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The Basic Structure of the Federal Reserve System

The Federal Reserve System was created by the Federal Reserve Act in 1913 and began operating in 1914. The primary motivation for creating the Federal Reserve System was to address banking panics. The Fed is an unusual mixture of public and private elements. A network of 12 Federal Reserve Banks and 25 branches make up the Federal Reserve System under the general oversight of the Board of Governors.

The Reserve Banks serve banks, the U.S. Treasury, and, indirectly, the public. A Reserve Bank is often called a “banker’s bank,” storing currency and coin, and processing checks and electronic payments. Reserve Banks also supervise commercial banks in their regions.

All member banks hold stock in Reserve Banks and receive dividends. Unlike stockholders in a public company, banks cannot sell or trade their Fed stock. Reserve Banks interact directly with banks in their Districts through examinations and financial services.

Approximately 38 percent of the 8,039 commercial banks in the United States are members of the Federal Reserve System. National banks must be members; state-chartered banks may join if they meet certain requirements. The member banks are stockholders of the Reserve Bank in their District and as such, are required to hold 3 percent of their capital as stock in their Reserve Banks.

In addition to the approximately 3,000 member banks, about 17,000 other depository institutions provide checkable deposits and other banking services. These depository institutions include nonmember commercial banks, savings banks, savings and loan associations, and credit unions. Although not formally part of the Federal Reserve System, these institutions are subject to System regulations, including reserve requirements, and have access to System payments services.