The American Banking System: Its Structure, Its Many Regulators

The American banking system is the outlier among developed economies. Where the United Kingdom, Canada and most of Europe concentrated retail banking into a handful of national institutions, the United States still has several thousand separately chartered banks and supervises them through more than one federal agency plus fifty state regulators.

The fragmentation is not an accident of history that nobody got round to fixing. It is the product of deliberate political choices, repeated over a century and a half, and understanding why is more useful than memorising the current structure — which changes, while the reasons do not.

The dual banking system

The defining structural feature is that a bank may be chartered either by a state or by the federal government, and the choice determines its primary supervisor.

The arrangement dates from the National Bank Act 1863, which created federally chartered national banks to finance the Civil War and to establish a uniform currency. State banks were expected to convert or disappear. They did neither: taxed on their note issue, they moved to deposit banking instead, and the two systems have run in parallel ever since.

The consequence is regulatory choice. A bank dissatisfied with its supervisor can convert its charter, and the possibility that it might do so shapes how supervisors behave. Critics call this regulatory arbitrage; defenders call it competition in regulation. Both descriptions fit the same facts.

The regulators, and which does what

The Office of the Comptroller of the Currency charters and supervises national banks and federal savings associations. It sits within the Treasury and is funded by assessments on the institutions it supervises.

The Federal Reserve supervises bank holding companies, financial holding companies and state-chartered banks that are members of the Federal Reserve System. It also conducts monetary policy and operates the payment system, so it is a supervisor and a central bank at once.

The Federal Deposit Insurance Corporation insures deposits, supervises state-chartered banks that are not Fed members, and acts as receiver when a bank fails. Its resolution powers are the most operationally significant in the system.

State banking departments charter and supervise state banks alongside whichever federal agency applies, so a state bank has two supervisors rather than one.

The Consumer Financial Protection Bureau, created in 2010, holds consumer-protection authority that was previously distributed among the prudential regulators, on the reasoning that an agency responsible for a bank's safety has an incentive to under-enforce rules that cost the bank money.

The National Credit Union Administration regulates credit unions, which are member-owned and hold a meaningful share of retail deposits.

The map is genuinely complicated, and the complication is the point of the topic. A large bank holding company with a national bank subsidiary, a state-chartered subsidiary and a broker-dealer answers to several agencies at once.

Why it stayed fragmented

Three forces, repeated over time.

Political resistance to concentrated financial power. The failure to renew the charters of the first and second Banks of the United States, in 1811 and 1836, established a pattern. Agrarian and populist opposition to eastern financial concentration was a durable feature of American politics, and it produced rules designed to keep banks small and local.

Restrictions on branching. For most of the twentieth century banks were prohibited from branching across state lines and often within states. A bank that could not open a second office in the next county could not consolidate, which is why the number of banks remained in the tens of thousands long after technology permitted otherwise. Interstate branching was permitted nationally only by the Riegle-Neal Act 1994, and consolidation followed immediately: the number of banks has fallen by roughly two thirds since.

The separation of commercial and investment banking. The Glass-Steagall provisions of the Banking Act 1933 separated deposit-taking from securities underwriting, on the view that the combination had contributed to the 1929 collapse. The separation was eroded by interpretation through the 1980s and 1990s and repealed in 1999 by the Gramm-Leach-Bliley Act. Whether the repeal contributed to the 2008 crisis is genuinely contested, and an assignment that asserts it without qualification is overstating a live argument.

What the structure produces

A long tail of small banks. Several thousand institutions hold a small fraction of total assets, while a handful of the largest hold a substantial majority. The tail is not a historical relic: small banks retain a real function in lending to small businesses and agriculture, where local knowledge matters and where large banks' standardised credit models perform poorly.

Distinctive failure patterns. Small bank failures are frequent and individually trivial, and the FDIC resolution process handles them routinely, often over a weekend. The system's problem has never been the failure of a small bank; it is the failure of a large one, which is what the post-2008 framework was built to address.

