DEFINITION of McFadden Act
The McFadden Act is Federal legislation that gave individual states the authority to govern bank branches located within the state. This includes branches of national banks located within state lines. The act was intended to allow national banks to compete with state banks by permitting them to open branches within state limitations.
BREAKING DOWN McFadden Act
The McFadden Act was passed by Congress in 1927. It was modified in 1994 by the Riegle-Neale Interstate Banking and Branching Efficiency Act, which allowed banks to open limited service bank branches across state lines by merging with other banks. This act repealed the earlier provision within the McFadden Act prohibiting this practice.
The act came amid the boom years of the 1920s when the sky seemed the limit for stocks, banks and the economy. The Federal Reserve, established in 1914, had been a huge success. The United States was considerably more unstable financially before the creation of the Federal Reserve. Panics, seasonal cash crunches and a high rate of bank failures made the U.S. economy a riskier place for international and domestic investors to place their capital. The lack of dependable credit stunted growth in many sectors, including agriculture and industry.
According to Federalreservehistory.org, The McFadden Act tackled three broad issues. "The first issue involved the Federal Reserve’s longevity. The original charters of the twelve Federal Reserve District Banks were set to expire in 1934, twenty years after the banks began operations. This twenty-year limit mirrored the twenty-year charters given to the First and Second Banks of the United States, the Fed’s nineteenth-century forerunners. Congress refused to recharter those institutions. Everyone knew this fact. The precedent threatened the Fed. To alleviate uncertainty, Congress not only rechartered the Federal Reserve Banks seven years early, but it also rechartered them into perpetuity.
The second issue focused on branch banking. From 1863 through 1927, banks operating under corporate charters granted by the federal government (known as national banks) had to operate within a single building. Banks operating under corporate charters granted by state governments (called state banks) could, in some states, operate out of multiple locations, called branches. Laws concerning branching varied from state to state. The McFadden Act allowed a national bank to operate branches to the extent permitted by state governments for state banks in each state."
Finally, the McFadden Act leveled the playing field between fed-chartered commercial banks that belonged to the Federal Reserve System and commercial banks that did not by allowing more and riskier investments and fewer regulations, all of which would have repercussions in the crash of 1929, and the bank failures and Depression that followed.