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 regulatory supervision. Every nationally chartered bank is required to join. State-chartered banks may apply if they want in. Membership brings a stock subscription, an annual dividend, routine federal examinations, and a vote in choosing regional Reserve Bank directors.
Who Has to Join and Who Can Choose
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 decides 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 become a member of 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
State-Chartered Banks
State-chartered banks may apply to join, but nothing forces them to. The application goes directly to the Board of Governors, which decides whether to admit the bank based on its financial condition and the character of its management.2Office of the Law Revision Counsel. 12 USC 321 – Application for Membership The Board also weighs capital adequacy and future earnings prospects.3eCFR. 12 CFR 208.3 – Application and Conditions for Membership in the Federal Reserve System
Most state-chartered banks choose not to join. Those that stay outside the system are typically supervised by the FDIC and their state regulator instead. A state bank that does join takes on dual oversight: it must follow both state banking laws and the full body of Federal Reserve regulations, and where the two conflict, the stricter standard generally applies.
The Stock Subscription
Every member bank must 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 stays subject to call by the Board of Governors, which can demand payment on it at any time.5Federal Register. Federal Reserve Bank Capital Stock If a member bank later increases its capital, it must buy additional stock to keep the 6% ratio.
This stock does not behave like ordinary corporate shares. It cannot be sold on the open market, cannot be transferred to another party, and gives the holder no control over Federal Reserve policy. It does pay an annual dividend. 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, while 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.
Supervision, Examinations, and Reports
Membership subjects a bank to the Fed’s full regulatory framework. For national member banks, the OCC remains the primary regulator, while the Fed conducts its own supervisory activities in coordination. For state member banks, the Fed serves as the primary federal regulator and works alongside the relevant 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 examination cycle instead.7eCFR. 12 CFR 208.64 – Frequency of Examination The Fed keeps the authority to examine any member bank more often when it sees cause.
Member banks must also file the Report of Condition and Income, commonly called the Call Report, every quarter. These filings show regulators the bank’s financial position, asset quality, and earnings. 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 has effectively gone dormant. Although Regulation D historically required member banks and other depository institutions to hold a percentage of certain deposits in reserve, 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 The regulation still exists, but no bank is currently required to hold reserves under it.
On the enforcement side, civil monetary penalties are structured in three tiers. A straightforward violation can draw up to $5,000 per day. Violations that form a pattern, cause more than minimal loss, or produce a gain for the bank climb to $25,000 per day. Knowing violations that recklessly cause substantial losses or gains can reach $1,000,000 per day, or 1% of the bank’s total assets, whichever is less.10Office of the Law Revision Counsel. 12 USC 505 – Civil Money Penalty The Fed also enforces capital standards through a prompt corrective action framework, with a critically undercapitalized bank facing potential receivership once tangible equity drops to 2% or less of total assets.11eCFR. 12 CFR Part 208 Subpart D – Prompt Corrective Action
What Members Get in Return
Before 1980, membership brought 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 changed that by requiring the Fed to make its services available to all depository institutions on the same fee schedule as member banks.12Office of the Law Revision Counsel. 12 USC 248a – Pricing of Services Non-member banks and credit unions now access the discount window and use Fedwire and FedACH, so those services are no longer unique to members.
The discount window itself still matters to any bank that uses it. The Fed offers primary credit to institutions in generally sound condition, typically overnight at a rate tied to the federal funds rate target. Secondary credit is available at a higher rate to institutions that don’t qualify for primary credit, when the borrowing supports a timely return to market funding. Seasonal credit serves smaller institutions with predictable swings in deposits and loan demand.13eCFR. 12 CFR 201.4 – Availability and Terms of Credit
The most meaningful privilege still exclusive to member banks is governance input. Member banks elect six of the nine directors on each regional Federal Reserve Bank’s board: three Class A directors representing the banking industry and three Class B directors representing the public. The remaining three Class C directors are appointed by the Board of Governors in Washington.14Office of the Law Revision Counsel. 12 USC 304 – Class A and Class B Directors, Selection Non-member institutions have no vote in that selection.
Leaving the System
A state-chartered member bank that wants to withdraw must file a written notice with the Board of Governors, generally six months in advance, though the Board can waive the waiting period. The bank surrenders and cancels all of its Federal Reserve Bank stock, and upon doing so, 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 the time of surrender. Each Reserve Bank is also limited to canceling no more than 25% of its capital stock for voluntary withdrawals in a single calendar year, so a rush 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 their charter. A national bank that wanted to leave would first need to convert to a state charter, and only then could it withdraw through the process above.
Members Versus Non-Members Today
The practical gap between member and non-member banks has narrowed considerably since 1980. Before that year, member banks bore the cost of holding reserves at the Fed without interest while non-member banks did not, which drove a steady decline in voluntary membership. The Monetary Control Act extended reserve requirements to all depository institutions and simultaneously opened Fed services to everyone.
The remaining distinctions are mostly regulatory. 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 in the elections for regional Reserve Bank directors, the one genuinely exclusive governance privilege that survives from the original system. For most depositors and borrowers, the difference is invisible. For the banks themselves, the choice between membership and non-membership is largely about which regulatory relationship and supervisory culture they prefer.