What Is a Member Bank in the Federal Reserve System?
Discover the fundamental nature of a member bank within the Federal Reserve System, detailing their key advantages and regulatory commitments.
Member banks are commercial banks formally affiliated with the Federal Reserve System, the central banking system of the United States. This relationship shapes their operations and regulatory oversight.
Understanding Member Banks
A member bank is a commercial bank that is part of the Federal Reserve System. This affiliation is determined by the bank’s charter type. All national banks, which are chartered by the Office of the Comptroller of the Currency (OCC), are legally required to be members of the Federal Reserve System. The OCC, an independent bureau of the U.S. Department of the Treasury, charters, regulates, and supervises national banks.
State-chartered commercial banks have the option to become members of the Federal Reserve System. If a state-chartered bank chooses to join, it must meet specific criteria established by the Federal Reserve. While state-chartered banks are primarily regulated by their respective state banking authorities, those that become Federal Reserve members also fall under the supervisory authority of the Federal Reserve.
Privileges of Membership
Federal Reserve membership provides banks with direct access to several important services and advantages. Member banks can access the Federal Reserve’s discount window, which allows them to borrow funds directly from their regional Federal Reserve Bank. This facility serves as a “lender of last resort,” offering short-term liquidity to manage unexpected funding needs.
Member banks also have direct access to the Federal Reserve’s payment systems, such as Fedwire and FedACH. Fedwire facilitates large-value, real-time electronic funds transfers, while FedACH processes automated clearing house transactions, enabling efficient and secure movement of funds.
Beyond operational benefits, member banks gain a degree of influence and a voice in the Federal Reserve’s policy-making processes. They are eligible to vote for and serve as directors for their district Federal Reserve Bank. This affiliation also confers a perception of enhanced stability and trustworthiness within the financial industry.
Responsibilities of Membership
Membership in the Federal Reserve System comes with distinct obligations. Member banks are required to purchase capital stock in their district Federal Reserve Bank. This stock subscription amounts to 6 percent of the member bank’s capital and surplus, with half of this amount, 3 percent, paid in and the remaining 3 percent on call. This stock is not publicly traded and cannot be sold, traded, or pledged as loan collateral. Member banks receive a fixed annual dividend of 6 percent on their paid-in stock, though for larger banks, this dividend may be the lesser of 6 percent or the 10-year Treasury note yield.
Member banks are subject to examination and regulation by the Federal Reserve, in addition to their primary chartering authority. This dual oversight ensures compliance with federal banking laws and regulations.
Historically, member banks were subject to reserve requirements, mandating them to hold a certain percentage of their deposits as reserves at the Federal Reserve. However, effective March 26, 2020, the Federal Reserve reduced reserve requirement ratios for all depository institutions to zero percent.
Contrasting Member and Non-Member Banks
Non-member banks are state-chartered banks that have chosen not to join the Federal Reserve System. These institutions are primarily regulated by their state banking authorities and the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000.
While non-member banks do not have the same direct regulatory relationship with the Federal Reserve, they can still access many Federal Reserve services. Non-member banks often gain indirect access to payment systems like Fedwire and FedACH through correspondent banking relationships with larger member banks. All depository institutions, regardless of Federal Reserve membership, can access Federal Reserve payment services directly if they maintain an account with a Federal Reserve Bank. This means that even without formal membership, non-member banks can participate in the broader financial infrastructure, though their primary regulatory supervision remains distinct.