Myth of Competition in the Dual Banking System

<div> The American banking system operates under a dual state and federal system of chartering and safety and soundness regulation. The dual banking system ostensibly allows banks operating in any state to choose between two different sets of primary laws to define their powers and to regulate their activities and investments. Banks may obtain a national charter and fall under the regulatory aegis of the Comptroller of the Currency, or they may obtain a state charter from the chartering state's primary banking regulator and fall under its regulatory aegis. In addition, within this system state banks can further decide whether to subject themselves to federal regulation by becoming members of the Federal Reserve System (Fed) or by insuring deposits through the Federal Deposit Insurance Corporation (FDIC). </div> <div> <br> </div> <div> The ideal of the dual banking system, with its overlapping system of state and federal regulation, is perhaps unique in the support it enjoys in the political and scholarly communities. Principal proponents of the economic approach to legal problems regard it as a promising source of efficient legal rules. This efficiency results from competition among state and federal regulators who desire to increase their market share by attracting additional chartering business. Thus, the currently accepted theory posits that competition among state and federal regulators manifests itself in the maximum freedom from regulation consistent with a safe and sound banking system. </div> <div> <br> </div> <div> At the same time, there is such widespread political support among regulators and politicians for the dual banking system that “questioning the underlying premise of the dual banking system has traditionally been outside the borders of permissible political discourse.” Indeed, the dual banking system “has long been a sacred cow in the American political tradition.” </div> <div> <br> </div> <div> The thesis of this Article, however, is that the efficiency justifications for the dual banking system are entirely misplaced. We find that the substantive differences between federal and state chartering regulations are far more apparent than real. Federal preemption and uniformity, rather than competition and diversity, are the legal norms in banking regulation. </div>