What Is a Chartered Bank?

Definition and Examples of a Chartered Bank

A chartered bank is any financial institution governed by a state or national charter, which guides its actions and ensures it operates according to certain banking rules.

The idea of chartered banks came about in 1863 by President Abraham Lincoln and his Treasury Secretary, Salmon P. Chase. They enacted the National Currency Act, which established the Office of the Comptroller of the Currency (OCC) and authorized it to charter national banks. In 1864, the National Currency Act became known as the National Bank Act, which provides a national banking system.

How a Chartered Bank Works

In the U.S., chartered banks can be regulated by the state or federal government. While state charters are controlled by state agencies, federal charters abide by federal regulations set forth by the OCC, a division of the Treasury Department.

Banks can choose whether they’d like to be state or federally chartered banks. They may also convert from one type of charter to another after they’ve been in business for some time.

Chartered banks are required to maintain deposit insurance issued by the Federal Deposit Insurance Corporation (FDIC). The FDIC insures checking accounts, savings accounts, money market deposit accounts, and certificates of deposit up to $250,000. It does not, however, cover stocks, mutual funds, annuities, securities, or other financial products a bank may offer.

A bank must apply to receive a federal or state charter. No matter which route it takes, the bank must prove it has a “reasonable chance for success” and will operate in a “safe and sound manner.” It’s also essential a bank has enough capital to support its operations and projected growth. After that, it needs to get approved for deposit insurance from the FDIC. If the bank wishes to join the Federal Reserve, it will need an additional approval from the Fed. If a bank is not a part of the Federal Reserve, it’s known as a nonmember bank.

Each state has its own requirements for starting a charter bank. In New Jersey, for example, you need a Certificate of Incorporation. You’ll also need to provide balance sheets and income statements that show your projections for three years. New Jersey’s Department of Banking and Insurance will also ask you to pay a filing fee and share your business plan.

Chartered Banks vs. Online Banks

While chartered banks may allow you to bank online via a website or a mobile app, they may also still have physical branches you can visit. Online banks are financial institutions with no physical locations.

Online banks can also be chartered banks, such as Varo Bank, Ally Bank, and Discover Bank. Since these banks have minimal overhead expenses (such as no rent or mortgage payments), many online banks offer a number of perks you may not find at a traditional, brick-and-mortar bank. These perks may include higher interest rates on savings accounts and lower fees.

Because most banks now offer online banking, accounts at both chartered banks and online-only banks can usually be accessed online at any time—all you need is an internet connection.

There may be online banks that operate overseas. These institutions may not have to follow the same regulations as banks chartered within the U.S. This means that, unlike chartered banks, they may not offer FDIC protection. If you do business with an online bank, find out whether it can offer you the same protection as a chartered bank. This is important because when your deposits are FDIC-insured, the U.S. government guarantees your money will be there when you need it, no matter what happens to your bank or the economy.