Comptroller of the Currency

Administrator of National Banks

Washington, DC 20219

www.occ.treas.gov
National Banks and

The Dual Banking System

S E P T E M B E R 2 0 0 3
Today, the dual banking system, which has been 

a hallmark of banking in the United States for 

nearly 200 years, is under attack, as many states 

have attempted to assert legislative and enforcement 

authority over national banks in a way that contradicts 

constitutional principles that have been well-settled 

since the early nineteenth century. 

This paper explains the history and features of the 

“dual banking system” and discusses the judicial and 

legislative precedents establishing the constitutional 

limits on the ability of states to control or direct 

national bank powers conferred under federal law. 

The “dual banking system” refers to the parallel state and 

federal banking systems that co-exist in the United States. 

The federal system is based on a federal bank charter, 

powers defined under federal law, operation under federal 

standards, and oversight by a federal supervisor. The state 

system is characterized by state chartering, bank powers 

established under state law, and operation under state 

standards, including oversight by state supervisors. 

It has been a bedrock precept of our constitutional law for 

more than 180 years, since the Supreme Courtʼs decision 

in M’Culloch v. Maryland in 1819, that states cannot 

constitutionally control the powers of entities created under 

federal law. Courts have consistently applied this principle 

over the years to national banks, holding a variety of state 

laws inapplicable to national banks, and finding that the 

federally authorized powers of national banks are not subject 

to state supervision and regulation. 

1 
Against this background, it is quite surprising to hear 

supporters of the dual banking system criticizing national 

banks for utilizing — and the OCC for asserting and 

defending — the very characteristics of the national bank 

charter that distinguish national banks from state banks 

and make the system “dual.” Itʼs as if they were saying 

“We think the dual banking system is great, except for the 

features that make it dual.” 

As this paper explains, the OCCʼs positions on national 

bank powers and preemption and the OCCʼs exclusive 

regulatory authority over national banks are not new. They 

are deeply rooted in constitutional principles and the history 

of the national banking system. Preemption of state laws 

that retard, impede, or obstruct national banks’ ability to 

exercise powers authorized under federal law, and the OCCʼs 

extensive, virtually exclusive “visitorial powers” over 

national banks, are differences in national and state bank 

powers and supervisory implementation that are not 

inconsistent with the dual banking system; they are the 

defining characteristics of it. 

2 
Early History of the Dual 

Federal/State Banking System 

The banking system in the United States is described 

as “dual” because it is made up of separate federal 

and state component systems. This duality has 

existed in various forms since the earliest years of our 

nation, and while the federal and state components of the 

system have evolved in structure over the years, the essential 

characteristics of the system’s duality have not. The federal 

system is based on a federal bank charter, powers defined 

under federal law, operation under federal standards, and 

oversight by a federal supervisor. The state system is 

characterized by state chartering, bank powers established 

under state law, and operation under state standards, subject 

to state supervision. As Professor Kenneth Scott wrote 

in his landmark analysis of the dual banking system, the 

“very core of the dual banking system is the simultaneous 

existence of different regulatory options that are not alike in 

terms of statutory provisions, regulatory implementation and 

administrative policy.”1 

Although a system of national banks would not be created 

until 1863, the need for and desirability of federal banks 

and their potential role in shaping a national economy 

were evident from the very beginning of the United 

States. Initially, the federal component of the dual banking 

system comprised just one bank — the First Bank of the 

United States, the brainchild of Alexander Hamilton, the 

first Secretary of the Treasury. The First Bank operated 

nationally, through multiple, multi-state offices, from 1791 

until 1811. The U.S. government subscribed for 20 percent 

of its stock, borrowing from the Bank itself in order to buy 

the stock. The remaining 80 percent of the First Bank was 

1 Kenneth E. Scott, The Dual Banking System: A Model of Competition in Regulation, 30 Stan. 

L. Rev. 1, 41 (1977). 

3 
owned by private investors, but they were required to use 

recently issued government bonds to pay 75 percent of their 

stock subscription price. Thus, in all, 80 percent of the 

First Bank’s original capital was backed by some form of 

government obligation. 

Yet the First Bank actually dealt in government debt only 

in connection with these transactions at its inception. Its 

main function was “to provide a large, stable, but flexible 

national money supply for the financing of ordinary business 

and economic development . . . . Hamilton insisted that 

it be operated for the private profit of its stockholders, 

thus making it in the interest of the stockholders to run it 

properly.”2 As a check, however, the operations of the First 

Bank were subject to inspection by the Treasury Department. 

The First Bank’s charter expired in 1811, but it was revived 

as the Second Bank of the United States in 1816. The 

Second Bank was designed to replicate the First Bank in 

structure and many of its functions. Again, 80 percent of 

the Bank’s capital stock was offered to the investing public, 

and the remaining 20 percent was purchased by the federal 

government using various forms of government obligations 

as consideration. Twenty of the Bank’s 25 directors were 

elected by the stockholders, with five appointed by the 

President. The Second Bank operated nationally, through 

a system of branch offices, from 1816 until 1836, at which 

time President Andrew Jackson blocked renewal of its 

charter. 

2 Forrest McDonald, Alexander Hamilton, A Biography 195 (1979). 

4 
The Second Bankʼs most lasting legacy, however, may have 

been the litigation its activities provoked when the state of 

Maryland sought to tax its activities. In an effort to stabilize 

credit and currency, the Bank had begun calling in its loans 

and tightening its credit policies. This action triggered an 

intense economic depression, known as the Panic of 1819. 

