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Thursday, August 21, 2014

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SRC Insights: Third Quarter 2008

Refresher on Capital Stock Subscriptions

A little known provision in the Federal Reserve Act requires national banks and state-chartered banks that belong to the Federal Reserve System (member banks) to hold stock in their local Federal Reserve Bank. The subscription process associated with this requirement is technical and sometimes overlooked by member banks. The purpose of this article is to provide an overview of the stock requirements and provide information that will assist member banks in complying with the statute.

Overview of Federal Reserve Capital Stock Requirements
Regulation I, Issue and Cancellation of Federal Reserve Bank Capital Stock, addresses Section 5 of the Federal Reserve Act, which requires member banks to hold Federal Reserve Bank capital stock (Federal Reserve stock) in an amount equal to six percent of the subscribing bank's capital and surplus. The par value for one share of Federal Reserve stock is $100, half of which must be paid upon issuance; the remainder is due on call by the Board of Governors of the Federal Reserve System. Currently, a six percent dividend is paid on the paid-in portion of Federal Reserve stock (a 3% semiannual payment).

Why is it important for member banks to hold an accurate amount of Federal Reserve stock in the correct Federal Reserve Bank? First, it is required by the statute. Second, it is necessary to ensure that each member bank receives the dividends to which it is entitled. Finally, the 12 Federal Reserve Banks use capital stock balances at year-end to determine internal cost allocations between Districts.

A variety of events can impact Federal Reserve stock subscriptions. These triggering events typically include statutory mergers and other events that impact the capital accounts of member banks, as well as legal events, such as charter conversions. These events usually require formal applications to acquire or redeem stock. It is the responsibility of each institution to be aware of all triggering events so that they can complete the Regulation I requirements in a timely manner. Your local Reserve Bank is available to support you in this regard if questions arise.

Purchase of Capital Stock
A Federal Reserve stock application must be submitted in the following circumstances:

  • Formation of a de novo member bank
  • Acquisition of another bank by a member bank
  • Conversion of a state nonmember bank to a member bank

The following table outlines the applications that banks must file for events related to purchasing Federal Reserve stock.

Event or PurposeApplication
Issuance of Federal Reserve Stock—Organizing National BankFR 2030
Issuance of Federal Reserve Stock—Nonmember State Bank Converting to National BankFR 2030a
Nonmember State Bank Converting to State Member BankFR 2083A
Mutual Savings Bank Converting to State Member BankFR 2083B
Adjustment in Holdings*FR 2056

Cancellation of Capital Stock
Member bank ownership of Federal Reserve stock is subject to cancellation for the following reasons:

  • Insolvency or voluntary liquidation
  • Conversion to nonmember status through merger, acquisition, or change in charter
  • Voluntary or involuntary termination of membership

The cancellation of Federal Reserve stock should occur at or before consummation of the event. The following table outlines the applications that member banks must file for events related to canceling Federal Reserve stock.

Event or PurposeApplication(s)
Liquidating Member Banks FR 2086
Member Bank Converting into or Merging with a Member or Nonmember BankFR 2086a
Insolvent Member BankFR 2087
Adjustment in Holdings*FR 2056

*Quarterly and Year-End Requirements
Section 5 of the Federal Reserve Act states that Federal Reserve stock shall be adjusted when member banks increase or decrease capital stock or surplus. As declared by the Board of Governors, member banks shall only make quarterly adjustments if the cumulative change exceeds the lesser of 15 percent or 100 shares of Federal Reserve stock. Required changes must be made promptly after filing the Call Report, whenever such changes in capital stock and surplus exceed the amount permitted to be deferred.

Year-end adjustments are most critical to ensure that the year-end books are accurate. Each member bank must file to eliminate any differences between the actual number of shares owned and the required number of shares specified in Section 5 of the Federal Reserve Act. At year-end, immediate changes must be made to reflect the exact number of shares.

Conclusion
Teamwork and coordination between the Federal Reserve Banks and their member banks are necessary to ensure that these institutions hold an accurate amount of Federal Reserve stock at the appropriate District. For questions regarding capital stock, please contact Eric Nichols at (215) 574-3716 or William Lenney at (215) 574-6074. Forms and instructions may be obtained online at the Board of Governors' website Exterior Link.

The views expressed in this article are those of the author and are not necessarily those of this Reserve Bank or the Federal Reserve System.