Skip to Main Content

Member bank

You need to understand what a member bank is. Here’s what you need to know.

What is a member bank?

A member bank is a commercial bank that’s part of the Federal Reserve System. These banks maintain reserve deposits in the Federal Reserve Bank in their districts. National banks must be members; state-chartered banks may join by meeting certain requirements. In total, 38 percent of the 8,039 commercial banks in the U.S. are member banks.

Deeper definition

The Federal Reserve System was founded by Congress in 1913 to provide the nation with a safe, flexible and more stable monetary and financial system.

Over the years, its role in banking and the economy has expanded. Today, a network of 12 Federal Reserve Banks serves regions of the country, with the banks based in Boston, New York, Philadelphia, Cleveland, Atlanta, Chicago, St. Louis, Minneapolis, Dallas, San Francisco, Kansas City, Missouri, and Richmond, Virginia.

In addition to the approximately 3,000 member banks, another 17,000 institutions offer banking services to Americans. These nonmember banks are state banking institutions. They include nonmember commercial banks, savings banks, savings and loan associations, and credit unions.

Although not formally part of the Federal Reserve System, they are subject to Fed regulations, including reserve requirements, and have access to the system’s payments network for check clearing and wire transfers, and to its discount window for short-term, cheap-money loans to meet temporary shortages of bank funds.

Each Fed regional bank issues shares of stock to member banks. To be sure, owning Fed bank stock is not the same as owning stock in a private company like Ford, Apple or General Electric.

The Fed branches are not operated for profit, and ownership of a certain amount of stock is a condition of membership in the Fed banking system.

Each member bank must hold capital stock in its Fed branch equal to 6 percent of its combined capital and surplus, excluding retained earnings, with 3 percent paid in and the remaining 3 percent held on call.

In addition, the stock may not be sold, traded or pledged as security for a loan. By law, dividends to member banks are limited to 6 percent per year.  Still, that’s not bad when compared to the Nasdaq Composite, which wrapped up 2016 with a net gain of 7.5 percent.

Nonmember banks don’t have the same requirement of buying stock in their Federal Reserve Bank, but at that rate of return, joining the system seems like a smart money move.

Member bank example

HSM Bank, a state-charted bank in Florida, is also a member bank of the Federal Reserve Bank of Atlanta. As such, a check written by Charley, a depositor in HSM, to a vendor in Macon, Georgia, most certainly will pass through the Atlanta Fed or one of its branches for processing.


More From Bankrate