in the early twentieth century during two important events. The first was the implementation of the Federal Reserve System, established by the Federal Reserve Act of 1913 in response to ongoing concerns about a lack of reserve currency. Also, leaders of all US national banks made a decision by 1935 to transfer their note-issuing responsibilities to the Federal Reserve System.

By the 1940s, most American banks carrying the national bank designation functioned as commercially run entities. From that time onward, financial institutions carrying a national bank designation were required to have the letters “N.A.,” denoting “National Association,” in their legal name. (One such example would be New York–based Citibank, which carries the legal name Citibank, N.A.) American financial institutions holding a national bank charter must uphold a federally mandated level of lending practices that are intended not to be predatory in nature. Also, national banks must disclose all rates and fees in accordance with the Truth in Lending Act that was enacted by Congress in 1968.

Despite their commercial independence, the federal Office of the Comptroller of the Currency still has a level of authority over modern national banks, particularly with regulatory and supervisory functions. While the American currency system is uniform, state-chartered banks continue to exist as well under their own operating system. Regardless of the designation, the Federal Deposit Insurance Corporation covers deposits at all financial institutions.

Countries across the globe have varied examples of national banks, some modeled directly after the system in place in the United States. In other instances, there is a hybrid of a public-private relationship, as evidenced by the national bank system in place in Australia. The Commonwealth Bank of Australia was created by the parliament’s Commonwealth Bank Act in 1911. The country’s bank nationalization system at the time gave the Commonwealth Bank the power to conduct general privatized banking functions but dually served as the nation’s official bank that carried a guarantee from the Australian federal government. The Commonwealth Bank was fully privatized in the 1990s.

Other examples of government-influenced national banks include the Pashtany Bank (Afghanistan), National Bank of Canada (Canada), BancoEstado (Chile), National Bank for Agriculture and Rural Development (India), and Bank Melli Iran (Iran).

New Zealand is one example of a country with a complex nationalized banking system. The country has a state-owned bank, Kiwibank, which is modeled after the US state charter system. Until the early 1990s, the country’s federal government also ran two national banks: Post Office Savings Bank and the Bank of New Zealand. Both financial institutions have since been privatized. ANZ New Zealand, a privately held company, acquired one of the two formerly national New Zealand banks. It also owns another financial institution, the National Bank of New Zealand, which was never overseen by the federal government.

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