McFadden Act - Explained
What is the McFadden Act?
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What is the McFadden Act?
The McFadden Act is Federal legislation in the United States that allows different states to regulate and govern bank branches located within the state. This federal law, when modified, also permitted national banks to have intrastate branches the same way state-chartered banks were allowed to have branches across states. The McFadden Act was established in 1927 and it was named after Louis Thomas McFadden, who was the Chairman of the U.S House Committee on Banking and Currency at that time. This law permitted state governments to govern branches on banks within their state and also allowed national banks to open branches within states.
How Does the McFadden Act Work?
The McFadden Act was passed as a federal law based on the recommendations of Henry May Dawes, the former Comptroller of the Currency, but it was named after the Chairman of the U.S House Committee on Banking and Currency, Louis Thomas McFadden. This act only permitted intrastate branching at the time of establishment, it was however modified by the Riegle-Neale Interstate Banking and Branching Efficiency Act in 1994 which made room for interstate banking. This modification repealed the portion of the McFadden Act that prohibited interstate branching.
The McFadden Act was created at a period when the economy of the United States was booming and a huge success recorded in the banking and financial sector. The Federal Reserve which was created in 1914 also contributed to financial stability in the U.S. However, not long after, crashes and crunches occurred in the U.S which led to the failure of many banks. The McFadden Act was established to tackle three broad issues namely;
- To guarantee the Federal Reserves longevity.
- To pave way for intrastate branch banking and thereafter modified to permit interstate bank branching.
- To level the playing field between fed-chartered commercial banks and commercial banks.