Interstate Branching Act (1994) history

A banking law passed by Congress, and the first significant change in the structure and geography of banking since the 1920s. Also known as the Riegle- Neal Interstate Banking and Branching Efficiency Act, the law allowed bank holding companies to merge across state lines. They were also allowed to merge their operations into national networks. In some cases, banks had been able to do so previously but were required to open subsidiary operations in another state. The act abolished the need to establish specialized subsidiaries.

Interstate banking had been seriously constricted since Congress passed the MCFADDEN ACT in 1927, prohibiting banks from opening de novo (new) out-of-state branches. The original act was an attempt to prevent bank expansion at the same time that CHAIN STORES were spreading across the country and was widely seen as an attempt to prevent banks from becoming truly national by expanding in the same manner.

In the years between 1927 and 1994, banks were sometimes able to open limited banking operations in other states through subsidiary companies, but the ultimate decision lay with the banking authorities in the state in which the subsidiary was proposed. As a result, interstate banking was effectively prohibited until the McFadden Act was replaced with more liberal banking regulation. The cost of opening and operating subsidiaries in those states that did permit out-of-state banks to operate was also expensive and proved a hindrance to many banks that thought of expanding operations.

After the act was passed, U.S. banking entered a consolidation phase that witnessed the merger of many bank holding companies across state lines. Among the largest was the merger between NationsBank of North Carolina and the BANK OF AMERICA, with headquarters in California. Other regional banking MERGERS also occurred, enabling banks to widen their operations if not to become truly national, spreading into all states. The states also had to change their existing laws concerning out-of-state banking in order to comply with the new law. The law was one in a series of banking deregulation laws passed during the 1990s.

See also FEDERAL RESERVE; FINANCIAL SERVICES MODERNIZATION ACT.

Further reading

• McLaughlin, Susan. “The Impact of Interstate Banking and Branching Reform: Evidence from the States.” Current Issues in Economics and Finance 1, No. 2 (May 1995).