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National Bank Act

The National Bank Act was enacted on March 3, 1865 by U.S. federal law to establish a system of national charters for banks.  The implementation of National Bank Act resulted in the development of a national currency system in U.S.

Earlier, American banking system was associated with the First Bank (1791-1811) and Second Bank (1816-1836) of the United States.  These banks were the only executive representatives of the U.S. Treasury.  They officially issued and backed U.S. money.  All other banks were operated by private parties under state charters.  All such state and private banks issued their own individual banknotes.  There was a competition among the state and private banks and the two U.S. Banks for the full exchange value of their notes.

After the end of the two U.S. national banks, the federal government had no direct involvement in regulating the U.S. banking system.  The national economic crisis followed by the Civil War pushed the formation of a new banking regulation.  The Civil War caused huge amounts of credit in nation’s finance.  This financial difficulty caused to drain out nation’s gold standard (reserve).  Consequently, the gold standard was abandoned.  Bank borrowings were the major source of credit.  In 1861, there were around 1,600 state-chartered banks.  At that time, there was not a central bank system to monitor credit or for a direct federal supervision.

In 1861, Salmon P. Chase, the U.S. Treasury Secretary suggested the establishment of a national banking system.  The federal government chartered the national banks and approved to issue bank notes secured by government bonds.  To tackle the situation of federal debt, the national banks entrusted to buy government bonds.  Before the inception of national banks, the federal government tried direct sale of currency notes to the public to control the financial contingency.  In 1862, Congress approved the issuance of $150 million currency notes to satisfy the wartime credit needs.  However, this was not a successful attempt.  In 1863, the National Currency Act was amended and reenacted as the National Bank Act.  In 1864, the federal government created a national banking system as proposed by Salmon P. Chase.  The national bank system survived the Civil War credit needs and became an essential element of the modern U.S. bank regulatory system.

The U.S. commercial banking system is known as a “dual banking system.”  Here, the state banks and national banks are chartered and supervised at different levels.  Under this dual banking system, national banks are chartered and regulated under federal law and standards.  Here the national banks are supervised by a central agency.  State banks are chartered and regulated under state laws and standards.  The state banks are supervised by a state agency.

The National Bank Act provides the creation of the Comptroller of the Currency within the Treasury Department.  This authority was sanctioned to issue national bank charters since 1864.  Banking business associations transformed to separate legal entities by forming their articles of association.  These articles of association are to be filed with the Comptroller of the Currency.  The newly chartered national bank must entrust government bonds equal to $30,000 or one-third of its capital to the Comptroller of the Currency.  The National Bank Act imposed a 10% tax on state banknotes to eliminate non-federal currency from circulation.  The role of federally chartered national banks controlled by the Comptroller of the Currency is very significant in the national economy.

The national banking system has basic banking powers such as lending and accepting deposits, flexible power to engage in data processing services, lease financing of automobiles, municipal bond insurance, securities activities, and selling variable annuities.

The Office of the Comptroller is responsible for administration of virtually all federal laws applicable to national banks.  The authorization of the Comptroller is required for any significant action taken by a national bank such as establishment of branches, and changes in corporate control or structure.  Moreover, the Comptroller is the supervising authority over the day-to-day administration, loan and investment policies, trust activities, issuance of securities of national banks.  The Comptroller is responsible to provide periodic on-site examinations through national bank examiners.  It is mandatory that the Comptroller must supervise the financial services activities of national bank subsidiaries, the confidentiality of nonpublic personal information of customers of national banks, and consumer protection issues associated with insurance sales.

Inside National Bank Act