States reacted with different measures, including taxation, 

designed to drive the branches of the Second Bank from 

their jurisdictions. (States rankled particularly at the fact 

that, with a charter from the federal government, the Second 

Bank was able to open branches and operate its business 

where it pleased, without state permissions.) The Bank 

resisted the attack from Maryland, and the issue ultimately 

was resolved by the landmark Supreme Court decision 

on federal preemption, M’Culloch v. Maryland,

3

 in which 

the Court declared that “states have no power, by taxation 

or otherwise, to retard, impede, burden, or in any manner 

control” the operations of a federally created entity, such as 

the Second Bank.4 

During this early period, banks were chartered at the state 

level, generally through special acts of the state legislatures. 

Following the demise of the Second Bank, however, the 

states began to enact “free banking” laws, which permitted 

organizers to incorporate banks without going through a 

legislative process, provided they met specified conditions. 

These free banking laws encouraged the chartering of new 

state banks and resulted in a dispersed and decentralized 

state banking system. State banking powers varied state-tostate, and the capacities of state supervision were uneven. 

3 M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819). 

4 Id. 

5 
Creation of the National Banking System 

The exigencies of the Civil War were the catalyst 

for President Abraham Lincoln to establish the 

national banking system, but the origins of the 

system trace directly to the First and Second Banks of the 

United States. Lincoln, it will be recalled, “had been a 

confirmed Whig and a follower of Henry Clay,”5

 before 

the Whig Party waned, and he joined the newly created 

Republican Party. The centerpiece of the Whig party’s 

nationalist economic program in the early to mid-1800s was 

Clay’s “American System,” a visionary program of national 

economic development that included federal construction 

of interstate turnpikes and canals, federal funding for other 

internal improvements, protective tariffs to nurture fledgling 

domestic industries, and a national bank. The American 

System, including its national bank component, in turn, 

traced its lineage to the economic policies and programs of 

Alexander Hamilton.6

 Clay fought for, but lost, the battle 

over re-chartering of the Second Bank of the United States 

in the 1830s, but he and the Whigs continued to advocate 

the importance of a national bank in order to stabilize the 

currency and money supply and provide needed credit to 

support national economic growth. 

Lincoln did not forget Clay’s political legacy,7 and in 

the midst of his first administration, he sent to Congress 

legislation to establish the national banking system. But 

5

 Maurice G. Baxter, Henry Clay and the American System 209 (1995). 

6 Of the link between Clay and Hamilton, it has been written that Clay “made Federalism a

living vision, replacing the dry logical prose of Hamilton with thrilling pictures of a glorious 

future. The blaze of nationalism suggested a new and disarming name – the American System 

– and under Clay’s solicitous care, this rebaptized Federalism slowly won its way to the inner

councils of the government.” Arthur M. Schlesinger, Jr., The Age of Jackson 12 (1945). 

7

 In 1861, after his election to the presidency and shortly before his first inauguration, Lincoln 

recalled how he “loved and revered [Clay] as a teacher and leader.” 4 The Collected Works of 

Abraham Lincoln 184 (Roy P. Basler, ed., 1953) (letter from Lincoln to James Sulgrove, Jan. 

28, 1861). A year and a half later, mired in the midst of the Civil War, Lincoln acknowledged a 

memento sent to him by one of Clay’s sons, and wrote of Clay, “I recognize his voice, speaking 

as it ever spoke, for the Union, the Constitution, and the freedom of mankind.” Abraham 

Lincoln: His Speeches and Writings 651 (Roy P. Basler, ed., 1946) (letter from Lincoln to John 

Clay, Aug. 9, 1862). Five months later, Lincoln sent to Congress legislation to establish the 

national banking system. 

6 
rather than revive the First Bank and Second Bank model of 

a single large, big city-based bank with (unpopular) branch 

locations intruding into multiple states, Lincoln borrowed the 

separate bank incorporation concept from state free-banking 

statutes. The new national banking system accordingly 

was designed to be made up of many separate, federally 

chartered, privately owned, and locally managed banks that 

would be established throughout the country. 

Yet, while this new national system would function via 

multiple federal charters, its constituent parts shared the 

same essential federal character as their First and Second 

Bank predecessors. They operated pursuant to a federal 

charter, but were privately controlled and managed. 

Wherever located, they would exercise a uniform set of 

federal powers, under federal standards of operation, and 

federally mandated capitalization, with a federal supervisor 

overseeing all of the foregoing. The new national banks 

also were required to buy Treasury securities as a portion 

of their capitalization — providing the federal government 

with a vital source of funds to finance its Civil War effort 

— and these securities, in turn, were pledged as backing 

for a new species of circulating notes issued by the banks 

with the Comptroller’s approval. Backed by government 

securities, these circulating notes were designed to be the 

new national currency that would hold a stable value and 

could be used, reliably, across the nation. Thus, while the 

Civil War provided the catalyst for establishing a new system 

of national banks, the national banking system was more 

than just a financing arm for the government’s war effort. It 

was part of a national program of economic development, 

expounded by Henry Clay, traceable to Alexander Hamilton, 

finally implemented by Lincoln.8 

8

 Baxter, supra, at 209, 210 (“During the Civil War, a decade after the Kentuckian’s death . . . 

Lincoln and the Republican Party implemented much of the American System.”). 

