The McFadden Act

The McFadden Act (1927 – 1994) was appealed by the Riegle-Neal Interstate Banking and Branching Efficiency Act. The Act made national banks competitive against state-chartered banks by letting national banks add more branches to the extent permitted by state law.

The McFadden Act specifically prohibited interstate branching by allowing each national bank to branch only within the state in which it is located.

Implications of The McFadden Act

1. Economies of Scale

Large banks were unable to exploit economies of scale. Economies of Scale are a fall in the long run average costs because of an increased scale of production. The most significant advantage of achieving economies of scale is a reduced cost per unit of production.

2. Sizes of Banks

U.S. banks became smaller than their foreign counterparts.

Reasons for Branching Regulations

The reasons were mostly political because local banks pushed for laws protecting them from competition from the larger banks.

There was public hostility towards the large banks.

Technology had already made banking more competitive.

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