The Evolution of Banking in Delaware
David S. Swayze
In recent years, the banking industry has evolved dramatically, driven by changes in the business and economic environment, in competitive pressures and enabling technologies, and in legislative and regulatory changes designed to deregulate banking markets. In fact, the banking industry has been operating in a constant sea of change for most of the past two decades. Here in Delaware, the recent announcement of the merger between Bank of America and MBNA is evidence of a rapidly changing financial services marketplace right here at home. Our theme is that the United States banking industry has risen deftly to the challenges presented by changing economic and political environments, and that Delaware banks, with the nurture of Delaware government, have proven to be particularly nimble in doing so.
Although we assume most readers of this publication are sophisticated and experienced Delaware bankers, we thought we should test our assumption before beginning a discussion of the evolving face of banking in our state. And so, dear readers, a brief pop quiz. (the correct answers will appear later in the text):
Now, back to the mundane (and no fast forwarding to the answers!)
A. A Brief History of Delaware Banking
Any history of Delaware banking must begin with our country’s banking history. Merchants (typically British merchants), not banks, were the sources of money and credit in the colonial period of American history. It was only after American independence that the first commercial bank received a charter from Congress, the Bank of North America, chartered in 1791. By the time our country adopted the Constitution in 1789, our nation boasted three commercial banks, the Bank of North America and two state banks, those of Massachusetts and New York.
In the 1790s and early 1800s, most bank chartering was almost solely at the state level, and entry into the banking business was heavily influenced by political considerations. Delaware was no exception to this rule. On February 9, 1795, the Delaware Legislature chartered our State’s first bank, "The President, Directors and Company of the Bank of Delaware,” with capital stock of $100,000. The bank was located on the corner of Market and Fourth Streets and opened for business on August 17th of the same year.  Farmers Bank of the State of Delaware was chartered by the Legislature on February 4, 1807, bringing an end to the twelve years of monopoly enjoyed by the Bank of Delaware. During the next decade, the Delaware General Assembly chartered three additional banks.
Unfortunately, the period between 1811 and 1820 was a difficult time for this country’s fledgling banking industry, as 195 banks in this country became insolvent. While this crisis was looming, the five Delaware banks were determined to weather this economic challenge and restore the eroding confidence of the public in the banking industry. On January 2, 1816, at a meeting of representatives of the banks of the State in Dover, the local banks devised a plan to receive the notes issued by each bank in order to establish a general circulation of currency throughout Delaware.
The years between 1837 and 1863 were known as the “Free Banking” era in this county. The movement, which started with the Free Banking Act of New York, allowed for entry into the state banking system through a general law of incorporation rather than through a specific legislative act. The Delaware General Assembly continued to charter banks in our State, and the banking industry continued to grow during this period in a relatively unregulated environment.
The National Bank Act of 1863 introduced competition to state banks by inviting state banks to take out federal charters. An amendment to the Act in 1864 called for taxing the issuance of state bank notes, causing the number of state banks to fall from about 1,500 in 1864 to 250 by the end of the decade. Many projected the National Bank Act would cause the demise of state banks. However, to find a substitute for notes and avoid the state tax, state banks pioneered demand deposits, and within ten years, state banks had more deposits than national banks – a lead maintained until 1943.
Delaware banks remained proactive during this period. The Delaware legislature continued to charter a number of new state-banks, including Artisans’ Savings Bank in February of 1861, and the Security Trust and Safe Deposit Company of Wilmington in March of 1885. The rise in banking activity, particularly in the City of Wilmington, led Delaware banks in September 1887 to organize the Wilmington Clearing House Association, which facilitated and regulated the intra-industry activities of Wilmington’s eight banks. The success of this new organization led to the formal organization of the Delaware Banker’s Association in 1895. The Association, recognizing the need for stability on a relatively unregulated industry, worked with the Delaware General Assembly to establish the Office of the State Bank Commissioner in 1919.
B. The Rise (and Fall?) of State-Chartered Banking
The Twentieth Century ushered in numerous changes to our country’s state and federal banking systems. The Federal Reserve was created in 1913, just six years before the Office of the Delaware State Bank Commissioner. When the efforts of the Federal Reserve failed to prevent the bank collapse of the 1930’s, the Glass-Steagall Banking Act of 1933 established the Federal Deposit Insurance Corporation. While such federal government intervention served to protect consumers, it conversely required more supervision and regulation on the banking industry. As a result, until the early 1980s, state chartered banks continued to thrive, as states were more willing to allow flexibility and experimentation than their federal regulatory counterparts. In the 1980’s, state chartered banks represented about two-thirds of all commercial banks and held approximately 40 to 45 percent of the commercial assets in this country.
The mid-1980s ushered in the beginning of the era of bank mergers and consolidations. Legislation designed to de-regulate banking markets and partially break down geographic barriers to entry, (particularly the 1994 Riegle Neal Interstate Banking and Branching Efficiency Act), technology and other factors contributed to the banking industry’s merger mania. Between the mid-1980s and 2003, the number of banking organizations in the United States declined by nearly 40 percent. Since 1995, the ten largest banking organizations in the United States have increased their share of domestic banking assets from 29 percent to 46 percent at year-end 2003.
