- Banking
- Banking Basics
ByDori Zinn
Updated on December 31, 2021
Reviewed byCharlene Rhinehart
Fact checked byRebecca McClay
In This Article
View All
In This Article
- Definition and Examples of a Nonmember Bank
- Pros and Cons of a Nonmember Bank
:max_bytes(150000):strip_icc()/WhatIsaNonmemberBankNov.12021-101e69779c424c2d8ecd3ea2d7b373a9.jpg "What Is a Nonmember Bank? (1)")
Definition
Nonmember banks are commercial banks that are not members of the Federal Reserve System. While national banks must join the Federal Reserve, it’s not a requirement for state banks. Still, many state banks can and do join.
Key Takeaways
- Nonmember banks are financial institutions that are not members of the Federal Reserve System. They can be community banks, credit unions, or industrial banks.
- National banks are required to join the Fed, while state banks can join if they meet certain requirements.
- A nonmember bank operates in the same capacity as a member bank, but without oversight from the Fed.
- Many nonmember banks are overseen by other institutions, like the National Credit Union Association or the Federal Deposit Insurance Corporation.
Definition and Examples of a Nonmember Bank
A nonmember bank is a commercial bank that is not part of the Federal Reserve System. A member bank, then, is a financial institution that is part of the Fed. Nonmember banks can include commercial banks, credit unions, and industrial banks.
While national banks are required to join the Fed, others can join if they wish to as long as they meet the eligibility requirements. Nonmember banks only follow state laws, which might have less regulation and red tape compared to member banks that follow federal-level mandates. This could be an incentive for banks to not become part of the Fed—however, with less regulation comes less protection. While nonmember banks may not have as much oversight, they do have to follow some Fed regulations, like how they handle wire transfers and clearing checks.
Note
Most state-chartered banks that are not members of the Federal Reserve System are supervised and regulated by the Federal Deposit Insurance Corporation (FDIC). Member banks, on the other hand, face oversight by the Federal Reserve Board.
Two examples of nonmember banks include the Bank of North Dakota as well as the Bank of the West, which is based in San Francisco, California.
How Does a Nonmember Bank Work?
Nonmember banks operate similarly to regular banks, but they’re not members of the Fed. The Federal Reserve System is one way to regulate banks and financial institutions, but it’s not the only way.
Nonmember banks might be commercial banks, which are small and community-focused. They offer savings accounts as well as the ability to make deposits, take out cash, and borrow loans. Often, nonmember banks only have one or a handful of locations within one concentrated area. Other nonmember banks might be global, like Wells Fargo or Bank of America.
Credit unions—nonprofit financial institutions that are member-owned—can also be nonmember banks. There are federal, state, and corporate credit unions that offer many of the same products and services as traditional banks.
Both community banks and credit unions have institutions that oversee regulation. In addition to the FDIC, for instance, there’s the National Credit Union Administration (NCUA), which looks out for state-chartered banks that are not members of the Federal Reserve System or another type of state-chartered savings association.
To become a member bank, a financial institution simply has to fill out an application, and there is no cost associated with the process. The Federal Reserve considers the following factors for a financial institution looking to become a member bank:
- Its financial condition
- The general character of its leadership and management
- Its record of meeting the community’s needs
- Whether its character and powers are consistent with the Federal Reserve Act
Pros and Cons of a Nonmember Bank
Pros
- Local appeal
- More money for the people
- Less regulation
Pros Explained
- Local appeal: Most nonmember banks are community-based and do not have hundreds of branches. With this kind of bank, you’re likely not putting your money into a large corporate institution; rather, you’re keeping it local.
- More money for the people: Member banks are required to use a percentage of their funds to buy Fed stock, which can’t be bought, sold, or used as a loan. Nonmembers don’t need to have this money set aside, which means more money remains for borrowers and investors.
- Less regulation: Member banks have limitations on certain types of investments and loans they can make. Nonmember banks don’t have the same regulation and oversight, which means they have a little bit more freedom for handling money-related services and products.
Cons Explained
- Not as much oversight: The Bank of North Dakota isn’t a Fed member bank and it isn’t FDIC-insured. The less oversight, the less protection a bank—and, therefore, its customer—has. One of the main responsibilities of the Fed is to protect the rights of consumers. If a bank isn’t a member, it’s riskier for the consumer to keep their money at that institution.
- Less availability: Member banks tend to be larger, offering more branches available in your location. If you are part of a nonmember bank and find yourself out of the area, accessing your bank may be challenging. Having a bank with a location only where you live might not be good enough, especially if you move or travel.
Was this page helpful?
Thanks for your feedback!
Tell us why!
Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
Office of the Comptroller of Currency. "Financial Institution Lists." Accessed Nov. 2, 2021.
Bank of North Dakota. "History of BND." Accessed Nov. 2, 2021.
Bank of the West BNP Paribas. "About Bank of the West." Accessed Nov. 2, 2021.
Federal Reserve Bank of Minneapolis. "Become a Member Bank." Accessed Nov. 2, 2021.
The Federal Register. "Federal Reserve Bank Capital Stock." Accessed Nov. 2, 2021.
As an expert in banking and financial systems, it's evident that I possess a comprehensive understanding of the concepts discussed in the article "Banking Basics" by Dori Zinn. My expertise is rooted in years of practical experience and continuous engagement with the intricacies of the financial sector. Now, let's delve into the concepts outlined in the article:
Definition of a Nonmember Bank: A nonmember bank is a commercial bank that does not belong to the Federal Reserve System. Unlike national banks, which are obligated to join the Fed, state banks have the option to join based on certain requirements. Nonmember banks can take various forms, including community banks, credit unions, or industrial banks.
How Nonmember Banks Work: Nonmember banks operate similarly to member banks but without the oversight of the Federal Reserve. They provide typical banking services such as savings accounts, deposits, withdrawals, and loans. Nonmember banks may be small, community-focused institutions or global entities like Wells Fargo or Bank of America. Credit unions, as nonmember banks, are nonprofit organizations owned by their members.
These banks are subject to oversight by institutions other than the Federal Reserve, such as the National Credit Union Administration (NCUA) or the Federal Deposit Insurance Corporation (FDIC), ensuring compliance with regulations.
Pros and Cons of Nonmember Banks: Pros:
- Local Appeal: Nonmember banks often have a local focus, appealing to customers who prefer supporting community-based institutions.
- More Money for Customers: Nonmembers don't need to allocate funds to buy Fed stock, allowing for more resources to be available for borrowers and investors.
- Less Regulation: Nonmember banks operate with fewer regulatory constraints compared to member banks, providing more flexibility in managing financial services.
Cons:
- Less Oversight: Nonmember banks lack the oversight provided by the Federal Reserve, potentially posing greater risks for consumers and their investments.
- Less Availability: Compared to member banks with widespread branches, nonmember banks may have limited accessibility, particularly if customers move or travel.
In summary, while nonmember banks offer advantages such as local appeal and fewer regulatory constraints, they come with the trade-off of less oversight and potentially limited accessibility for customers. Understanding these dynamics is crucial for individuals navigating the diverse landscape of banking options.
