Bank laws
Financial Markets
Date November 22, 2012
The McFadden Act of 1927 was one of the most hotly contested pieces of legislation in
U.S. banking history, and its influence was still felt over half a century later. The act was
intended to force states to accord the same branching rights to national banks as they accorded to
state banks. By uniting the interests of large state and national banks, it also had the potential to
expand the number of states that allowed branching. Congressional votes for the act therefore
could reflect the strength of various interests in the district for expanded banking competition.
Unlike previous work, we find strong evidence of elite influence. The United States has long had
a dual banking system, where state banks are chartered and regulated at the state level, while
national banks operate under federal oversight. Before the McFadden Act, some states allowed
state banks to open multiple branches, while others prohibited all branching. The McFadden Act
attempted to level the playing field by forcing states to accord largely the same branching rights
to national banks as to state banks. It was the key piece of federal legislation regulating bank
branching, and hence bank competition, in the United States for about 70 years—up until the
passage of the Riegle -Neal Act in 1994.
McFadden insulated small banks from out-of-state competition, and inefficient, weak, small
banks cannot be driven out of business by competition from a more efficient bank from another
state, or even the same state. Branching restrictions varied from state to state. Some states had
"unit branch banking" laws, which permitted only one location, NO branches. In most cases, it
was easier for a bank to open a branch in a foreign country than to open a branch in another state,
or even the same state. Reflects the historic hostility toward large banks,rent-seeking by small
rural banks. Legacy of 19th century politics: heavy restrictions on branch banking, many small,
local banks. Similar result: