What Is an Edge Act Corporation?

An Edge Act corporation (EAC) is a subsidiary of a U.S. or foreign bank that engages in foreign banking operations; these subsidiaries are named after the 1919 Edge Act, which authorized them. The Edge Act, named after the U.S. senator who sponsored it, was an amendment to the Federal Reserve Act of 1913 that was introduced to increase the competitiveness of American financial firms on a global stage.

Key Takeaways

  • An Edge Act Corporation is an American bank that is granted federal authority to engage in international banking and financial operations.
  • The law was passed to let U.S. banks better compete with foreign financial firms in the early 20th century
  • Edge Act corporations may either take in deposits from and make loans to corporations doing business internationally or make investments in foreign companies.

Understanding Edge Act Corporations

Prior to the Edge Act, U.S. banks were not allowed to own foreign banks. The legislation – which was sponsored by Senator Walter Evans Edge, a New Jersey Republican – amended the Federal Reserve Act to allow them to do so, subject to approval by the Federal Reserve Board. The Edge Act also exempts banks' foreign subsidiaries from state laws, as the Fed is in charge of monitoring and regulating Edge Act corporations. Since 1978, foreign banks have been allowed to own Edge Act corporations.  

There are two types of Edge Act corporations: banking Edge corporations, which take deposits from and make loans to companies doing business internationally; and investment Edge corporations, which make an investment in foreign companies. Edge Act corporations may do some business domestically, but only if it is related to their international business: for example, financing imports and exports.

State Regulations

A similar vehicle, an Agreement corporation, is essentially a state-chartered Edge Act corporation. In the U.S., banks may operate nationally as part of the National Association (NA) or as state-chartered banks within its borders. An agreement corporation is a permission given to a bank by a state that allows it to engage in international banking and transactions.

Congress passed the Agreement Corporation Act in 1916. This new law authorized American banks to invest 10% of their capital into state-chartered banks and corporations permitted to finance projects internationally. The state-chartered bank would need to enter into an agreement with the Federal Reserve, agreeing to be bound by the rules and regulations set out in the Act. It was from these agreements that the term "agreement corporation" arose.