7 
What Makes the Dual Banking System Dual? 

From the very outset, therefore, national banks were 

unique federal creations. Beyond their short-term role 

in Civil War finance, this was a system of financial 

institutions with a distinct pedigree, designed to far outlast 

the financial requirements of the War, with attributes of 

uniformity and stability intended to foster commerce 

throughout the nation in furtherance of a strong national 

economy. The uniformity of powers and operating standards 

established for national banks under the National Bank 

Act — assured through preemption of any state laws that 

would attempt to “retard, impede, burden, or in any manner 

control” their federally authorized activities — coupled with 

the OCCʼs exclusive supervisory and regulatory authority, 

have been defining characteristics of national banks from 

their inception. Together, these characteristics constitute 

essential distinctions between the national banking system 

and the system of state-chartered and state-regulated banks 

that make up the other half of our dual banking system. 

Ironically, many opponents of preemption are also ardent 

defenders of the “dual banking system.” It is perplexing 

to hear those advocates on the one hand embracing the 

“dual banking system,” while at the same time criticizing 

national banks for asserting — and the OCC for defending 

— the very characteristics of the national bank charter that 

distinguish national and state banks and make the system 

“dual.” These commentators praise the state banking system 

because of the variety of activities that may be allowed 

in different states. It is said that the varied powers and 

regulatory approaches possible in different states enable 

8 
state systems to serve as laboratories for innovation and that 

this potential diversity of standards is a valued attribute of 

the state component of the dual banking system. But then 

these same commentators criticize the other half of the dual 

banking system — national banks — for seeking national 

standards of operation and supervision, consistent with the 

national character of their charter and their supervisor. It’s 

as if they were saying “We think the dual banking system is 

great, except for the features that make it dual.” 

Preemption of state laws that would “retard, impede, 

burden, or in any manner control” national banks’ ability 

to exercise powers authorized under federal law, and the 

OCCʼs extensive, virtually exclusive “visitorial powers” over 

national banks, are differences in national and state bank 

powers and supervisory implementation that are not 

inconsistent with the dual banking system; they are the 

defining characteristics of it. Those that resist or try to blur 

those distinctions effectively undermine the character of the 

dual banking system. 

9 
Benefits of the Distinctions Between the 

National and State Banking Systems 

Each component of the dual banking system makes 

different, positive contributions to the overall 

strength of the U.S. banking system, and efforts to 

dilute the unique characteristics of one component of the 

system undermine the collective strength that comes from 

the diverse contributions of the two systems. Commentators 

and state bank supervisors rightly assert, for example, that 

a separate system of state banks “allows the states to serve 

as laboratories for innovation and change, not only in bank 

powers and structures, but also in the area of consumer 

protection.”9

 State supervisors also make what is, in effect, 

a “smaller is better” argument in favor of the attributes of 

state systems, lauding the physical proximity of state bank 

regulators to the institutions they supervise, suggesting 

that state banks have greater access to state regulators and 

that geographic proximity gives state regulators greater 

familiarity with the banks they oversee. 

On the other hand, the national banking system is the venue 

for testing and evaluating the efficiencies and benefits that 

flow from uniform national standards. This takes on a new 

value as the banking and financial marketplace evolves, 

increasingly oblivious to state boundaries, as a result of 

enhanced technology and the growth of national markets for 

loans, deposits and other financial products. In other words, 

the national banking system is a laboratory, too, but what 

it demonstrates is the value of applying uniform national 

standards to activities and products that, today, have national 

markets. 

9 Testimony of Joseph A. Smith, Jr., North Carolina Commissioner of Banks, on behalf of the 

Conference of State Bank Supervisors, before the House Committee on Financial Services, June 

4, 2003, available at http://www.csbs.org/government/legislative/testimony/leg_testimony_ 

060403.htm. 

10 
The OCC’s nationwide jurisdiction over banks ranging 

from modest-sized community banks to some of the largest 

banks in the world also contributes to the agency’s ability 

to develop and maintain highly expert credit examination 

and risk management capabilities that benefit all sizes and 

types of banks in the national system. And its nationwide 

reach enables the OCC to take actions to protect national 

bank customers regardless of the state in which they reside. 

In this regard, pioneering steps taken by the OCC to combat 

unfair or deceptive practices, and the OCC’s progressive 

approach to customer privacy issues, have had nationwide 

consumer benefits. 

Nor do state banking systems hold a monopoly on innovation 

or on proximity to the banks they supervise. The OCC’s 

resources and depth of expertise have supported major 

advances in the business of banking through the national 

bank charter, and the OCC has pioneered a supervisory 

approach premised on distinctions in the type of proximity 

most appropriate for a given type of bank. Supervision 

of most national banks, which are community banks, is 

conducted through a network of over 60 field offices located 

throughout the country, while the largest, most complex 

national banks are supervised by teams of examiners actually 

stationed on premises at those banks. 

The benefits of having a dual banking system thus flow 

from allowing each of the two components of the system to 

function in accordance with its distinctive attributes. State 

banking does not deliver the benefits of having separate 

state systems serve as “laboratories” if state bank powers 

simply copycat national bank powers, or if state consumer 

protection standards that would otherwise be applicable to 

state banks are waived whenever such a law is preempted 

11 
as applied to a national bank. Nor are the benefits of the 

attributes of the national system realized if national banks 

are unable to realize the efficiencies and benefits of operating 

under uniform national standards and the federal supervisory 

system. 

The following sections discuss the historical background and 

extensive body of case law that has addressed the attributes 

of the national bank charter and the national banking system 

— federal powers, virtually exclusive federal supervision, 

and the resulting limited applicability of state law — and 

explain how these characteristics are essential and inherent 

in the “duality” of the dual banking system. 

