Encyclonomic WEB*pedia: TRADITIONAL BANKS

TRADITIONAL BANKS:
The first financial intermediaries to function as depository institutions, maintain deposits, make loans, and directly control the checkable deposits portion of the economy's money supply. Traditional banks were THE original banks, the financial depository institutions first to offer checkable deposits. Traditional banks invariably have the word "bank" in their names and are charted by either the Comptroller of the Currency or one of the fifty state corporation commissions. Three other types of banks, as a group commonly termed thrift institutions, are credit unions, savings and loan associations, and mutual savings banks.
Traditional banks are the checking-account-issuing financial intermediaries that most often come to mind when the term "bank" is used. Like other depository institutions that accept deposits and make loans, traditional banks are also responsible for maintaining liquid checkable deposits that are used as money for the economy. While mergers and bankruptcies change the number for year to year, about 10,000 traditional banks operate in the U.S. economy.
Traditional banks are classified as either "national" or "state" depending on the level of government that does the chartering. National banks are chartered by the Comptroller of the Currency at the federal level. State banks are charted by one of the fifty state corporation commissions. All traditional banks are subject to regulations by the Federal Reserve System and the Federal Deposit Insurance Corporation.
If an aspiring banking entrepreneur, such as Duncan Thurly, aspires to start a "bank," then a traditional bank is bound to be at the top of the list. A traditional bank would allow Duncan to provide any and all banking services that he might desire to offer--checking accounts, savings accounts, car loans, free popcorn, and little league sponsorship. It would allow Duncan to construction a fancy building with marble pillars outside and a big vault inside.
THE Original Banks
Traditional banks are THE original banks that go way back in the history of the economy. They were the original financial intermediaries to offer checking accounts. They owned the big buildings with marble pillars outside and oodles of cash stashed in vaults inside. They had the word "Bank" in their titles. They were major players of the financial markets of the circular flow. They diverted household income into loans for business investment.
If Duncan Thurly had sought to establish a bank throughout most of the history of the U.S. economy, from the 1790s to the 1970s, then he invariably would have started a traditional bank.
Regulated Checking Accounts
For a long time traditional banks were the only entities to offer checking accounts. These checkable deposits have been and continue to be a sizeable portion, and an important component, of the economy's money supply. For this reason traditional banks have long been heavily regulated entities. Included on any list of bank regulators is the Comptroller of the Currency, the Federal Reserve System, the Federal Deposit Insurance Corporation, and a host of other government entities. State and local government agencies, especially state corporate commissions, also get in to the regulatory act for some banks.
The good news for banking customers is that aspiring banking entrepreneurs must abide by a host of stringent regulations. While Duncan Thurly might be able to start up a lawn care business will little effort, he cannot launch a traditional bank quite as easily. This provides the banking public with some degree of assurance that the bank is prudently managed and that their deposits are moderately safe. It also helps to keep the medium of exchange sound and avoid problems of inflation and unemployment that might occur otherwise.
State and National
Traditional banks come in two varieties--national and state. Duncan could establish either a national bank (Thurly National Bank) or a state bank (State Bank of Duncan)
National banks, which are often the biggest ones, are chartered by the Comptroller of the Currency and subject to regulations by the Federal Reserve System, the Federal Deposit Insurance Corporation, and a host of other government entities.

State banks, which tend to be smaller, are chartered and regulated by state government agencies. However, they are also subject to regulations by the Federal Reserve System and the Federal Deposit Insurance Corporation.
National banks are automatically members of the Federal Reserve System. State banks, in contrast, can choose to join the Federal Reserve System, or not. While membership in the Federal Reserve System increases the regulatory oversight a notch or two, it also entails services not readily available to nonmembers.
Seven of the ten largest banks and twelve of the twenty largest banks in the United States are national banks. And while eight of the twenty largest banks are state chartered banks, only one is not a member of the Federal Reserve System.
Thrift Institutions
While traditional banks were the only financial institutions to operate as banks throughout much of the history of the United States, three types of thrift institutions began operating as banks in the 1970s. While most were not technically considered "banks" when they were established, all now function much like traditional banks.
Should Duncan Thurly not wish to operate a traditional bank, he could enter the banking industry through one of these three thrift institutions.
Savings and Loan Associations: Savings and loan associations (S&Ls) are depository financial institutions that were originally established to assist home owners with low-cost mortgage loans. The funds for these loans were obtained by offering simple savings deposits. S&Ls were an outgrowth of the exploding housing needs of the middle class in the mid-1900s.

Credit Unions: Credit unions are non-profit depository financial institutions that were established to provide members of a specific group, such as employees of a company, with low-cost personal loans. Credit unions were founded, often by labor unions, over concerns that traditional banks were not providing adequate services to working class consumer, especially personal loans.

Mutual Savings Banks: Mutual savings banks are something of a cross between credit unions and savings and loan associations. They are nonprofit, like credit unions, but originally specialized in mortgage loans, like savings and loan associations. Mutual savings banks were created for reasons similar to that of credit unions--concern that traditional banks were not providing adequate services at reasonable prices.
Check Out These Related Terms...
     | banking | banks | fractional-reserve banking | reserve | savings and loan associations | credit unions | mutual savings banks | thrift institutions |
Or For A Little Background...
     | money | M1 | profit | industry | monetary economics | government functions | financial markets | liquidity |
And For Further Study...
     | money creation | Federal Reserve System | Federal Deposit Insurance Corporation | Comptroller of the Currency | central bank | monetary policy | bank panic | monetary aggregates | barter |
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