A bank charter is the legal authorization, granted by a government authority, that permits an institution to organize and operate as a bank, typically including the power to accept deposits and make loans. In the United States a charter is issued either by a state banking regulator or, for national banks and federal savings associations, by the Office of the Comptroller of the Currency (OCC). The term is used mainly in the US; most other countries speak of a banking license.
A charter defines what the institution is and which regulator is its primary supervisor. It does not by itself provide deposit insurance, membership of the Federal Reserve System or access to Federal Reserve payment services. Each of those requires a separate application and a separate approval.
The dual banking system
US banking has two parallel chartering tracks, a structure known as the dual banking system. State banks were the only commercial banks until the National Currency Act of 1863 and the National Bank Act of 1864 created federally chartered national banks supervised by the newly established OCC. Both tracks have coexisted since.
- A national bank is chartered and supervised by the OCC and must be a member of the Federal Reserve System. Its activities are governed mainly by federal law, and federal preemption can limit the reach of some state laws.
- A state-chartered bank is chartered by a state department of banking or financial services, such as NYDFS in New York. Its federal supervisor is the Federal Reserve if it joins the Federal Reserve System, or the FDIC if it does not.
State regulators coordinate through the Conference of State Bank Supervisors (CSBS).
What a charter does and does not provide
Separating the approvals explains why a chartered institution may still lack important capabilities:
- Deposit insurance requires approval by the FDIC under the Federal Deposit Insurance Act. Most new commercial banks seek it, as it is practically essential for taking retail deposits.
- Federal Reserve membership is required for national banks and optional for state banks.
- A Federal Reserve master account, which gives direct access to services such as Fedwire and settlement in central bank money, is granted at the discretion of the relevant Reserve Bank under guidelines published by the Federal Reserve in 2022. Novel charter types without deposit insurance have found access difficult to obtain.
Types of bank charter
Beyond full-service commercial bank charters, US law and state law provide narrower forms, including savings associations, trust companies with limited fiduciary powers, industrial loan companies chartered in a few states, and newer specialized forms such as Wyoming's special purpose depository institution. The OCC has also offered special purpose national bank charters to some non-traditional firms, a policy that has faced legal challenges from state regulators.
Obtaining a bank charter
A de novo bank applicant must present a business plan, a qualified board and management team, sufficient initial capital, compliance and risk management frameworks, and evidence that the proposed bank can be profitable within a reasonable period. Organizers, directors and each significant shareholder are investigated, and anyone who would be a control person undergoes background checks. Regulators also assess regulatory capital plans and often impose conditions for the first years of operation. The process commonly takes a year or more. Acquiring an existing bank instead requires approval of the change of control, which involves similar scrutiny. For a practical description, see applying for a banking license in the US.
Bank charters and fintech
Because a charter is costly and slow to obtain, many fintech firms instead partner with a chartered sponsor bank or operate under state money transmitter licenses. A charter offers deposit funding, lending powers and, in principle, a path to direct payment system access, but brings full prudential supervision, capital requirements and restrictions on non-banking activities. Whether the trade-off is worthwhile depends on the business model and scale.