A member bank is a commercial bank that holds stock in one of the twelve regional Federal Reserve Banks and operates under the Federal Reserve’s direct supervision. Every nationally chartered bank in the United States is required to be a member. State-chartered banks can apply to join but are not obligated to, and most do not. Membership brings a defined set of financial obligations, a heightened level of federal oversight, and a small but real voice in the governance of the regional Reserve Bank.
Who Has to Join and Who Chooses
The United States runs a dual banking system, meaning a bank can incorporate under either a federal charter or a state charter. That charter choice is what determines whether Federal Reserve membership is mandatory or optional.
National Banks
Any bank that receives a national charter from the Office of the Comptroller of the Currency must join the Federal Reserve System. Federal law requires every national bank to subscribe to stock in its district’s Reserve Bank within ninety days, and failure to do so triggers penalties.1Office of the Law Revision Counsel. 12 USC 222 – Federal Reserve Districts, Membership of National Banks Because national banks make up a large share of the industry by assets, this rule puts most of the country’s banking activity under Fed supervision by default.
State-Chartered Banks
Banks chartered by a state banking authority may apply for Fed membership, but nothing forces them to. The application goes to the Board of Governors, which decides whether to admit the bank based on its financial condition, the character of its management, its capital adequacy, and its future earnings prospects.2Office of the Law Revision Counsel. 12 USC 321 – Application for Membership3eCFR. 12 CFR 208.3 – Application and Conditions for Membership in the Federal Reserve System
Most state banks stay out. Those that do are supervised by the FDIC and their state regulator instead. A state bank that joins takes on dual oversight: it must comply with both state banking law and the full body of Federal Reserve regulations, and where those conflict, the stricter standard generally controls.
The Stock Ownership Requirement
Every member bank has to subscribe to capital stock in its regional Federal Reserve Bank equal to 6% of the member bank’s own capital and surplus.4Office of the Law Revision Counsel. 12 USC Chapter 3 Subchapter VI – Capital and Stock of Federal Reserve Banks Half of that subscription is paid in when the stock is issued. The other half remains subject to call by the Board of Governors, which means the Fed can demand payment on it at any time.5Federal Register. Federal Reserve Bank Capital Stock If the bank later increases its capital, it has to buy more stock to keep the 6% ratio intact.
This stock is not like ordinary corporate shares. It cannot be sold on the open market, cannot be transferred, and does not confer any control over Federal Reserve policy. It does pay an annual dividend, and the rate depends on size. Member banks with more than $10 billion in total consolidated assets receive the lesser of 6% or the most recent 10-year Treasury note auction yield. Smaller member banks receive a flat 6%.6Office of the Law Revision Counsel. 12 USC 289 – Dividends and Surplus Funds of Reserve Banks The size-based split was introduced by the Fixing America’s Surface Transportation (FAST) Act in 2015 and has meaningfully reduced dividends for the largest institutions.
What Fed Supervision Actually Looks Like
Membership puts a bank inside the Fed’s full regulatory framework. For national member banks, the OCC remains the primary regulator and the Fed coordinates with it. For state member banks, the Fed is the primary federal regulator and works alongside the state banking authority.
The Fed is required to conduct a full-scope, on-site examination of every insured member bank at least once every twelve months. Banks with less than $3 billion in total assets that are well capitalized and meet other conditions may qualify for an extended eighteen-month cycle instead.7eCFR. 12 CFR 208.64 – Frequency of Examination The Fed can also examine any member bank more often whenever it considers it necessary.
Member banks also file a Report of Condition and Income, known as the Call Report, every quarter. These filings show the bank’s financial position, asset quality, and earnings in detail. The deadline is generally thirty days after each quarter ends, with an extra five calendar days for institutions that maintain foreign offices.8Federal Register. Request for Information – Streamlining the Call Report
One obligation that has effectively gone dormant is the reserve requirement. The Board of Governors reduced all reserve requirement ratios to zero in March 2020, and they remain at zero.9Board of Governors of the Federal Reserve System. Reserve Requirements Regulation D still exists, but no bank is currently required to hold reserves under it.
