What is a Member Bank?

A member bank is usually understood to mean a bank that is part of a central banking and/or clearing system. Within the United States, this specifically refers to a member bank of the Federal Reserve System. Occasionally, the term may be used to refer to membership of a trade association, but this is usually discouraged to avoid confusion.

All nationally chartered US banks are required to be members of the Federal Reserve system. State charted banks have the right to apply to become members, though acceptance is not guaranteed. State-based mutual savings banks can also apply for membership.

There are two major requirements of a member bank in the Federal Reserve system. The first involves the 12 Federal Reserve Banks, which each represent a geographical area of the nation. Alaska and Hawaii come under the "San Francisco" district, though this actually covers most of the western states. These reserve banks enact the policy of the central Federal Reserve bank, most notably in the attempts to influence the supply of money and credit across the nation.

Each member bank must buy stock in the Federal Reserve Bank for the district in which it is chartered. This stock is to the value of 6% of the member bank's paid-in capital, which is the money it has received by selling shares. Half of this money is considered an asset of the member bank that happens to be held by the Federal Reserve district bank, while the other half can be called in by the central Federal Reserve Bank.

These funds help pay the operating costs of the Federal Reserve banking system. This includes providing inter-banking services such as check clearing, dealing with electronic transfers between banks, and distributing and collecting notes and coins. The Federal Reserve district banks also handle the revenues of many types of federal taxes.

The second main requirement of a member bank is to keep a portion of its deposits at the Federal Reserve district bank. This is the money that is used to settle money transfers between customers of different banks. It also ensures that banks maintain enough funding to meet the withdrawal demands of customers, in normal circumstances at least. The precise portion of deposits that must be held at the Federal Reserve bank varies and is often used by officials as a way to control credit availability, the logic being that the more money a bank has to put into reserves, the less it has to lend to the public.