What Type of Bank Is Your Bank?

No, it’s not a trick question. While most people think a bank is a bank is a bank, the financial institutions we usually call a “bank” actually come in many different flavors. Some are organized under federal laws, some under state laws. Some are a special kind called thrift, savings and loan or savings association. Some are members of the Federal Reserve, some are not. Depending on the types, they are regulated by different entities. I learned these from the book The Greatest-Ever Bank Robbery which I reviewed a few weeks ago. Here are some categories of banks in the United States:

1. National Bank. These institutions are organized under federal laws. Their primary federal regulator is The Office of the Comptroller of the Currency (OCC). All national banks are required to be members of the Federal Reserve. Their names typically (but don’t have to) include the word “national” or end with “N.A.” which stands for National Association. For example Zions First National Bank and Bank of America N.A. are national banks.

2. Federal Savings Association. These institutions are organized under the federal Home Owners’ Loan Act. They are required to do a substantial amount of business in mortgage lending. Their primary federal regulator is a different branch of the Treasury department called The Office of Thrift Supervision (OTS). They are NOT members of the Federal Reserve, but are instead members of a parallel Federal Home Loan Banks system. Their names often (but not always) include the word “savings” or end with “FSB” which stands for Federal Savings Bank. For example Washington Mutual Bank and ING Bank, fsb are federal savings associations.

3. State Member Bank. These institutions are organized under the state laws but they chose to become members of the Federal Reserve. Their primary federal regulator is the Federal Reserve. For example SunTrust Bank and Fifth Third Bank are state chartered banks which are also members of the Federal Reserve.

4. State Non-Member Bank. These institutions are organized under the state laws but they are NOT members of the Federal Reserve. Their primary federal regulator is FDIC. For example Bank of the West and GMAC Bank are state chartered banks who are not members of the Federal Reserve.

5. State Savings Association. Like their federal counterpart, these institutions also do substantial amount of business in mortgage lending, except they are organized under state laws. Their primary federal regulator is FDIC. For example Emigrant Bank is a state chartered savings association.

	Charter	Is Thrift?	Primary Regulator	Example
National Banks	Federal	No	OCC	Bank of America, Zions
Federal Savings Associations	Federal	Yes	OTS	Washington Mutual, ING
State, Fed Member	State	No	Federal Reserve	SunTrust, Fifth Third
State, Fed Non-Member	State	No	FDIC	GMAC Bank
State S&L	State	Yes	FDIC	Emigrant Bank

Finally, a credit union is not a bank at all. Credit unions are not insured by FDIC. They are supervised and insured by a different federal agency NCUA.

How do you find out what type of bank yours is? If you use an online savings account, sometimes they use a trade name and you may not even know who’s behind the service. My previous post Online Savings Accounts and Their Backers has a list of popular online savings accounts and the real names of the banks behind them. Then use FDIC’s Find an Institution search form. Type in a name and you will see its Bank Charter Class. For example, NetBank, which was shut down by the OTS last week, was a Savings Association.

As a customer, should you care? Today both banks and savings and loans offer pretty much the same array of services. They are all FDIC insured. That’s probably why most people don’t even know they are different under the hood. Yet who regulates them may make a difference. During the 1980s the banking regulators in some states and the predecessor of OTS had looser rules, which contributed to the massive savings and loan crisis. However as long as the banks were insured by the federal government, the customers didn’t care whether they were run in a safe and sound manner. They dumped large sums of money to the troubled banks because the troubled banks offered higher interest rates. This phenomenon is called the moral hazard.

The customers are still doing the same today. The Wall Street Journal reported that Countrywide Bank is attracting $50 million a day with its higher interest rate. Customers are not concerned about Countrywide’s negative publicity because their deposits are insured.

In my opinion, as a customer, you should care how your bank is run, even if the deposits are FDIC insured. There’s a moral aspect to your decision. If chasing the highest yield resulted in a FDIC payout, it means you are taking money from other depositors who may be less well off than you are. Doing that intentionally is wrong.

Related Posts:

• Online Savings Accounts and Their Backers
• What Happens When a Bank Goes Out of Business