Member bank – What is it?

This is a bank that is on the membership list of the United State Federal Reserve System, which includes all nationally chartered as well as all state chartered banks that have applied for membership and have been accepted. Each member bank holds stock in the Federal Reserve Bank in their area, the purchase of which is a condition of membership.
The Federal Reserve System is a government agency that organizes and regulates banking throughout the United States and is composed of twelve regional reserve banks. Its duties include conducting monetary policy, influencing credit conditions, the supervising and regulating of banking institutions and maintaining stability in the monetary system.

All private, commercial banks in the Unites States fall into one of three categories; national banks are chartered by the federal government and are by law members of the Federal Reserve System. State banks, commercial banks chartered by states, have the option of joining the Federal Reserve System as a member bank or to be a non-member bank. About 38% of the country’s 8,000 banks are members of the Federal Reserve System.

Each member bank is required to purchase stock in one of the Federal Reserve banks to the amount of 3% of their capital and surplus. Banks receive a 6% annual dividend on their stock holding and have the right to vote for Class A and Class B directors at the Federal Reserve Bank. The stock is merely a legal obligation that goes with membership. A bank cannot resell the stock and there is no opportunity for capital gain, as the stock does not carry any implication of control or financial interest in the Federal Reserve Bank.

Member banks do have a voice in the regulation of the nation’s money supply and the short term interest rate targets but this is a minority voice, as those decisions are made by a committee ñ the Federal Open Markets Committee ñ of which only five of the twelve voting members come from banks. The remaining seven committee members are the Federal Reserve Systems Board of Governors and are appointed by the president. Joining the Federal Reserve System has a number of advantages for state banks. One of the primary advantages is the public relations value of membership: membership expresses an association, with the reputation and the public trust the Federal Reserve System enjoys. Banks are continuously evaluated on several criteria, including the bank’s financial condition, quality of management, capital adequacy and whether the bank serves the needs of the community.

Any number of institutions may apply to become a member bank, which includes a newly organized state commercial bank, existing non-member state banks, existing national banks that wishes to convert to a state charter, while continuing its membership and a depositary or thrift institution that is converting to a state chartered bank.

New banks and non-member banks are well advised to seek membership of the Federal Reserve System as it is an essential step to legitimacy in the public eye. Recent economic conditions have put pressure on banks to reassure their customers and non-member banks will find this a difficult task. For example, online stores will be very hesitant to rely on a non-member bank for their Credit Card Processing facilities, nor would stores be willing to hold a merchant account with a non-member bank.

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