Competition at the retail level. Deposit pricing and small-business lending are more competitive than in concentrated systems, which is the strongest argument in fragmentation's favour.

Duplication and cost. Several agencies examining overlapping populations produce inconsistent standards and a compliance burden that falls hardest on the smallest institutions — the ones fragmentation was meant to protect.

The shadow banking question

Any account confined to chartered banks understates the system, because a large share of American credit never passes through one.

Money market funds, mortgage originators, finance companies, insurers, hedge funds and the securitisation markets together perform functions that in a bank-centred system sit on bank balance sheets. The share of credit intermediated outside the banking system is substantially higher in the United States than in Europe, and it is the direct consequence of deep, liquid capital markets — mortgages are originated to be securitised rather than held, and a company of moderate size issues bonds where a British equivalent would borrow from its bank.

Two implications follow.

Supervision covers less than it appears to. An agency examining a bank sees the bank's exposures and not necessarily the market conditions that will determine whether those exposures perform, and entities performing bank-like functions without deposit insurance are outside prudential supervision by design.

Stress transmits differently. A funding run in the American system can begin outside the banking sector entirely — in money market funds, in repo, in a securitisation channel that simply stops — and reach banks through the markets they depend on, not through their depositors. The events of 2008 and of March 2020 both followed that shape.

The regulatory response since 2010 has extended some oversight to non-bank institutions designated as systemically important, and the designation process has been contested and partly reversed. The unresolved question is whether an activity should be regulated by what it is or by who performs it, and the American answer has moved in both directions.

Deposit insurance, and what it is for

The Federal Deposit Insurance Corporation was created in 1933 after a wave of bank failures, and its design carries a lesson that generalises beyond the United States.

Insurance covers deposits up to a limit per depositor, per institution, per ownership category. The limit is the mechanism: it protects the household whose money is its savings, and leaves the large depositor with an incentive to care which bank holds the balance. Unlimited insurance would remove market discipline entirely; no insurance leaves ordinary depositors running at the first rumour, which is what produced the failures the scheme was built to stop.

The limit is also the scheme's weak point, because in a large failure the authorities repeatedly face a choice between honouring it and containing the consequences. Uninsured deposits have been protected in practice on several occasions, most visibly in 2023, through a systemic-risk determination. Each such episode strengthens the expectation that they will be protected again, which erodes the discipline the limit exists to preserve.

That is the enduring tension in deposit insurance anywhere: the scheme works because it is credible, and each demonstration of its credibility in a crisis weakens the boundary it draws. The United States illustrates it more clearly than most systems because it has had more failures to resolve.

Compared with the United Kingdom

The contrast is the usual examination question, and the differences are structural and not incidental.

Concentration. A small number of institutions hold most UK retail deposits; the American market has no equivalent concentration at the retail level.

Supervisors. The United Kingdom runs a twin-peaks model: the Prudential Regulation Authority for safety and soundness, the Financial Conduct Authority for conduct and markets. Two regulators with clearly divided mandates, against the American arrangement of several with overlapping ones.

Branching. British banks branched nationally from the nineteenth century, which is the single largest reason for the difference in structure. No comparable legal barrier existed.

Crisis response. Both systems required extensive intervention in 2008. The United Kingdom's produced further consolidation; the American response produced a new consumer agency, a resolution regime for large institutions, and stress testing, while leaving the fragmented charter structure intact.

A fourth difference is worth adding where the question allows it: the United States operates deposit insurance through an agency that also supervises and resolves, while the United Kingdom separates the compensation scheme from the supervisor. Combining the three functions gives the FDIC an unusually direct interest in preventing failures it would have to pay for, which is an argument in the arrangement's favour and a conflict of interest in the same breath.

The conclusion worth reaching is that neither structure is simply better. Fragmentation buys competition and local credit supply at the cost of duplication and supervisory gaps; concentration buys efficiency and clearer accountability at the cost of competition and of institutions too large to be allowed to fail.