1784 - Civil War
The Division traces its origins to February 7, 1784 with the chartering of The Bank of Massachusetts, the forerunner of the former First National Bank of Boston, through Chapter 25 of the Acts of 1783. This Charter, signed by Governor John Hancock and Senate President Samuel Adams, includes one of the first known provisions to require bank examinations. It is believed that the first general statute in the country came about later requiring periodic reports from banks requiring all banks to make semi-annual reports to the Governor and Council, Chapter 132 of the Acts of 1802, on March 8, 1803. Examinations initiated in 1810 included committees of attorneys whose duty was " to enquire into the doings" of various banks. The charter of State Bank in the following year included the appointment of three Commissioners to examine the vaults of new banks to ensure sufficient capital was paid-in before operations could commence.
Massachusetts was on the forefront of the banking industry as well as banking regulation. The Provident Institution for Savings in the Town of Boston was incorporated as the nation's first mutual bank in 1816, with the intention of profiting the depositors. The first regional note clearinghouse was operated by Suffolk Bank for 40 years from the date of its charter in 1818. During the banking panic of 1837, some attributed the relatively mild effect felt by Massachusetts to the effectiveness of the Suffolk system. Massachusetts was also the first state to pass comprehensive laws regulating banks. While restrictions were previously contained within individual bank charters, the 1829 Act to Regulate Banks and Banking brought uniformity to areas such as capital, limitations on debt, and the liability of directors.
Civil War - 1906
In the 1860s, the Civil War had a profound impact on the state's banks. Initial reports indicated losses in the Commonwealth's business and banking community. Within a year however, the commissioner commented on the boom in mechanical employments where there was "hardly a branch of domestic industry which has not been actively employed."
The National Currency Act of 1863 authorized the chartering of national banks. The Act created the Office of the Comptroller of the Currency to supervise national banks, provided for a single currency, and helped finance the Civil War. In an effort to promote a nationwide currency and reduce the number of state-chartered banks and their often discounted state banknotes, national banks were required to accept at par the banknotes of all other national banks. In addition, Congress acted to tax all outstanding state banknotes at the rate of 10%. This decreased the profitability of state-chartered banks and resulted in numbers conversions to national bank charters.
Within a few years this trend would reverse itself and state banking would make a significant comeback with the advent of the checking account as a substitute for banknotes. The tax benefits of national banknotes were effectively marginalized and resulted in the vast majority of financial transactions being conducted by check.
In 1877, the Commonwealth's first co-operative bank, Co-operative Savings Fund & Loan Association, was chartered.
1906 - Today
Chapter 204 of the Acts of 1906
On March 27, 1906, Chapter 204 of the Acts of 1906 was signed and established the current structure of the Division of Banks (Division). The Act also created a board to oversee new bank charters. The Board was comprised of the Bank Commissioner, the Treasurer and Receiver General, and the Commissioner of Corporations. This board was later named the Board of Bank Incorporation.
Following the enactment of Chapter 204, Pierre Jay was appointed the first Commissioner of Banks. He oversaw a number of significant changes, including the nation's first savings bank life insurance law enacted in 1907.
As a strong supporter of the credit union concept, Commissioner Jay was instrumental in establishing the credit union movement in Massachusetts together with Edward Filene, the founder of Filene's department store. Massachusetts passed the first state credit union law in 1909 and it served as the basis for similar laws in other states. The first Massachusetts credit union charter was granted to St. Jean's Credit Union in Lynn.
Massachusetts enacted the first Uniform Small Loans Law in 1911 as a result of rampant loan sharking. Originally under a separate department headed by the Supervisor of Loan Agencies, these companies eventually came under the jurisdiction of the Division.
In 1913, the Federal Reserve Act was signed into law by President Wilson which created the Federal Reserve System , the United States' Central Bank.
The Great Depression
The Great Depression severely tested the Commonwealth's banking industry and the Division. In the 1931 there were severe losses in businesses due to depreciated markets and restricted credit facilities. Heavy withdrawals from savings banks decreased their aggregate deposits.
In 1932, the Massachusetts Legislature created the nation's first two deposit insurers, the Mutual Savings Central Fund, Incorporated (now the Depositors Insurance Fund) and The Co-operative Central Bank.
The impact of the Great Depression culminated in 1933. Acting Governor Lieutenant Governor Gasper G. Bacon responded by declaring a banking holiday in Massachusetts on Saturday, March 4, 1933 and Monday, March 6, 1933, "on which all banking institutions in the Commonwealth were to be closed."
Also on March 6, 1933, President Franklin Roosevelt proclaimed a bank holiday to extend until March 9 for all banks in the United States. Three days later, Congress passed the Banking Emergency Act and extended the banking holiday until further proclamation by the President.
Commissioner Guy reported on March 10 that after a rapid investigation, aside from five trust companies, all other institutions were authorized to resume business.
On June 16, 1933 the Congress passed the Banking Act of 1933. In addition to amending many aspects of the Federal Reserve Act, the Act provided a federal safety net through the creation of the Federal Deposit Insurance Corporation , which provides deposit insurance to banks. (Similarly, the current structure of the National Credit Union Administration , which provides deposit insurance to credit unions, was established in 1970.)
In 1940, Commissioner Joseph E. Perry described the industry's emergence from the Great Depression as one with a strong safety record, with a well established regulatory body, and increasingly assimilated financial institutions. Those tendencies would continue over the next forty years and be recognized by the Legislature in the 1982 recodification of the banking laws.
Despite the onset of World War II, the Commonwealth remained well organized and operations continued with steadfast patriotism and professionalism.
Post War to Current Day
During the 1950s and 1960s, the economy grew and financial institutions prospered. In addition, a series of laws brought the licensing and supervision of consumer finance companies under the jurisdiction of the Division.