The consolidation activity has significantly impacted state-chartered banks, as assets are becoming increasing concentrated in national banks. As of March 2005, only one of the ten largest insured commercial banks had a state charter. Although the number of state-chartered banks continues to rise, this increase is coupled with a decrease in relative size.
C. Delaware is Not Immune
The answers to the pop quiz posed in the Prologue to this article hopefully underscore the fact that the evolution of the banking industry in Delaware mirrors (indeed, magnifies) the breadth of change nation-wide. See how you did:
D. Delaware Responds
Fortunately, as with the early years of banking, Delaware financial institutions, working in partnership with the State’s elected officials and regulators, have proven to be models of innovation and flexibility. Through the years, the Delaware legislature has responded to the business needs of the financial services industry arguably better than the legislature in any other state. No piece of legislation better illustrates Delaware’s leadership than the Financial Center Development Act of 1981. The Act, which was introduced and adopted by the General Assembly in one month, seized upon the quest, particularly by so-called “Money Center” banks, to escape the excessive costs and taxes in New York, and to take advantage of the newly recognized right of a bank to “export” the interest rates of the State in which it is chartered, or, in the case of a national bank, where it is principally located. The Act did so by eliminating all consumer interest-rate restrictions, and by applying a regressive corporate tax structure to income generated by banks in this State. Chase and JP Morgan promptly signed on, and the floodgates opened.
Another example of Delaware leadership in the state banking arena occurred with the passage of the Bank Insurance Powers Act of 1995. Prior to 1995, banks around the country were prohibited (by the Federal Reserve Act with respect to bank holding company systems, and by the laws of most states) from underwriting insurance. Citibank and Chase Manhattan Bank, both with Delaware state bank subsidiaries, chose the First State as the venue for change. In 1995, the General Assembly adopted, and Governor Carper signed, the Bank Insurance Powers Act, and Citibank and Chase Manhattan (among others) joined the ranks of the nation’s insurers.
In addition to these seminal pieces of legislation, Delaware has remained on the forefront of the financial services industry. The General Assembly has continually updated our banking and trust laws, including more recently the statutes relating to limited purpose trust companies, asset protection trusts and business trusts. Even today, amendments to the State Banking Code are afforded the same deference by the General Assembly as changes to the Delaware General Corporation law, and with equally positive effect.
E. Delaware Banking Today
Delaware remains one of the major money market centers in this country. While our State has not been immune to the mergers and consolidations in the industry, we have responded aggressively to the challenges presented by the reformulated marketplace. A majority of the largest banks in this country still have a presence in Delaware, including Citibank, JPMorgan Chase, HSBC, and Bank of America. While Delaware has seen a decrease in the number of federally chartered institutions doing business in this State, this decrease is smaller than the national average, and according to the Office of the State Bank Commissioner, Delaware has seen a significant rise in the total deposit volume of its national banks.
With regard to the state charters, the tide is shifting once more. While Delaware has seen a slight decline in the number of state-chartered banks and savings associations, (from 24 institutions in 1994 to 19 institutions in 2004), the State has enjoyed vibrant growth in its ability to attract and retain state and national limited purpose trust companies. In 1994, Delaware had only one licensed limited purpose trust company, five state non-deposit trust companies and zero national non-deposit trust companies. By 2004, those numbers had risen to 15 limited purpose trust companies, six state trust companies and six national trust companies. Again, Delaware recognized the quantum shift in the financial services industry toward fee based activities, and it provided the legislative and regulatory framework to accommodate that shift.
Perhaps the best measure of our vibrant financial services industry is its contribution to our State’s economy. In addition to the tens of thousands of jobs created by the industry, we have seen a concomitant surge in bank franchise tax revenues. Prior to the passage of the Financial Center Development Act, the banks, trust companies and savings and loans generated approximately $3 million a year in bank franchise taxes. In FY 2004, the State collected more than $136.6 million in bank franchise tax revenues.
Delaware banking has come a long way from the creation of the Bank of Delaware in 1795. The industry has weathered federal legislative and regulatory changes, rapidly changing technologies, competitive pressures, bank failures and mergers and acquisitions. However, despite all these changes --and arguably because of them -- the Delaware banking industry, with a strong helping hand from the State, remains a pillar of economic strength and resilience.
This article was published in Delaware Banker, Fall 2005, Vol. 1, No. 4
 The authors would like to thank Mr. Kevin J. Muller of the Office of the State Bank Commissioner for his invaluable assistance with this article.
 Alan Greenspan, Chairman, Federal Reserve Board, Remarks Before the Annual Meeting and Conference of State Bank Supervisors (May 2, 1998).
 J. Thomas Scharf, History of Delaware, 1609-1888, Volume II, Chapter XXIII “Banking Institutions” p. 1 (1888) (page numbers coincide with electronic version of document).
 Id at 11.
 Greenspan, supra.
 Scharf, supra at 18.
 Greenspan, supra .
Donald E. Powell, Chairman, FDIC, Remarks Before the Conference of State Bank Supervisors Annual Convention (June 3, 2005).
 Alan Greenspan, Chairman, Federal Reserve Board, Testimony Before the Committee on Banking, Housing and Urban Affairs, U.S. Senate (April 20 2004).
 Powell, supra.
 63 Del. Laws, c. 2.
 70 Del. Laws, c. 112.
 Similar legislation permitting broad securities powers to Delaware – chartered banks was adopted in 1989.
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