Is My Mother's Bank Better?

My mom still banks the old-fashioned way. That is, when she wants cash, she pulls up to her neighborhood bank's drive-through teller lane, actually talks to a real person through a microphone, and places a written request for cash into a plastic tube, which is then sucked up into the bank through a series of vacuum pipes. Likewise, when she wants to deposit money, she goes through the same process. This all must have seemed so high-tech...in the 1970's.

Every time I witness this ritual, I give my mother no end of grief. "They have ATM cards, you know," I say. "You could switch to a bank that has automated machines located on practically every corner, all easily accessible at any time of day or night, not just during bank hours." But my mother is a stubborn creature of habit, and is perfectly happy at her small bank, doing things the way she has for 20 years.

I've never given her bank much credit. After all, it doesn't have a fancy online interface that can pay bills or offer paperless statements as neatly as, say, Bank of America does. But there was a story in the news recently that made me wonder if smaller banks are actually better.

State-chartered vs. national-chartered banks

State-chartered banks, like my mother’s, are actually more carefully regulated than national mega-banks. Since the National Bank Act of 1864, nationally chartered banks have fallen under the thumb of the federal government, while most state-chartered banks have been subject to both a state and a federal regulator (either the FDIC or the Federal Reserve Board).

State-chartered banks are regulated according to state laws—laws that are designed to address the unique needs of that state’s citizens. Federal laws, on the other hand, must be broad enough to work for institutions operating all across the country under many different circumstances. Regulations affecting state-chartered banks tend to be more sensitive to local needs and conditions than those issued by the US Congress. By working closely with the state legislature and the Governor, state bankers can more dramatically impact banking policy at the state level than at the federal level.

New Supreme Court ruling gives more power to states to regulate national-chartered banks

Recently, the Supreme Court was given the task of reinterpreting the National Bank Act of 1864, deciding if the states shouldn’t have some regulatory powers over the large, national banks as well. The case comes after several years of the Fed turning the other cheek to sub-prime lending, credit card gouging, and, some say, race and gender discrimination by many nationally chartered banks. So it seems like more regulation would be a good thing. And that's what the Supreme Court’s 5-4 ruling concluded, too.

The decision is "a stinging defeat for the large banks and federal regulators who have worked for years to stop states from enforcing state consumer protection and antidiscrimination laws," says James E. Tierney, director of Columbia Law School's national attorneys general program.

So maybe mom had it right all along. By avoiding the nationally chartered mega-banks, she was getting—in addition to friendly, human teller service—an added measure of state regulation (just in case her bank misbehaved). The good news is that now we’ll all benefit from potential state involvement if our banks step out of line (vacuum-pipe system not required).

Photo courtesy of http://www.flickr.com/photos/f-r-a-n-k/ / CC BY 2.0