In 1961, the Legislature created the Massachusetts Credit Union Share Insurance Corporation for the purpose of insuring the shares and deposits of state-chartered credit unions.
In 1966, under the leadership of Commissioner John B. Hynes, the Commonwealth passed the nation's first truth in lending law. It became the model for the subsequent federal law, and allowed Massachusetts state-chartered banks and credit unions to be exempted from the federal truth-in-lending law and Regulation Z.
The Civil Rights Movement also resulted in numerous new banking laws aimed at ensuring fair and equal access to banking services, including the Fair Housing Act, the Equal Credit Opportunity Act, the Home Mortgage Disclosure Act, and the Community Reinvestment Act. In 1982, a parallel State Community Reinvestment Act was also passed. As a result, Massachusetts remains one of the few states with active CRA enforcement and the only state in the country which examines all state-chartered credit unions for compliance with CRA.
The 1970s brought many changes to the industry with the rise of money market mutual funds and disintermediation. The industry rose to the challenge with new and innovative products. For example, Massachusetts state-chartered banks became the first in the country to offer NOW accounts. Restrictions on branch banking were also loosened; from the initial strict county limitations to a more expanded authority where branch offices could be opened up to 40 miles from a bank's main office regardless of county lines. Statewide and interstate authority soon followed. The introduction of electronic banking and ATMs were also part of the banking innovations at this time.
This evolution within the banking industry would be formally recognized by the Legislature in 1982. The power among savings banks, co-operative banks and trust companies were equalized. Each charter was granted the broadest deposit, loan, investment, or other authority existing for any charter. The authority for century-old mutual savings banks and co-operative banks to convert to stock form immediately followed.
The late 1980s brought additional changes to the Commonwealth's banking industry. The failure of other states' deposit insurance funds called into question the 1934 insurers for Massachusetts chartered savings banks and co-operative banks. Statutory changes in 1985 resulted in a voluntary movement to those funds changing from primary deposit insurers to becoming insurers for those deposits in excess of FDIC limits. The changed status would become vital for events which followed.
After a period of unusually high interest rates, their subsequent decline ignited a real estate boom and subsequent bust. By the late 1980s, bank failures which had occurred in other parts of the country began to spread to Massachusetts. It was a trying time for both the industry and regulators. The Commonwealth's excess deposit insurers were instrumental in providing assistance to distressed banks. By the end of 1994, however, 44 state and federally chartered banks in Massachusetts had failed. The failure of the Rhode Island Share and Deposit Insurance Corporation for Credit Unions in 1991 would result in a similar process whereby all Massachusetts credit unions are now federally insured and the Massachusetts Credit Union Share Insurance Corporation provides only excess deposit insurance.
Massachusetts previously passed the first regional interstate banking act in 1982. This law was used as a model for laws enacted in several other states for interstate holding company acquisitions within specified geographic regions. This regional restriction was eliminated in 1990 and four years later, Congress passed the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 providing for nationwide banking. The Massachusetts companion interstate banking and branching law passed in 1996 also contained many provisions advantageous to state-chartered banks including authorizing the Division to implement the first state banking department risk based assessment system and providing state-chartered banks parity with national banks through rulemaking of the Division. Similar authority for state-chartered credit unions would be enacted 3 years later.
Similar to the rest of the country, Massachusetts has witnessed substantial consolidation within the banking market during the past 20 years. However, while the number of banks in Massachusetts has decreased by over 30 percent since 1980, the total combined assets of Massachusetts state-chartered banks have increased fourfold during this period. Despite this significant consolidation, employment studies indicate that the number of jobs tied to the Massachusetts banking industry has increased dramatically in the past 20 years.
The mortgage market has fundamentally changed. The Division received the legislative mandate in 1991 to license mortgage lenders and brokers. Securitization, new and improved delivery systems, the development of the subprime market, the creation of new mortgage products, and a prolonged low interest rate environment all contributed to increased competition and shifts in market share. As a result, after over 15 years of licensing, the number of mortgage lenders and brokers supervised by the Division has increased from just over 100 to almost 1500. In addition, with the passage of Chapter 206 of the Acts of 2007, "An Act Protecting and Preserving Homeownership," the Division was charged with licensing loan originators. Other terms of Chapter 206 included extending provisions similar to the Massachusetts Community Reinvestment Act to certain mortgage lenders, establishing a foreclosure database at the Division of Banks to include information on all preliminary Right to Cure or foreclosure filing notices and all final foreclosure sale information, strengthening rights of consumers facing foreclosure, and increasing education requirements for first-time homebuyers seeking a subprime adjustable rate mortgage. Given the new mandates facing the Division, the agency was reorganized and a new Investigation and Enforcement Unit was created in 2008.
Bank insurance sales and credit union insurances sales laws were enacted at the state level and the Gramm-Leach-Bliley Act of 1999 repealed most of the provisions of the Glass-Steagall Act thereby allowing banks to engage in a broader array of financial services.
Since the chartering of the Bank of Massachusetts in 1784, the Commonwealth's banking industry has prospered while overcoming substantial challenges. Technology has revolutionized the business of banking and its regulation. The horrific events of 9/11 resulted in the swift passage of the USA Patriot Act and a refocusing on anti-money laundering efforts. Banks and credit unions have changed dramatically during those years. Technological innovations alone have perhaps resulted in more significant changes in the past 15 years than in the previous 100. While consolidation, increasing competition, and the difficulties of conducting financial transactions during an age of global terrorism will continue to provide challenges to Massachusetts financial institutions, the Division takes pride and comfort in the knowledge that for over 200 years, Massachusetts banks, credit unions, and financial entities have faced many of these challenges and endured.
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