12 
The Powers of National Banks 

The long-range goals of Congress for the national 

banking system — supporting a stable national 

currency, financing commerce, acting as private 

depositories, and generally supporting the nation’s economic 

growth and development — required a type of bank that was 

not just safe and sound, but whose powers were dynamic 

and capable of evolving, so that national banks could 

perform their intended roles, well beyond the Civil War. 

Key to these powers is language set forth at 12 U.S.C. § 24 

(Seventh), which provides that national banks are authorized 

to exercise “all such incidental powers as shall be necessary 

to carry on the business of banking; by discounting and 

negotiating promissory notes, drafts, bills of exchange, and 

other evidences of debt; by receiving deposits; by buying 

and selling exchange, coin and bullion; by loaning money on 

personal security; and by obtaining, issuing, and circulating 

notes.” 

Congress had modeled this authority on the bank charter 

authorized by the New York Free Banking Act, a type 

of charter that the New York courts explicitly had found 

to possess flexible and adaptive powers. Shortly before 

enactment of the National Bank Act, the New York Court of 

Appeals described the dynamic nature of the New York bank 

charter, stating that “[t]he implied powers [of a bank] exist 

by virtue of the grant [to do the banking business], and are 

not enumerated and defined; because no human sagacity can 

foresee what implied powers may, in the progress of time, 

the discovery and perfection of better methods of business, 

and the evervarying attitude of human relations, be required 

to give effect to the express powers.”10 

10 Curtis v. Leavitt, 15 N.Y. 9, 157 (1857). 

13 
The specifications of certain banking activities that were 

contained in the New York banking laws, (and subsequently 

copied into the National Bank Act) were “eminently useful,” 

but “not indispensable,” according to the court in that case. 

Based on this lineage, in construing the National Bank Act 

the OCC typically looks to the objectives in addition to 

simply the mechanics of the Act, approaching the statute, as 

one commentator put it, as “an architect’s drawing and not a 

set of specifications.”11 As a result, the powers of national 

banks to engage in the business of banking and activities 

that are “incidental” thereto have been continually updated 

and consistently interpreted by the OCC — and accepted 

by the courts — as evolutionary; capable of developing and 

adjusting as needed to support the evolving financial and 

economic needs of the nation. 

Any doubt concerning this characterization of the powers 

of national banks was settled with the Supreme Court’s 

decision in NationsBank v. Variable Annuity Life Insurance 

Co. in which the Court expressly held that the “business of 

banking” is not limited to the enumerated powers in section 

24(Seventh) and that the Comptroller has discretion to 

authorize activities beyond those specifically enumerated in 

the statute.12 In the same decision, the Court also reiterated 

a previous admonition that the Comptroller’s determinations 

regarding the scope of permissible national bank activities 

pursuant to this authority should be accorded great 

deference, stating emphatically that “[i]t is settled that courts 

should give great weight to any reasonable construction 

of a regulatory statute adopted by the agency charged 

with enforcement of that statute. The Comptroller of the 

Currency is charged with the enforcement of banking laws to 

11 Henry Harfield, The National Bank Act and Foreign Trade Practices, 61 Harv. L. Rev. 782 

(1948). 

12 NationsBank of North Carolina v. Variable Annuity Life Ins. Co., 513 U.S. 251 (1995). 

14 
an extent that warrants the invocation of this principle with 

respect to his deliberative conclusions as to the meaning of 

these laws.”13 

So, today, national banks operate pursuant to federal 

authority contained in a federally granted charter. That 

authority is recognized as flexible and adaptable to serve 

changing customer and business needs and desires, and the 

OCC is uniquely authorized to define and refine the content 

of the business of banking in order to enable national banks 

to best serve those evolving needs on a safe and sound basis. 

13 Clarke v. Securities Industry Assn., 479 U.S. 388, 403-04 (1987) (quoting Investment Co. 

Institute v. Camp, 401 U.S. 617, 626-27 (1971)). 

15 
Background of the OCC’s Unique Authority 

to Supervise and Regulate National Banks 

At its inception, it was anticipated, by both 

proponents and opponents of the new national 

banking system, that national banks would 

supersede the existing system of state banks because state 

banks would convert to national charters in order to issue 

the new national bank note currency.14 Given this assumed 

impact on state banks and the resulting diminution of 

control by the states over banking in general,15 and probably 

remembering the state hostility directed at the First and 

Second Banks, the proponents of the national banking 

system were understandably very concerned that states 

would attempt to undermine the new system by imposing 

1

14 Representative Samuel Hooper, who reported the bill to the House, stated in support of the 

legislation that one of its purposes was “to render the law [Currency Act] so perfect that the 

State banks may be induced to organize under it, in preference to continuing under their State 

charters.” Cong. Globe, 38th Cong. 1st Sess. 1256 (Mar. 23, 1864). While he did not believe that 

the legislation was necessarily harmful to the state bank system, he did “look upon the system 

of State banks as having outlived its usefulness.” Id. Opponents of the legislation believed that 

it was intended to “take from the States . . . all authority whatsoever over their own State banks, 

and to vest that authority . . . in Washington.” Cong. Globe, 38th Cong., 1st Sess. 1267 (Mar. 

