State Commercial Banks

SIC 6022

Industry report:

This category includes commercial banks and trust companies (accepting deposits) chartered by one of the states or territories. Trust companies engaged in fiduciary business but not regularly engaged in deposit banking are classified in SIC 6091: Nondeposit Trust Facilities.

Industry Snapshot

U.S. state commercial banks enjoyed an increasingly relaxed regulatory climate throughout the 2000s, until the financial debacle later in the decade caused the federal government to tighten the reins on all financial institutions in the United States. State banks remained subject to a range of regulations at both the state and the federal level. For example, in addition to the federal regulatory bodies that oversee national banks, each state has a system of supervisory bodies charged with the chartering and regulation of state commercial banks. These diverse structures and organizations are responsible for regulating the state's banking industry in a manner that is most appropriate for the financial, economic, and social environment of the state.

Historically, there were advantages to be found for banks in the multiplicity of rules and regulations state to state. At one time, for example, Minnesota was among the few states to allow its banks to sell insurance. Meanwhile, Texas once barred branch banking, so any bank building had to exist as its own corporation with its own board of directors. While such differences smoothed out to a great extent, thanks to interstate banking deregulation in the 1980s and 1990s, enough perceived differences remained in the form of tax incentives and loose restrictions to convince many banks that it was still advantageous to be chartered by a state rather than by the federal government.

Organization and Structure

Commercial banks, which are organized primarily to conduct general banking business, are most often state or national banks. State banks are organized under a charter granted by the state government, while national banks are organized under charters issued by the Comptroller of the Currency of the United States. Many institutions that are chartered as trusts offer services that are generally considered commercial banking, while many banks also offer trust and savings services. These institutions and operations are also included under the commercial banking category.

The regulation of banks on the state level is delegated to a banking authority in each state. These bodies exercise primary and additional regulatory powers. There are four primary bank regulatory powers: new bank charter approval, new branch or separate facility application approval, cease and desist orders, and officer removal orders. There are also four additional state bank regulatory powers: power to fine, power to order affiliate examinations, power to order special examinations, and power to issue regulations. Such regulatory powers are exercised by either the state's primary banking authority or by the state's banking board, depending upon the structure of the state's system. Most states maintain a banking board made up of five to seventeen members who are generally appointed by the governor for three- to six-year terms. Some states, however, regulate banking without a banking board.

The specific type of institutions that are regulated by the state banking authorities can also vary. Normally, the state authorities will regulate commercial banks, trust companies, money order companies, loan production offices, and foreign bank branches. The states may also regulate other entities, such as travelers check issuers, currency exchanges, and collection agencies. State banks may voluntarily join the Federal Reserve System, in which case they are required to adhere to the regulations that apply to all national banks, including those that apply to the purchase, sale, underwriting, and holding of investment securities and stock for national banks.

Background and Development

Among the first institutions created by the administration of President George Washington was the Bank of the United States. Washington's Secretary of the Treasury, Alexander Hamilton, insisted that a national bank was necessary to give the fledgling democracy stability and legitimacy. Centralized banking remained a politically divisive issue for more than 70 years, as those fearful of a powerful federal government attacked the power vested in the bank. President Andrew Jackson made the Second Bank of the United States one of the primary issues in his presidential campaign of 1832, launching what is known as the Bank War, which left the nation with no central banking agency by 1834. Nearly 30 years later, the Federal Banking Act of 1863 brought banking under federal control and created a uniform bank currency controlled by a central authority for the first time in the nation's history.

The existence of a strong federal banking structure after the Civil War underlay the explosion of productive capability that characterized the United States in the late nineteenth century. Yet, while a dependable money supply aided economic expansion, it also prompted distrust of those controlling the flow of money. Important steps were taken during the administrations of Woodrow Wilson (1912 to 1920) and Franklin D. Roosevelt (1932 to 1944) to further curb the power of bankers and provide equal access to and protection from the U.S. banking system. The Federal Reserve Act of 1913 established twelve regional banking districts and made the district banks answerable to regional as well as national concerns, thus addressing the historical dominance of eastern bankers. The creation of the Federal Deposit Insurance Corporation (FDIC) in 1933 ensured Americans that their deposits were safe in accredited banks, thus calming concerns over bank instability caused by the Depression.

The U.S. banking system is thus the product of two centuries of adjustment designed to make banks serve the interests of the widest number of people operating in a capitalist economic system. Banking regulation proceeds downward from the Federal Reserve Bank through a variety of national regulations to state regulations crafted to suit the needs of particular localities. The "dual" banking system created by the actions of independent national and state regulatory agencies has allowed innovation in local banking, while ensuring continuity in banking between the states.

