What Are Non-Member Banks?
Let me explain what non-member banks are: they are banks that choose not to be members of the U.S. Federal Reserve System. Just like member banks, you need to know that non-member banks are subject to reserve requirements, meaning they have to keep a percentage of their deposits at a Federal Reserve Bank. Even though they don't have to buy stock in their district Federal Reserve banks, they can still use services from the Federal Reserve, such as the discount window, and they get these on the same terms as member banks.
Key Takeaways
You should understand that non-member banks are those not in the U.S. Federal Reserve System, often state-chartered banks. These state-chartered banks might decide against joining the Fed because regulation can be less strict under state laws and the Federal Deposit Insurance Corporation (FDIC), which oversees them. For instance, banks like Bank of the West and GMAC Bank are non-members.
How Non-Member Banks Work
Non-member banks can only be state-chartered, as all nationally-chartered banks must join the Federal Reserve System. One key reason state-chartered banks stay out is that regulation might feel less burdensome under the FDIC, which handles oversight for non-members, instead of reporting to regional Federal Reserve banks like members do.
Depending on their location, these banks follow only state laws, not federal ones, so they might choose states like North Dakota for lighter regulation. Plus, they can hold some reserves in interest-bearing securities. Like member banks, non-members get Federal Reserve services such as check clearing, electronic funds transfers, and automated clearing house payments.
If a bank wants to become a member, it's straightforward: submit an application, meet the requirements, and wait. Some non-member banks think this over carefully and proceed step by step if they see benefits in joining. In rare cases, non-members switch to gain advantages from the Federal Reserve System.
Examples of Non-Member Banks
During the 2008 financial crisis, some non-member banks turned to the Federal Reserve for safety. Take Goldman Sachs, an investment bank that faced uncertainty and applied for member status to access the discount window and take government-guaranteed deposits. In their press release, they presented it as becoming 'an even more secure institution with an exceptionally clean balance sheet and a greater diversity of funding sources' under Federal Reserve supervision.
Other non-member examples include Bank of the West, GMAC Bank, and the Bank of North Dakota.
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