24, 1864) (statement of Rep. Brooks). Rep. Brooks made that statement to support the idea 

that the legislation was intended to transfer control over banking from the states to the federal 

government. Given that the legislation’s objective was to replace state banks with national 

banks, its passage would, in Rep. Brooksʼ opinion, mean that there would be no state banks 

left over which the states would have authority. Thus, by observing that the legislation was 

intended to take authority over state banks from the states, Rep. Brooks was not suggesting that 

the federal government would have authority over state banks; rather, he was explaining the bill 

in a context that assumed the demise of state banks. Rep. Pruyn opposed the bill stating that the 

legislation would “be the greatest blow yet inflicted upon the States.” Cong. Globe, 38th Cong., st Sess. 1271 (Mar. 24, 1864). See also John Wilson Million, The Debate on the National Bank 

Act of 1863, 2 J. Pol. Econ. 251, 267 (1893-94) regarding the Currency Act. (“Nothing can be 

more obvious from the debates than that the national system was to supersede the system of 

state banks.”) 

15 See, e.g., Tiffany v. National Bank of Missouri, 85 U.S. (18 Wall.) 409, 412-413 (1874) (“It 

cannot be doubted, in view of the purpose of Congress in providing for the organization of 

national banking associations, that it was intended to give them a firm footing in the different 

states where they might be located. It was expected they would come into competition with 

state banks, and it was intended to give them at least equal advantages in such competition . . . . 

National banks have been national favorites. They were established for the purpose, in part, of 

providing a currency for the whole country, and in part to create a market for the loans of the 

general government. It could not have been intended, therefore, to expose them to the hazard of 

unfriendly legislation by the states, or to ruinous competition with state banks.”). See also Bray 

Hammond, Banks and Politics in America from the Revolution to the Civil War 725-34 (1957); 

Paul Studenski & Herman E. Krooss, Financial History of the United States 155 (1st ed. 1952). 

16 
restraints on national bank activities. Remarks of Senator 

Sumner in 1864, the first year of the national banking 

system, addressing the prospect of state taxation of national 

banks, illustrate the sentiment of many legislators of the 

time. He said, “[C]learly, the bank must not be subjected to 

any local government, State or municipal; it must be kept 

absolutely and exclusively under that Government from 

which it derives its functions.”16 

The allocation of any supervisory responsibility for the 

new national banking system to the states would have been 

inconsistent with this need to protect national banks from 

state interference. Congress, accordingly, established a 

federal supervisory regime and vested responsibility to 

carry it out in the newly created OCC. Congress granted the 

OCC the broad authority “to make a thorough examination 

into all the affairs of [a national bank],”17 and solidified 

this federal supervisory authority by vesting the OCC with 

exclusive “visitorial” powers over national banks. These 

provisions assured, among other things, that the OCC would 

have comprehensive authority to examine all the affairs of 

a national bank and protect national banks from potential 

state hostility by establishing that the authority to examine 

national banks is vested only in the OCC, unless otherwise 

provided by federal law.18 

16 Cong. Globe, 38th Cong., 1st Sess., at 1893 (Apr. 27, 1864). See also Anderson v. H&R 

Block, 287 F.3d 1038, 1045 (11th Cir. 2002) (“congressional debates amply demonstrate 

Congressʼs desire to protect national banks from state legislation . . . .”).

17 Act of June 3, 1864, c. 106, § 54, 13 Stat. 116, codified at 12 U.S.C. § 481. 

18 Writing shortly after the Currency Act and National Bank Act were enacted, then-Secretary of 

the Treasury, and formerly the first Comptroller of the Currency, Hugh McCulloch observed that 

“Congress has assumed entire control of the currency of the country, and, to a very considerable 

extent, of its banking interests, prohibiting the interference of State governments.” Cong. 

Globe, 39th Cong., 1st Sess., Misc. Doc. No. 100, at 2 (Apr. 23, 1866). 

17 
The importance of national banks’ independence and 

insulation from state interference — and potential retribution 

— was highlighted by Congress’ next move against state 

banks. When state banks failed to convert in expected 

numbers, Congress placed a high tax on state banks’

circulating notes in an attempt to drive them out of business. 

This effort failed when state banks adjusted and shifted from 

issuing circulating notes to taking deposits and offering 

checking accounts. State banks survived, the new national 

banking system grew and prospered, and our current dual 

banking system took shape. 

18 
Recognition of the OCC’s Supervisory and

Regulatory Role by the Supreme Court 

and Congress 

Consistent with this history, courts have consistently 

recognized the distinct status of the national banking 

system and the limits placed on state involvement 

in national bank supervision and regulation by the National 

Bank Act. For example, in Guthrie v. Harkness,

19 the 

Supreme Court stated that “Congress had in mind, in passing 

this section [section 484], that in other sections of the law it 

had made full and complete provision for investigation by 

the Comptroller of the Currency and examiners appointed 

by him, and authorizing the appointment of a receiver to 

take possession of the business with a view to winding up 

the affairs of the bank. It was the intention that this statute 

should contain a full code of provisions upon the subject, 

and that no state law or enactment should undertake to 

exercise the right of visitation over a national corporation. 

Except in so far as such corporation was liable to control in 

the courts of justice, this act was to be the full measure of 

visitorial power.”20 

The Supreme Court also has recognized the clear intent on 

the part of Congress to limit the authority of states over 

national banks precisely so that the nationwide system of 

banking that was created in the Currency Act could develop 

and flourish. As the Court stated in Easton v. Iowa,

21 the 

National Bank Act “has in view the erection of a system 

extending throughout the country, and independent, so far as 

powers conferred are concerned, of state legislation which, 

if permitted to be applicable, might impose limitations and 

19 199 U.S. 148 (1905). 

