In recent months, a number of concerns have arisen about supervision and exams for FDIC nonmember state banks. Generally, these concerns have revolved around inconsistent regulatory positions on compliance, fair lending and return deposit item fees. Since state banks have two options for their federal regulatory agency, the FDIC and the Federal Reserve (“Fed”), we have had an uptick in questions about Fed membership and Fed supervision. This document is intended to address some of these questions.

Let me begin by stating the obvious – all bank and thrift holding companies are supervised by the Federal Reserve regardless of the chartering authority. Although nationally chartered banks are required to be members of the Federal Reserve, financially sound state-chartered commercial banks, including newly formed banks (even de novos), have the option to become a member of the Federal Reserve System. Membership requirements are outlined in Section 208.3(b) of Regulation H.

There are twelve regional Federal Reserve Banks which supervise all state member banks in their Districts, in partnership with state regulators. This is integral to their mission to promote a safe and sound banking industry. 

12 Federal Reserve Districts

Here are a few of the benefits of becoming a state Fed member:

Greater Efficiency for State Banks
If you are owned by a holding company, becoming a state member bank will reduce the number of federal supervisors from two to one. Although the FDIC remains responsible for all banks’ safety and soundness, they generally stay in the background. 

Examination Tailoring and Consistency
Exams are risk-focused to achieve supervisory efficiency and consistency. The scope, length, and frequency of examinations is based on the size, condition, activities, and complexity of an organization. Similar to the process used by the FDIC, Fed supervision is performed in partnership with state regulators, usually a seamless process. The state and the Fed alternate in leading examinations. Whenever practical, the Federal Reserve conducts examination work remotely to reduce administrative burden on banks.

Each member bank will be assigned a dedicated Fed contact and have access to Fed senior management. This allows for timely responses to questions, issues, or concerns.

Staff Expertise
Fed staff are knowledgeable and well trained to supervise banks of all sizes and complexities. Living in the region they serve, Federal Reserve examiners are familiar with local economic conditions and the community.

Member banks may request Fed examiners to provide training for areas of special interest such as consumer compliance, Bank Secrecy Act, or liquidity risk.

The Fed does not charge application filing or supervision fees for institutions. 

Timing of Conversion
Filing a Reserve Bank membership application does not require public notice and completing the membership application does not require a post-approval waiting period. As we will discuss below, notwithstanding the time required for the pre-membership exam, the application process usually only takes about a month.


Requirements for Fed membership:

If you decide to proceed with the membership process, at no cost to the bank, representatives of the appropriate Reserve Bank will meet with your Board to discuss the process and answer questions. Prior to applying for membership, you will be asked to adopt two board resolutions which will be provided by the Federal Reserve. These resolutions authorize the Federal Reserve to complete a pre-entry examination of your bank and confirm your agreement with certain conditions of membership.

Only well-run bank banks (Composite CAMELS rating 1 and 2) with no regulatory orders can qualify to become Fed members. Unless you have been recently examined by the FDIC or OCC, you will be required to have a pre-application examination by a team from the Federal Reserve. During this process, they will review your bank both from a safety and soundness, compliance and – if applicable – a trust perspective. This is usually a minor event as much of the examination can be done remotely.

Assuming there are no exam issues, you can now apply for membership. There is no filing fee (unless you have assets over $100 billion). The time it takes for approval is usually less than a month but may vary depending on any particular issues that may arise.

Like national banks and unlike state non-member banks, new Fed members are required to invest in Federal Reserve Bank stock in an amount equal to 3 percent of their combined capital and surplus (but excluding retained earnings) with another 3 percent on call. The stock pays an annual dividend of 6%. 


Helpful Links:

Fed Membership Application and Conditions

Board Resolutions Provided by the Fed

The Advantages/Disadvantages of Fed Membership


Founded in 1993, DD&F Consulting Group provides consulting services to the community banking industry nationwide. We’d be happy to visit with you about converting to a state member bank, introduce you to other state member banks or connect you with a representative of the Federal Reserve.