Non-Member Banks
Non-member banks are banks that are not members of the U.S. Federal Reserve System. One reason that state-chartered banks may decide to refrain from membership is that regulation can be less onerous, some believe, under the Federal Deposit Insurance Corporation (FDIC), which oversees non-member banks rather than the Federal Reserve Banks (member banks report to regional Federal Reserve banks). Depending on where they are located, non-member banks are only subject to state laws, rather than federal laws, so they may opt for less-regulated operations in a state like North Dakota. Although non-member banks are not required to purchase stock in their district Federal Reserve banks, they still have access to services offered by the Federal Reserve, such as its discount window on the same terms as member banks. Non-member banks refer to banks that are not members of the U.S. Federal Reserve System, typically state-chartered banks. As with member banks, non-member banks are subject to reserve requirements, which they have to maintain by placing a percentage of their deposits at a Federal Reserve Bank.
What Are Non-Member Banks?
Non-member banks are banks that are not members of the U.S. Federal Reserve System. As with member banks, non-member banks are subject to reserve requirements, which they have to maintain by placing a percentage of their deposits at a Federal Reserve Bank. Although non-member banks are not required to purchase stock in their district Federal Reserve banks, they still have access to services offered by the Federal Reserve, such as its discount window on the same terms as member banks.
How Non-Member Banks Work
Non-member banks can only be state-chartered since all nationally-chartered banks necessarily have to be members of the Federal Reserve System. One reason that state-chartered banks may decide to refrain from membership is that regulation can be less onerous, some believe, under the Federal Deposit Insurance Corporation (FDIC), which oversees non-member banks rather than the Federal Reserve Banks (member banks report to regional Federal Reserve banks).
Depending on where they are located, non-member banks are only subject to state laws, rather than federal laws, so they may opt for less-regulated operations in a state like North Dakota. In addition, they are able to keep at least a part of their reserves in interest-bearing securities. Non-member banks, like members, still receive services from the Federal Reserve System, including check clearing, electronic funds movements, and automated clearing house payments.
Becoming a member is only a matter of submitting an application, fulfilling the requirements, and going through a waiting period. Some non-member banks deliberate on this decision carefully and engage in the process in measured steps if they believe that being a member is ultimately more beneficial than remaining a non-member. There are also examples of, in extreme cases, non-member banks deciding to change their status to take advantage of certain benefits of becoming part of the U.S. Federal Reserve System.
Examples of Non-Member Banks
In 2008, some non-member banks fled into the arms of the Federal Reserve System for protection. Such was the case with investment bank Goldman Sachs, which faced economic uncertainty during the financial crisis in 2008. The investment bank humbly sought and received member status to access the Fed's discount window and begin taking government-guaranteed deposits from the public. In a press release heralding its new status, the bank spun it this way: "We believe that Goldman Sachs, under Federal Reserve supervision, will be regarded as an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources."
Other examples of non-member banks include the Bank of the West, GMAC Bank, and the Bank of North Dakota.
Related terms:
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State Banking Department
A state banking department is a state-specific regulatory body that oversees the operations of financial institutions within its jurisdiction. read more
Chartered Bank
A chartered bank is a financial institution engaged in the business of providing monetary transactions, such as safeguarding deposits and making loans. read more
Checking Account
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Community Reinvestment Act (CRA)
The Community Reinvestment Act is a federal law that encourages lenders to meet the credit needs of low- and moderate-income neighborhoods. read more
Federal Deposit Insurance Corporation (FDIC)
The Federal Deposit Insurance Corporation (FDIC) is an independent federal agency that provides insurance to U.S. banks and thrifts. read more
Federal Reserve System (FRS)
The Federal Reserve System is the central bank of the United States and provides the nation with a safe, flexible, and stable financial system. read more
Federal Reserve System (FRS)
The Federal Reserve System, commonly known as the Fed, is the central bank of the U.S., which regulates the U.S. monetary and financial system. read more
National Bank
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Primary Regulator
A primary regulator is a state or federal regulatory agency that is the main supervising body of a bank or other financial institution. read more