20 Id. at 159. 

21 188 U.S. 220 (1903). 

19 
restrictions as various and as numerous as the states. . . . If 

[the states] had such power it would have to be exercised 

and limited by their own discretion, and confusion would 

necessarily result from control possessed and exercised by 

two independent authorities.”22 

The Court in Farmersʼ & Mechanicsʼ Bank v. Dearing, 

similarly found that “States can exercise no control over 

[national banks] nor in anywise affect their operation, except 

in so far as Congress may see proper to permit. Anything 

beyond this is ʻan abuse, because it is the usurpation of 

power which a single State cannot give.ʼ”23 

Consistent with the need for a uniform system of laws 

and uniform supervision that would foster the nationwide 

banking system, courts have interpreted the OCC’s visitorial 

powers expansively. The Supreme Court in Guthrie, (citing 

First Nat’l Bank of Youngstown v. Hughes24) noted that the 

term “visitorial” as used in section 484 derives from English 

common law, which used the term “visitation” to refer to 

“the act of a superior or superintending officer, who visits 

a corporation to examine into its manner of conducting 

business, and enforce an observance of its laws and 

regulations. Burrill defines the word to mean ʻinspection; 

superintendence; direction; regulation.’”25 “Visitors” of 

corporations “have power to keep them within the legitimate 

22 Id. at 229, 232; see also Marquette Nat’l Bank v. First of Omaha Serv. Corp., 439 U.S. 

299, 314-315 (1978) (“Close examination of the National Bank Act of 1864, its legislative 

history, and its historical context makes clear that, . . . Congress intended to facilitate . . . a 

ʻnational banking system.ʼ” (citation omitted)); Franklin Nat’l Bank of Franklin Square v. New 

York, 347 U.S. 373, 375 (1954) (“The United States has set up a system of national banks as 

federal instrumentalities to perform various functions such as providing circulating medium 

and government credit, as well as financing commerce and acting as private depositories.”); 

Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896) (“National banks are instrumentalities 

of the Federal government, created for a public purpose, and as such necessarily subject to the 

paramount authority of the United States.”). 

23 Farmersʼ & Mechanicsʼ Nat’l Bank v. Dearing, 91 U.S. 29, 34 (1875). 

24 6 F. 737, 740 (6th Cir. 1881), appeal dismissed, 106 U.S. 523 (1883). 

25 Guthrie, 199 U.S. at 158. See also Peoples Bank of Danville v. Williams, 449 F. Supp. 

254, 259 (W.D. Va. 1978) (visitorial powers involve the exercise of the right of inspection, 

superintendence, direction, or regulation over a bank’s affairs). 

20 
sphere of their operations, and to correct all abuses of 

authority, and to nullify all irregular proceedings.”26 The 

Guthrie Court also specifically noted that visitorial powers 

include bringing “judicial proceedings” against a corporation 

to enforce compliance with applicable law.27 Thus, section 

484 establishes the OCC as the exclusive regulator of the 

business of national banks, except where otherwise provided 

by federal law. 

Congress affirmed the OCC’s exclusive visitorial powers 

in the mid-1990s with respect to national banks operating 

on an interstate basis in the Riegle–Neal Interstate Banking 

and Branching Act of 1994 (Riegle–Neal).28 Riegle–Neal 

clarifies that interstate branches of national banks are subject 

to specified types of laws of a “host” state in which the bank 

has an interstate branch — including consumer protection 

laws — to the same extent as a bank based in that state, 

except when federal law preempts the application of 

such state laws to national banks. The statute also makes 

crystal clear that even when the state law is not preempted, 

authority to enforce the state law is vested in the OCC.

26 Guthrie, 199 U.S. at 158. 

27 Enforcement through judicial proceedings was the most common means of exercising the 

visitorial power to enforce compliance with applicable law at the time section 484 was enacted 

into law. Administrative actions were not widely used until well into the 20th century. 

28 Pub. L. No. 103-328, 108 Stat. 2338 (Sept. 29, 1994). 

29 See 12 U.S.C. 36(f)(1)(B) (“The provisions of any State law to which a branch of a national 

bank is subject under this paragraph shall be enforced, with respect to such branch, by the 

Comptroller of the Currency.”). 

21 

29 
History of Federal Preemption of State Laws 

Applied to Federally Chartered Banks 

Closely linked to the issue of how national banks 

are supervised is the issue of what laws and 

standards apply to their operations. Preemption 

of state and local laws, in the context of national banks, 

is an often misunderstood and mischaracterized question. 

Fundamentally, national bank preemption issues raise 

the same question: To what extent are national banks, as 

federally created and federally supervised enterprises, able 

to operate under federal standards? Individual skirmishes 

concerning displacement of particular state laws miss the 

key point: Preemption is a means by which national banks 

are enabled to operate under the uniform national standards 

that Congress intended from the very outset of the national 

banking system. Resistance to preemption is equivalent to 

resistance to the uniform standards inherent in the national 

component of the dual banking system. 

The doctrine of preemption traces to the very roots of the 

national banking system. As described above, constitutional 

principles of federal preemption were recognized by the 

Supreme Court in the landmark case of M’Culloch v. 