The stock market crash of 1987 came at a bad time for commercial banks. After investing heavily in infrastructure to make them competitive in the investment banking industry, the banks were faced with a much smaller and more competitive market in the wake of the crash. Equally troubling to the banking industry was the failure of hundreds of savings-and-loan institutions. While these institutions were insured, the administration of President Ronald Reagan left them largely unregulated, and taxpayers were left to cover the roughly $500 million needed to repay depositors. In the aftermath of these two disasters, broad skepticism about the stability of the financial system brought the banking system under scrutiny. However, booming profits in the mid-1990s and a looser regulatory environment led to a blurring of the regulatory borders between various branches of the financial services world.

Throughout the 1990s banks were granted greater freedom to focus on other activities, such as investment banking. Following a series of concessions by regulatory bodies, state banks strived to court wealthier clients by delving into the surging hedge fund industry (investment strategies that in general "hedge" against market downturns), acting as management custodians, lenders, and brokers. Furthermore, commercial banks increasingly participated in the lucrative investment-banking sector, a practice forbidden commercial banks since the Great Depression. Thus the industry continued to chip away at the long-standing regulatory climate restricting the range of banks' activities. By the end of the decade, however, bankers finally achieved the sweeping legislation they were hoping for.

As U.S. banks enjoyed record revenues, the financial industry geared for a long-awaited overhaul as a result of the Gramm-Leach-Bliley Act in November 1999. Also known as the Financial Services Modernization Act, this legislation repealed the Glass-Steagall Act, capping a 20-year effort by lobbyists. The new law allowed banks to engage in a range of activities prohibited since the Great Depression. By establishing financial holding companies, banks could establish brokerages, insurance operations, and other financial service offerings in addition to their traditional banking activities all under one institution. To establish a financial holding company, banks must meet the following criteria: they must be considered well capitalized, determined by a ratio of at least 10 percent total capital to risk-adjusted assets, as evaluated by the Federal Reserve; they must receive a satisfactory rating under the Community Reinvestment Act; and aggregate consolidated assets of all banks' financial subsidiaries must amount to either less than $50 billion or 45 percent of the banks' total assets, whichever is lower.

Return on assets for state-chartered banks grew from 1.11 percent in 2001 to 1.14 percent in 2002. These figures did remain below the 1.25 return on assets percentage achieved in both 1999 and 2000. However, national commercial banks realized a 1.54 percent return on assets, achieving a level higher than all three previous years. Some analysts believe that this discrepancy was due to the fact that the consolidation of the 1990s had favored the larger, more well-capitalized banking institutions, particularly national and superregional banks, which were able to achieve greater economies of scale than state and local banks.

Both national and state commercial banks in the early 2000s saw increased loan and lease losses, as the U.S. economy continued to weaken. However, these were "offset in large part by realized gains in investment account securities: these gains developed as banks' portfolios benefited from declining short- and immediate-term market interest rates," according to the June 2002, Federal Reserve Bulletin. The September 11 terrorist attacks in 2001 undermined the economy further, prompting the Federal Reserve to reduce interest rates repeatedly in 2001 and 2002. As a result, home mortgages' interest rates dropped to near record lows, fueling a refinancing flurry, which also helped to offset losses in other areas.

The overall commercial banking industry weathered the decline in the economy during the first years of the new millennium, and by the mid-2000s banks were operating efficiently, with revenues of over $100 billion in 2004. Loans increased by 11 percent, and construction and home equity lending were robust, growing 25 percent and 40 percent, respectively, during 2004. Commercial banks were aided by the Federal Reserve's decision to keep interest rates extremely low through 2003 to help fuel the economy during the recession. However, by 2004, the Fed decided the economy was once again healthy and, to prevent a swing toward inflation, began to raise interest rates gradually.

Also during the mid-2000s, state-chartered commercial banks faced challenges in their effort to compete effectively with national banks. In January 2004, the Office of the Comptroller of the Currency (OCC) put into place new rules that provided national banks broad protection from the imposition of state laws. The ruling was designed to allow for consistent business operations within the national banking system, many of whose members operate banks in multiple states. State bank proponents argued that the ruling provided an unfair advantage to national banks and threatened the health of the nation's dual banking system. Robert C. Eager and C. F. Muckenfuss III offered their opinion in Community Banker in September 2004: "These developments raise the real possibility that the American banking system soon will no longer effectively be a 'dual banking system' characterized by a relative, and dynamic, balance between the state and federal systems, both in numerical terms and in the perception among bankers of the relative attractiveness of federal and state charters." Eager and Muckenfuss noted that in 2000, approximately 45 percent of commercial bank assets were held by state-charted banks; by 2004, that number had fallen to about 33 percent.

According to the Conference of State Bank Supervisors, more than 70 percent of all U.S. commercial banks were state chartered at the end of 2005, and more than 30 percent of all commercial bank assets were held by state banks. Of the more than 5,700 state-chartered banks, 919 were members of the Federal Reserve System. In 2006, the number of bank start-ups was more than 190, the most banks created since 2000. Of those new banks, 81 percent were state-chartered commercial banks.

