Title: What Are Non-Member Banks — A Practical Guide for Banks and Customers
Summary / Key takeaways
– Non-member banks are state‑chartered banks that are not members of the U.S. Federal Reserve System. (National banks must be Fed members.)
– Non-member banks remain subject to reserve requirements and may hold reserves at a Federal Reserve Bank or in vault cash, and they may use many Fed services (check clearing, ACH, discount window) on similar terms as member banks.
– Non-member banks are primarily supervised by the FDIC rather than by the Federal Reserve, which is one reason some state banks choose non‑membership.
– Examples include the Bank of North Dakota, GMAC Bank, Bank of the West and, historically, institutions that converted to bank charters and/or Fed membership in times of stress (e.g., Goldman Sachs in 2008). (Source: Investopedia)
What a “non‑member bank” means
– Definition: A non‑member bank is a state‑chartered depository institution that has chosen not to join the Federal Reserve System. By law, nationally‑chartered banks must be members of the Fed; state banks have the option.
– Regulatory oversight: Non‑member banks are generally supervised by the Federal Deposit Insurance Corporation (FDIC) rather than by the Federal Reserve.
– Access to Federal Reserve facilities: Non‑member banks still maintain required reserves (via Reserve Bank accounts or vault cash) and have access to many Fed services such as check clearing, automated clearinghouse (ACH) services, electronic funds transfer services, and the discount window on terms comparable to member banks. (Source: Investopedia)
How non‑member banks operate — practical mechanics
– Reserve requirements: Like member banks, non‑member banks must meet reserve requirements. They meet those requirements by holding vault cash or balances at a Federal Reserve Bank.
– Fed services: Non‑member banks can use Fed payment and settlement services and, in many cases, access the discount window if needed.
– Regulatory differences: Because they are supervised by the FDIC instead of the Fed, non‑member banks may face a different supervisory approach or emphasis; some banks prefer perceived regulatory differences, cost structures, or state law advantages.
– Chartering constraints: Only state‑chartered banks can be non‑members. A change in charter (e.g., converting from a national bank to a state bank or vice versa) affects membership requirements.
Pros and cons of remaining a non‑member bank
Pros
– Regulatory supervision primarily by the FDIC (perceived as lighter or different by some banks).
– Potentially greater flexibility depending on state law and business strategy.
– Ability to keep at least some reserves in interest‑bearing securities (depending on circumstances and regulations).
Cons
– Less direct involvement with Federal Reserve governance or policymaking.
– Possible perception issues for customers or counterparties who view Fed membership as a sign of additional credibility (which, in some crises, has led banks to seek membership).
– May need to weigh the costs and operational steps of maintaining relationships with the Fed versus full membership.
Examples and historical context
– Bank of North Dakota, GMAC Bank, Bank of the West are cited examples of non‑member banks. (Source: Investopedia)
– During the 2008 financial crisis, some institutions sought Federal Reserve membership to gain access to facilities and assurances (for example, Goldman Sachs converted to a bank holding company and obtained access to Fed facilities). (Source: Investopedia)
Practical steps for a state bank considering whether to remain a non‑member or to join the Fed
1. Prepare an internal cost‑benefit analysis
– Compare regulatory supervision (FDIC vs. Federal Reserve), compliance costs, capital and liquidity requirements, and the long‑term strategic implications for funding and credibility.
2. Assess access needs to Fed facilities and liquidity tools
– Determine whether access to the discount window, intraday liquidity, Reserve Bank services, or participation in payments infrastructure requires membership or can be obtained otherwise.
3. Consult regulators and outside counsel
– Discuss options with your state banking regulator, the FDIC, and outside legal and regulatory counsel experienced in bank charters and Fed membership.
4. Review capital, governance and operational readiness
– Membership typically requires meeting supervisory capital and governance expectations and purchasing required Federal Reserve Bank capital stock (terms vary). Review accounting, treasury, and reporting systems needed to interact with the Fed.
5. Submit the application and plan for transition
– If applying for membership, submit required applications to the Federal Reserve and coordinate any change in charter, supervisory regime, and operational onboarding. Allow time for review, approval, and system changes — timelines vary by institution and complexity.
6. Communicate changes
– Coordinate communications to customers, depositors, counterparties and staff about any charter or membership changes, emphasizing deposit insurance status and any new services or protections.
Practical steps for consumers and businesses choosing between member and non‑member banks
1. Verify deposit insurance
– Confirm FDIC insurance (essential regardless of Fed membership). Use the FDIC’s bank lookup to verify insurance status.
2. Check the bank’s charter and regulator
– Determine whether the bank is state‑chartered/non‑member or a Fed member (national bank). This may affect supervisory approach but not FDIC insurance.
3. Evaluate services, fees and protections
– Compare interest rates, fees, online/mobile capabilities, branch access, customer service, and fraud/consumer protections offered.
4. Ask about liquidity/backing for large deposits
– For very large or commercial deposits, ask how the bank manages liquidity and whether it has backup lines or access to Federal Reserve liquidity facilities.
5. Consider reputation and crisis‑time behavior
– Research how the bank performed in past stress events, its capital levels and transparency of reporting.
Further reading and sources
– Investopedia — “Non‑Member Banks” (source content): https://www.investopedia.com/terms/n/non-member-banks.asp
– Federal Reserve (general information about Reserve Banks and services): https://www.federalreserve.gov
– Federal Deposit Insurance Corporation (FDIC) — bank supervision and consumer tools: https://www.fdic.gov
If you’d like, I can:
– Produce a one‑page checklist for a bank board evaluating Fed membership.
– Produce a one‑page checklist for consumers comparing banks (member vs. non‑member).
– Summarize regulatory differences between FDIC and Fed supervision in more detail (with citations). Which would be most useful?