Maryland, where the Court held that under the Supremacy 

Clause of the U.S. Constitution, states “have no power, 

by taxation or otherwise, to retard, impede, burden, or in 

any manner control the operations” of an entity created 

under federal law.30 The first Comptroller of the Currency 

invoked these standards in his first report to Congress in 

1863,31 and since that time, courts have applied comparable 

principles of federal preemption in connection with many 

aspects of national banksʼ operations, repeatedly finding 

30 M’Culloch v. Maryland, 17 U.S. (4 Wheat.) 316, 436 (1819). 

31 1863 Office of the Comptroller of the Currency First Annual Report to Congress 53. 

22 
that the exercise by federally chartered national banks of 

their federally authorized powers is ordinarily not subject to 

confinement by state law. 

Preemption is simply the legal theory that enables national 

banks to operate nationwide, under the uniform national 

standards, subject to the oversight of a federal regulator, 

just as Congress originally intended. As the Supreme Court 

noted in 1939, in Deitrick v. Greaney, “[t]he National 

Bank Act constitutes ʻby itself a complete system for the 

establishment and government of National Banks.’”32 In a 

much earlier case, decided in 1896, the Supreme Court stated 

that “[n]ational banks are instrumentalities of the Federal 

government, created for a public purpose, and as such 

necessarily subject to the paramount authority of the United 

States. It follows that an attempt by a state to define their 

duties or control the conduct of their affairs is absolutely 

void, wherever such attempted exercise of authority 

expressly conflicts with the laws of the United States, and 

either frustrates the purpose of the national legislation, 

or impairs the efficiency of these agencies of the Federal 

government to discharge the duties for the performance of 

which they were created.”33 

Independence from state direction and control both reflects 

the essential federal character of national banks and protects 

them from conflicting local laws that may undermine the 

uniform, nationwide character of the national banking 

system. Indeed, the Supreme Court consistently has held 

that subjecting national banks’ exercise of their federally 

authorized powers to state regulation or supervision would 

32 309 U.S. 190, 194 (1939). 

33 Davis v. Elmira Sav. Bank, 161 U.S. 275, 283 (1896). 

23 
be inconsistent with the system that Congress designed.34 

The Court also has recognized that because national banks 

are federal creations, state law aimed at regulating national 

banks and their activities applies to national banks only 

when Congress directs that result,35 and, as the Court said in 

1875, in Farmersʼ & Mechanicsʼ National Bank, “the States 

can exercise no control over them, nor in anywise affect their 

operation, except in so far as Congress may see proper to 

permit.”36 

The Court’s decisions also have agreed that Congress 

was concerned not only with the application of certain 

statesʼ laws to individual national banks but also with the 

application of multiple states’ standards, which would 

undermine the uniform, national character of the powers 

of national banks throughout the system. This point was 

highlighted by the Supreme Court in 1891, in Talbott v. 

Silver Bow County Commissioners where the Court stressed 

that the “entire body of the Statute respecting national banks, 

emphasize that which the character of the system implies 

— an intent to create a national banking system co-extensive 

with the territorial limits of the United States, and with 

34 See, e.g., Marquette Nat’l Bank v. First of Omaha Serv. Corp., 439 U.S. 299, 314-315 

(1978)(“Congress intended to facilitate . . . a ʻnational banking system.ʼ”); First Nat’l Bank of 

San Jose v. California, 262 U.S. 366, 369 (1923) (national banks are instrumentalities of the 

Federal government; “any attempt by a State to define their duties or control the conduct of their 

affairs is void whenever it conflicts with the laws of the United States or frustrates the purposes 

of the national legislation or impairs the efficiency of the bank to discharge the duties for which 

it was created.”). 

35 Of course, Congress may specifically require the application of state law to national banks 

for certain purposes. See, e.g., 12 U.S.C. 92a(a) (the extent of a national bank’s fiduciary 

powers is determined by reference to the law of the state where the national bank is located). 

Congress may also, more generally, establish standards that govern when state law will apply to 

national banks’ activities. See, e.g., 15 U.S.C. 6701 (codification of section 104 of the Gramm– 

Leach–Bliley Act, which establishes standards for determining the applicability of state law to 

different types of activities conducted by national banks, other insured depository institutions, 

and their affiliates). In such cases, the OCC applies the law or the standards that Congress has 

required or established. 

36 Farmersʼ & Mechanics’ Nat’l Bank v. Dearing, 91 U.S. 29, 34 (1875). 

24 
uniform operation within those limits.”37 A similar point 

was made by the Court 100 years ago, in 1903, in Easton v. 

Iowa, which stressed that the national banking system was “a 

system extending throughout the country, and independent, 

so far as powers conferred are concerned, of state legislation 

which, if permitted to be applicable, might impose 

limitations and restrictions as various and as numerous as the 

states.”38 

This federal character has consistently informed the 

decisions of the Supreme Court when the Court has 

considered whether particular state laws apply to national 

banks. In the Barnett case, for example, the Supreme 

Court had occasion to review the federal constitutional 

foundations of the national banking system, and reaffirmed 

that national bank powers are not normally limited by state 

law.39 The Court concluded that “where Congress has not 

expressly conditioned the grant of ‘power’ upon a grant of 

state permission, the Court has ordinarily found that no such 

condition applies.”40 

37 Talbott v. Silver Bow County Commissioners, 139 U.S. 438, 443 (1891). 

38 Easton v. Iowa, 188 U.S. 220, 229 (1903). 

39 Barnett Bank of Marion County, N.A. v. Nelson, 517 U.S. 25, 32 (1996) (the history of 

the legal concept of national bank powers “is one of interpreting grants of both enumerated 

and incidental ʻpowersʼ to national banks as grants of authority not normally limited by, but 

rather ordinarily pre-empting, contrary state law’”). See also Franklin Natʼl Bank, 347 U.S. 

at 378 (“We find no indication that Congress intended to make this phase of national banking 

[deposit-taking] subject to local restrictions, as it has done by express language in several other 

instances.”). 

