Non-Member Banks: Definition and Overview
Non-member banks are U.S. banks that are not members of the Federal Reserve System. They are always state‑chartered (nationally chartered banks must be Fed members) and are generally regulated primarily by the Federal Deposit Insurance Corporation (FDIC) and by state banking authorities rather than by the Federal Reserve.
How Non-Member Banks Work
- Reserve requirements: Non-member banks are subject to the same reserve requirements as member banks and maintain required reserves (for example, by holding vault cash or placing funds with a Federal Reserve Bank).
- Access to Fed services: Although they do not own stock in a Federal Reserve Bank, non-member banks still have access to many Federal Reserve services — such as check clearing, automated clearing house (ACH) settlement, electronic funds transfers, and, in certain circumstances, the discount window.
- Regulatory supervision: Non-member banks are primarily supervised by the FDIC and by state regulators. Member banks are subject to Federal Reserve supervision in addition to other regulators, and nationally chartered banks are overseen by the Office of the Comptroller of the Currency (OCC).
Why a Bank Might Remain a Non-Member
- Charter choice: State-chartered banks can choose not to join the Federal Reserve; some prefer state oversight and FDIC supervision.
- Perceived regulatory burden: Some institutions believe supervision and compliance requirements may be less onerous under state regulation and FDIC oversight than under the Federal Reserve.
- Operational flexibility: Depending on state law, non-member banks may operate under different rules (for example, how they manage reserves or certain business activities), which can be advantageous in particular jurisdictions.
Joining the Federal Reserve System
Becoming a member involves submitting an application, meeting statutory and regulatory requirements, and completing a review period. Some state banks carefully weigh the tradeoffs and pursue membership when the benefits (such as enhanced liquidity access or perceived credibility) outweigh the costs.
Examples
- Banks that have been non-members include the Bank of the West, GMAC Bank, and the Bank of North Dakota.
- In 2008, amid financial-market stress, Goldman Sachs (then an investment bank) converted to a bank holding company and sought Federal Reserve member status to access Fed facilities and government-backed deposits.
Key Takeaways
- Non-member banks are state‑chartered institutions that are not part of the Federal Reserve System.
- They remain subject to reserve requirements and can use many Federal Reserve services, but are primarily regulated by the FDIC and state authorities.
- Choosing non‑membership reflects tradeoffs between regulatory oversight, operational flexibility, and access to Federal Reserve facilities; banks can apply to become members if their strategic needs change.