FINANCIAL INSTITUTIONS; FEDERAL RESERVE BANK; BANKS AND BANKING;
Program Description; Federal laws/regulations;
The Connecticut General Assembly
OFFICE OF LEGISLATIVE RESEARCH
September 25, 1995 95-R-1200
FROM: Helga Niesz, Principal Analyst
RE: Federal Reserve Banks
You asked whether Federal Reserve Banks are government agencies or privately owned and whether private individuals can own stock in them.
Federal Reserve Banks' stock is owned by banks, never by individuals. Federal law requires national banks to be members of the Federal Reserve System and to own a specified amount of the stock of the Reserve Bank in the Federal Reserve district where they are located. It also lets state banks become members and purchase stock. But these stockholding members do not have the same rights as stockholders in a private corporation. Under federal law, the Federal Reserve Banks' actions and policies are mainly controlled by the Federal Reserve System's Board of Governors, which is an independent U.S. government agency.
The Federal Reserve System is the United States' central banking system, created by the Federal Reserve Act in 1913. It is administered by the Board of Governors of the Federal Reserve System, which has seven members appointed by the U.S. President and confirmed by the Senate for 14-year terms. The Board is an independent agency of the U.S. Government, reporting directly to Congress. It supervises the 12 Federal Reserve Banks and their 25 branches throughout the country. Also part of the system are federally chartered national banks (which federal law requires to become stockholding members of the Federal Reserve Bank in their district). State chartered banks can choose to become members by meeting the requirements for membership.
The Federal Reserve banks are primarily “banks for banks.” Their dealings are generally restricted to banks and the government, with the exception of open market operations and, in unusual emergency situations, direct loans to individuals, partnerships, and corporations. The Reserve Banks are the principal medium through which the Federal Reserve Board exercises its monetary and credit policies and general supervisory powers. They also serve as depositories for other banks' required reserves and clearing balances.
There are no individual stockholders. The stock is all owned by member banks, which are required to subscribe to the stock of the Federal Reserve Bank in their district in an amount equal to 6% of the member bank's capital and surplus. Only one-half of this subscription, 3%, is actually paid in. The stock has a par value of $100, is of one class, cannot be transferred, and pays a fixed cumulative dividend of 6%. The bank keeps this stock only as long as it is a member of the system, and its holdings rise and fall with changes in its own capital and surplus. The Federal Reserve Banks' residual earnings are not paid to its stockholders, but are used to build up its surplus to equal its subscribed capital and after that earnings are paid to the U. S. Treasury. The stockholders do not have the powers and privileges that belong to stockholders of private corporations (12 U.S.C.A. § 221).
Each Federal Reserve Bank has its own board of nine directors. Under the law, member banks in each district elect three Class A directors, who represent the member banks and are usually bankers, and three Class B directors, who are engaged in non-lending pursuits. The Federal Reserve Board of Governors appoints three Class C directors for each Federal Reserve Bank; one of these is appointed chairman and the other deputy chairman. The Class B and C directors cannot be bankers, and the Class C directors cannot own any bank stock. The Reserve Bank's own board of directors, with the Board of Governors' approval, appoints the Bank's chief executive officer, known as the President, and a first vice president for terms of five years. The locations of the twelve Federal Reserve Banks are Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, St. Louis, Minneapolis, Kansas City, Dallas, and San Francisco (Munn's Encyclopedia of Banking and Finance).