What Member Banks Get
Before 1980, membership came with exclusive operational benefits, including sole access to the discount window and the Fed’s payment infrastructure. The Depository Institutions Deregulation and Monetary Control Act of 1980 required the Fed to make its services available to all depository institutions at the same fees applicable to member banks.10Office of the Law Revision Counsel. 12 USC 248a – Pricing of Services Non-member banks and credit unions can now access the discount window and use Fedwire and FedACH, so those services no longer distinguish members.
The discount window is still a meaningful tool for any bank that uses it. The Fed offers three tiers of credit. Primary credit goes to institutions in generally sound condition, typically overnight, at a rate tied to the federal funds rate target. Secondary credit goes to institutions that don’t qualify for primary credit, at a higher rate, when the borrowing is consistent with a timely return to market funding. Seasonal credit serves smaller institutions with predictable swings in deposits and loan demand.11eCFR. 12 CFR 201.4 – Availability and Terms of Credit
The one privilege still exclusive to member banks is governance. Member banks elect six of the nine directors on each regional Federal Reserve Bank’s board. Three are Class A directors, who represent the banking industry, and three are Class B directors, who represent the public and cannot be bank officers or employees. The remaining three Class C directors are appointed by the Board of Governors.12Office of the Law Revision Counsel. 12 USC 304 – Class A and Class B Directors, Selection Non-member institutions have no vote in these elections.
Penalties for Breaking the Rules
Civil monetary penalties under federal law are structured in three tiers based on the severity and intent behind the violation.13Office of the Law Revision Counsel. 12 USC 505 – Civil Money Penalty
- A first-tier violation, meaning a straightforward regulatory breach, can result in a penalty of up to $5,000 for each day the violation continues.
- A second-tier violation, meaning conduct that is part of a pattern, causes more than minimal loss, or produces a gain for the bank, can bring up to $25,000 per day.
- A third-tier violation, meaning a knowing violation that recklessly causes substantial losses or gains, can trigger up to $1,000,000 per day, or 1% of the bank’s total assets, whichever is less.
The Fed also enforces capital standards through a prompt corrective action framework. Banks are sorted into five categories based on capital ratios, from well capitalized down to critically undercapitalized. A well capitalized bank must maintain, among other thresholds, a total risk-based capital ratio of at least 10% and a leverage ratio of at least 5%. Falling below those levels brings progressively tougher restrictions on the bank’s activities, and a critically undercapitalized bank, one whose tangible equity drops to 2% or less of total assets, faces potential receivership.14eCFR. 12 CFR Part 208 Subpart D – Prompt Corrective Action
Leaving the Federal Reserve System
A state-chartered member bank can withdraw. It files a written notice with the Board of Governors, typically six months in advance, though the Board can waive that waiting period. The bank then surrenders and cancels all of its Federal Reserve Bank stock, and once it does, all membership rights and privileges end immediately.15Office of the Law Revision Counsel. 12 USC 328 – Withdrawals from Membership
After settling any debts owed to the Reserve Bank, the withdrawing bank receives a refund of its cash-paid stock subscription plus interest at half of one percent per month from the date of the last dividend. The refund cannot exceed the book value of the stock at surrender. The law also limits each Reserve Bank from canceling more than 25% of its capital stock for voluntary withdrawals in a single calendar year, so a wave of departures in one district could create a queue.15Office of the Law Revision Counsel. 12 USC 328 – Withdrawals from Membership
National banks have no voluntary withdrawal option. Membership is a condition of a national charter. A national bank that wants out of the system has to convert to a state charter first, then withdraw through the process above.
Member Bank vs. Non-Member Bank Today
The practical gap between member and non-member banks has narrowed a great deal since 1980. Before then, member banks had to hold reserves at the Fed without interest while non-member banks did not, and that cost drove a steady decline in voluntary membership. The Monetary Control Act of 1980 leveled things by extending reserve requirements to all depository institutions and opening Fed services to everyone.
The remaining distinctions today are regulatory rather than operational. A state member bank’s primary federal regulator is the Federal Reserve. A state non-member bank’s primary federal regulator is the FDIC. Member banks hold stock in and receive dividends from their regional Reserve Bank. And only member banks vote for regional Reserve Bank directors. For most depositors and borrowers, none of this is visible. For the banks themselves, the choice comes down to which regulatory relationship and supervisory culture they prefer.