Question

Explain the branching restrictions imposed by the McFadden Act of 1927. When was the McFadden Act abolished? What law overturned the McFadden Act?

(3) Explain the separation of financial services regulated by the Glass-Steagall Act of 1933 (= Banking Act of 1933). When was the Glass-Steagall Act abolished? What law repelled the Glass-Steagall Act? Q. 3 (2 points)

(1) The number of commercial banks in the United States reached 23,000 in 1929, just before the outbreak of the Great Depression, but the number decreased to 14,125 by 1935. What was the main reason for such a drastic decrease in the number of commercial banks during the 1929-1935 period?

(2) The number of commercial banks in the United States reached 14,388 in 1980, but the number decreased to 5,116 as of March 2020. What was the main reason for such a drastic decrease in the number of commercial banks during the 1980-2020 period?

Answer 1

The branching restriction iposed by the McFadden Act of 1927 is that the Act allowed to operate branches by the national bank which is permitted by the state governments for state banks in each state. National banks donot have the right to open branches, it is prohibited. State chartered banks in a state can operate branches in the same city as headquarters.

In 1994, McFadden Act was abolished by the Riegle-Neal Interstate Banking and Branching Efficiency Act. It allowed banks to open limited service bank branches across state lines by merging with other banks.

3. The Glass-Steagall Act also known as Banking Act of 1933 was passed in 1933. It separated commercial banks and investment banking activities in response to the commercila bank involvement in stock market investment. The banking act was established to regulate interbank control, for providing safe and effective use of the assets of the banks, to prevent the undue division of funds into speculative operations and so on.   

In 1999, the Glass-Steagall act was abolished. This Act was replaced by The Graham-Leach-Billey Act (GLBA). It allows commercila banks to engage in investment banking and securities trading.It limited commercial bank activities with their assets.The GBLA removed the banned simultaneous service by any officer, director or employee of any member bank.

1. The main reason for the decrease in the number of commercial banks is Great Depression. People became anxious about the security of money in the bank because of the stock market clash. People spending less money and their investment also became low. Many depositers losted their faith in banks and they asked to pay back their deposits in the bank by cash. This will results to the failure of the bank because of the liquidation. For meeting the request of the customers bank want to take loan for giving their money in cash. Because banks keeps only certain percentage of deposit as cash in their hands. Increase in the farm debt and U.S policies also resulted to the failure of banks. The decline in the price of the agricultural goods as a result of the First World War made difficult to repay the loan which was taken by the farmers.

2. There are many reasons for the failure of commercial banks duringthe oeriod 1980-2020. They are stock market crashes, currency crisis, establishment of other fanancial organisations etc. International financial crisis also resulted to the failure of banks. Economic crisis like negativeGDP growth which means recession and depression resulted to many financial problems. Savings and loan crisis led to the massive taxpayers funded rescue of an industry collapsed. The failure of the S&L crisis which represented the bulk of the assets and number of banks leads to the failure of commercial banks.. The Monetory Control Act of 1980 removed many restrictions on thrifts and credit unions. The Tax Reform Act of 1986 altered the banking landscape and engendered conditions that resulted to the failure of banks.