Bank Examiners

The First Bank of the United States, founded in Philadelphia in 1791, was an unqualified success. It acted as the federal government's banker and received private and business deposits. The bank issued banknotes that could be exchanged for gold and succeeded in creating a national currency. In 1811, the visionary experiment came to an untimely end; despite the bank's many successes, its charter was not renewed. In a time when states' rights were considered supreme, a national bank was an unpopular idea.

The second national bank fared just as well—and no better. Despite an impressive list of achievements, the bank failed when President Andrew Jackson vetoed its charter renewal.

For the next several decades, the nation adhered to a system of "free banking," meaning that bank charters were readily granted to groups that met limited standards. The number of state banks multiplied rapidly. Each state bank issued its own banknotes, creating an untenable currency system.

In the 1860s, the U.S. Civil War destroyed the South's economy. Banks in the southern states did not have the resources to weather the difficulties. The only national financial organization, the Independent Treasury, was ill-equipped to meet the ensuing financial demands. The price of "free banking" became painfully clear.

In 1864, as the nation struggled to rebuild itself, the federal government passed the National Bank Act. Intended to bring about economic stability and prevent future bank failures, the act created the Office of the Comptroller of the Currency (OCC). The OCC initially had the power to charter national banks that could issue national banknotes. The OCC also was the first organization to conduct bank examinations.

Unfortunately, the National Bank Act of 1864 did not bring about the desired stability. Over the next several decades, the country experienced four bank panics, the worst of which occurred in 1907. Bank panics were characterized by "runs on the banks," during which people became fearful and tried to withdraw all their money, all at once. The banks often did not have enough cash in reserve and many failed. The Federal Reserve Act (1913) created a centralized reserve system that could lend banks money and prevent bank crises.

In its early form, the Federal Reserve System was unable to prevent the bank failures that led, in 1929, to the Great Depression. In 1933, in response to the Depression, the Federal Reserve's powers were extended. The Federal Reserve eventually would become a central bank that actively promoted monetary stability. Like the OCC, the Federal Reserve now regularly examines banks.

The Federal Deposit Insurance Corporation (FDIC) also was created in 1933. The FDIC pays depositors if an insured bank closes without the resources to repay people their money. The FDIC also is charged with the responsibility of preventing unsound banking practices within the banks it insures. The FDIC regularly examines all the banks it insures in order to ensure their safety and soundness. Since its creation, the FDIC has successfully prevented any widespread bank panics.

The years since 1933 have not been without challenges. In the mid-1980s, hundreds of savings and loan banks failed, reinforcing the need for the regular, thorough examination of banks by the OCC, the Federal Reserve, the FDIC, and a number of other federal and state agencies. In more recent years, the economic recession and the subprime mortgage crisis caused a significant number of banks and other financial institutions to fail. In 2008, Congress passed the Emergency Economic Stabilization Act, which provided funds to struggling financial institutions that were deemed too large to fail. In 2011, the Consumer Financial Protection Bureau was formed to regulate consumer-focused financial products and services. It has jurisdiction over banks, credit unions, mortgage-servicing companies, securities firms, and other financial companies. Today, most banks are examined on an annual basis, often by more than one regulatory organization.