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Banking

What is a chartered bank?

In banking, there are tons of confusing words that barely anyone understands, and the chartered bank is one of them. But what's a chartered bank, and why should you care?

A bunch of regulations bind chartered banks, and you should care because these rules mean your money and the economy are better protected than in an unchartered bank. Woop woop!

Keep reading for a no-nonsense, easy-to-understand chartered bank definition, plus a whole bunch of other information to help you make sense of how different types of banks work.

What is a chartered bank?

A charter is a contract between the government and a company, city, or school. In banking, charters are legal agreements between the federal or state government that say financial institutions will follow essential rules.

Chartered banks work like other banks, accepting deposits and offering loans. They can be commercial, savings, online-only banks, or credit unions. The difference between them and other banks is that all services are based on the charter. As a result, government agencies watch these chartered banks to ensure they don't break the rules.

Good ol' Abe Lincoln introduced the chartered bank way back in 1863. He set up the Office of the Comptroller of the Currency, which takes care of federally chartered banks, and invented the entire national banking system.

How does a chartered bank work?

Chartered banks work pretty much the same as any other bank, which can offer a range of accounts, such as:

  • Checking accounts

  • Money market accounts

  • Savings accounts

  • Certificate of deposit accounts

  • Custodial accounts

  • Student accounts

They can also offer their customers lending options, like:

  • Personal loans

  • Lines of credit

  • Auto Finance

  • Lines of credit

  • Mortgages

The similarities between chartered banks and other banks don't end there. For example, your bank may pay out interest over time when you deposit cash every payday. At the same time, the bank uses funds to make loans to customers, charging interest to make a profit.

Chartered banks can charge overdrafts for emergencies and foreign transfers. Online-only banks can be more generous than brick-and-mortar banks because online banks spend less on rent, equipment, and labor, which could mean more money in your pocket.

Banks aren't just given charters—they have to prove they're legit during the application process. That means showing they have what it takes to make a profit without operating as a shady business. They also have to insure deposits through the Federal Deposit Insurance Corporation (more on this later).

State-chartered banks vs. federally chartered banks

These days, banks can be chartered at the state or federal level. Federally chartered banks still follow the rules set by Abe's OCC, while state agencies control state-chartered banks.

Each state has its own rules for state-chartered banks. These institutions can join the Federal Reserve System and get regulated by the Fed. If they don't, the FDIC regulates them.

Chartered bank regulation

Chartered banks tend to offer a safe pair of hands for customers' money because they're regulated by the agency that chartered them. Let's look at some examples of how chartering agencies take care of your hard-earned money:

  • Verifying banks are following the law

  • Visiting banks in person to perform inspections

  • Creating and enforcing regulations

  • Making sure banks operate ethically

Crucially, if the economy falls off a cliff and your bank closes down, the FDIC steps in and covers customers' deposits. The current limit is a whopping $250,000 per depositor, per insured bank, for each ownership category, and that means your savings are not disappearing down a black hole.

What is the FDIC?

So we've established that the FDIC is the Spider-Man of the U.S. financial system, but how exactly does this superhero protect your money? Put simply, it ensures deposits in chartered banks and uses superhuman strength against banks that don't follow the rules. It aims to increase trust in the banking system and keep consumers like you safe.

How does the FDIC work?

If the worst happens, and a masked burglar with a swag bag steals your wallet, you assume you can get it back. Luckily, the FDIC (aka Spider-Man) swings in and makes sure it is.

It has two main powers, and both come with great responsibility:

  1. First, banks make profits by making frugal investments with people's money. The FDIC protects your cash in case a chartered bank makes losses on its investment. That means bad investments from the bank don't mean you can't pay your rent at the end of the month.

  2. If the bank fails and closes down, FDIC insurance means $250,000 of your deposits are protected.

Keep in mind that banks without charters tend not to have FDIC insurance. Lots of online banks are unchartered. So, if you want the convenience and low costs associated with online banking, remember that only a chartered one protects your money with the FDIC.

Chartered vs. online banks

The concept of foreign charters is something else to get your spidey senses tingling with online banks. Many sneaky online banks list themselves as chartered but aren't governed by state or federal regulations. So it's essential to check that the FDIC covers your banking partner, or you won't get the protections mentioned above.

Online chartered banks

Thankfully, online banks are chartered according to U.S. law, although they are few and far between. This type of bank offers S-tier interest on savings and lower fees and focuses on delivering the very best customer service. They can outperform traditional banks in these areas because they have fewer running costs.

Examples of chartered banks

Most of the top banks in America are chartered. Examples include:

  • Varo Bank

  • JPMorgan Chase

  • Goldman Sachs

  • Citibank

  • Bank of America

Chartered vs. commercial banks

There needs to be some clarity between chartered and commercial banks, with many people thinking they're the same thing. However, while all chartered banks are commercial, not all commercial banks are chartered.

Commercial just means the bank accepts deposits and lends money. It doesn't mean your money is protected by the OCC, FDIC, or a state agency.

For a commercial bank to be chartered, it has to be:

  • A national bank chartered by the OCC

  • A state-chartered, state-member bank that's part of the Federal Reserve System

  • A state-chartered nonmember bank that isn't part of the Federal Reserve System

Benefits of chartered banking

Before Abe invented the national banking system and the OCC in 1863, people thought banks were suspect. Creating and enforcing centralized rules helped people understand that banks are legit.

Unlike other banks, chartered banks must comply with more rules and pass more regular examinations than a high school kid. These exist to ensure the bank has enough cash to cover customers' money in the event of bank failure. Extra hardcore rules and regulations mean you, as a consumer, can sleep soundly knowing your money is safe and secure.

Key takeaways

Let's break down the key takeaways one more time for the people at the back:

  • Chartered banks follow rules set by the state or federal government

  • They must prove they have enough funds before they're approved for a charter.

  • A chartered bank performs the same functions as commercial banks—but not all commercial banks are chartered.

  • Online banks can be chartered, but make sure they're chartered with a U.S. agency.

  • Chartered banks are regulated by the OCC, a state agency, and the FDIC.

  • Your money is safer in a chartered bank, which protects up to $250,000 in deposits in case of an emergency.

Sounds like a pretty good deal, no?

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