40 Barnett, 517 U.S. at 34. 

25 
Drawing the Line Between State Laws That 

Are Preempted and Those That Are Not 

The foregoing analysis of preemption precedents does 

not mean that national banks are divorced from the 

standards of state law in all respects. State laws 

apply to national banks’ activities under circumstances 

that have been described variously by the courts as not 

altering or conditioning a national bank’s ability to exercise 

a power that federal law grants to it.41 In National Bank 

v. Commonwealth, for example, the Court observed that 

national banks are “subject to the laws of the State, and are 

governed in their daily course of business far more by the 

laws of the State than of the Nation. All their contracts are 

governed and construed by state laws. Their acquisition and 

transfer of property, their right to collect their debts, and their 

liability to be sued for debts, are all based on state law.”42 

Several years later, in McClellan v. Chipman, the Court 

recalled this principle, noting “the rule being the operation 

of general state laws upon the dealings and contracts of 

national banks,” but the “exception being the cessation of 

the operation of such laws whenever they expressly conflict 

with the laws of the United States or frustrate the purpose 

for which the national banks were created, or impair their 

efficiency to discharge the duties imposed upon them by the 

law of the United States.”43 As the Ninth Circuit recently 

41 See id. at 33-34.

42 National Bank v. Commonwealth, 76 U.S. (9 Wall.) 353, 362 (1869).

43 McClellan v. Chipman, 164 U.S. 347, 357 (1896).

26 
neatly summarized, “states retain some power to regulate 

national banks in areas such as contracts, debt collection, 

acquisition and transfer of property, and taxation, zoning, 

criminal, and tort law.”44 

Admittedly, the line between types of state laws that are 

preempted and those that are not “is not always well defined, 

and is often distinguished by such nice shades of difference 

on each side as to require the closest scrutiny.”45 Yet, if the 

Supreme Court’s decisions can be synthesized into a general 

rule, it would be that the types of laws that are not preempted 

are typically those that do not regulate the manner, content 

or extent of the activities authorized for national banks 

under federal law, but rather establish the legal infrastructure 

around the conduct of that business. In other words, nonpreempted state laws are convenient, useful, and in many 

cases, necessary, for national banks to conduct their federally 

authorized business, but they do not obstruct or condition the 

bank’s ability to exercise powers granted under federal law.46 

44 Bank of America v. City & County of San Francisco, 309 F.3d 551, 559 (9th Cir. 2002). With 

regard to state criminal laws, it is important to recognize the distinction drawn by the Supreme 

Court in Easton between “crimes defined and punishable at common law or by the general 

statutes of a state” and “crimes and offenses cognizable under the authority of the United 

States.” 188 U.S. at 238. The Court stated that “[u]ndoubtedly a state has the legitimate power 

to define and punish crimes by general laws applicable to all persons within its jurisdiction . . 

. . But it is without lawful power to make such special laws applicable to banks organized and 

operating under the laws of the United States.” Id. at 239 (holding that federal law governing 

the operations of national banks preempted a state criminal law prohibiting insolvent banks 

from accepting deposits). In determining whether a particular state law falls into a category of 

state laws that are not preempted, a state may not immunize a law from preemption simply by 

applying a criminal penalty to it. Also, notably, “[c]onsumer protection is not reflected in the 

case law as an area in which the states have traditionally been permitted to regulate national 

banks.” American Bankers Ass’n v. Lockyer, 239 F. Supp. 2d 1000, 1016 (E.D. Cal. 2002). 

45 Waite v. Dowley, 94 U.S. 527, 533 (1876). 

46 See Barnett, 517 U.S. at 33-34. 

27 
Conclusion 

Distinctions between the national banking system 

and the state banking system are rooted deep in 

constitutional principles and our country’s formative 

history. These distinctions are essential to the vitality of 

the dual banking system and should be encouraged and 

preserved, not blurred or undercut. Indeed, differences that 

may be controversial today are at the very heart of the “dual” 

character of the dual banking system and are inextricably 

linked to the benefits and success we associate with the dual 

system. 

The OCC bears a heavy responsibility as administrator of 

the national banking system component of the dual system. 

The national banking system is designed and premised on 

the OCC carrying out multiple responsibilities that trace 

to the agency’s origins: ensuring the safety and soundness 

of national banks’ operations, guiding the evolution of 

the business of banking that national banks may conduct, 

overseeing the standards by which national banks operate, 

and assuring that national banks are playing an appropriate 

role in the national economy. In this mix, the safety and 

soundness of national banks is of obvious importance, as 

is their competitive viability, but so too is the fairness and 

integrity national banks display in conducting their business. 

Our job at the OCC, as Carter Golembe put it in one of his 

famous commentaries, is “to assure that national banks are 

safe and sound, competitive and profitable, and capable 

of serving in the best possible manner the banking needs 

of their customers.” In this regard, we have the unique 

responsibility — and the privilege — of carrying out a 

mission initiated by Abraham Lincoln and 

Alexander Hamilton. 

28 
Comptroller of the Currency 

Administrator of National Banks 

Washington, DC 20219 

www.occ.treas.gov