In 2007, the housing bubble burst, and the state of financial institutions in the United States started to decline rapidly. In an effort to help stem the tide of mortgage defaults and foreclosures hurting the banking industry, in November 2007 the Conference of State Bank Supervisors (CSBS) and the American Association of Residential Mortgage Regulators (AARMR) announced that 40 state agencies had committed to participate in the Nationwide Mortgage Licensing System (NMLS), with seven states planning to begin using the NMLS at its launch on January 2, 2008. The NMLS is an Internet-based system that allows state-licensed mortgage lenders, mortgage brokers, and loan officers to apply for, amend, update, or renew a license online for all participating state agencies using a set of uniform applications. In October 2010, Hawaii became the fiftieth state to join the NMLS. CSBS president Neil Milner commented: "Having all 50 states on the system provides greater transparency within the mortgage industry and makes information available to all consumers as they obtain mortgages from state-licensed entities."

Current Conditions

Many small banks did not survive the financial crisis of the late 2000s. According to the FDIC, there were 25 bank failures in 2008 and 140 in 2009. In 2010, 139 banks had closed their doors by mid-October. Unfortunately for the small community banks of the United States, the federal bail-out funds doled out in the late 2000s went to the larger corporations, like Bear Stearns, AIG, Fannie May, and Freddie Mac.

As of June 30, 2010, there were 5,712 state-chartered institutions in operation in the United States. Together these establishments employed 711,069 people--down more than 32,000 from two years earlier--and held assets of approximately $3.9 billion.

At the start of the 2010s, state community banks prepared to deal with the ramifications of the "most profound restructuring of financial regulation since the Great Depression," according to Paul Hastings' Stay Current. The Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, called for a massive overhaul of financial services regulation and included more than 243 new formal rulemakings by at least 11 federal agencies, including several new entities, such as the Financial Stability Oversight Council, the Office of Financial Research, and the Consumer Financial Protection Bureau. Industry participants as well as informed consumers were divided about whether the Act would benefit the U.S. financial industry.

America and the World

Branches were the most popular mechanism by which U.S. commercial banks engaged in operations overseas. These entities maintained full access to their parent banks' capital when making lending decisions, rather than being restricted by their host countries to their own balance sheets. In the mid-2000s, approximately 360 state banks maintained about 190 foreign branches.

Foreign banks, while operating under what seem to be very different regulatory frameworks, nevertheless shared a number of regulatory concerns with the American banking system. These included regulation of market entry, capital and liquid adequacy, permissible business activities, foreign currency exposure, concentration of loans and country risk exposure, and bank examination. These regulatory concerns transcended national boundaries. In contrast to the U.S. "dual" banking system, most countries regulate their banking systems exclusively on the national level. Thus, there is generally no equivalent of a state commercial bank outside the United States.

Globally, patterns generally followed the U.S. trend in the 2000s toward relaxed regulation of financial services. Specifically, banks worldwide were allowed to offer a broader range of financial services, contrary to past practices. The European Union's (EU) financial liberalization program was a catalyst, encouraging the liberalization of American and Japanese policies to keep pace with their European competitors. In 1999, all EU members, with the exception of the United Kingdom, Sweden, and Denmark, officially chained their currencies to the euro.

Research and Technology

Changes in computer technology have radically altered the role of banks in American society. The most profound change was the capability of processing automated transfers of money between banks, companies, and consumers. Electronic funds transfers (EFTs) are computer-based payment systems that substitute electronic and digital transfers for movements of cash and paper checks. EFTs virtually eliminated manual paper handling in payments between institutions. Direct deposit also eliminated some of the paper transfers between institutions and individuals. By 2009, there were 4.54 billion direct deposit transactions, and the number of consumer bills paid electronically had topped 9 billion.

More visible to the consumer were automated teller machines (ATMs), those ubiquitous computerized terminals from which consumers can access their savings, checking, or credit accounts. The ATM revolution began in 1969, when Chemical Bank in New York City installed one of the first cash dispensers in the country. By 2004, the number of ATMs was approximately 384,000, equaling 1,300 ATMs for every 1 million U.S. citizens, the highest ATM density in the world. ATMs allowed consumers to process account balance inquiries, make cash withdrawals and deposits, and conduct transfers between accounts.

Internet banking was the next step in the rise to high-tech banking. A 2009 American Bankers Association survey showed that 36 percent of consumers of all ages preferred Internet banking, whereas 25 percent preferred to visit their local branch and 15 percent preferred to use ATMs. Mobile banking from such devices as cell phones and notebook PCs was also becoming more common. Research firm IDC reported that mobile banking use almost doubled between 2009 and 2010. Growth in this area was expected to continue unabated throughout the decade.

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