The Member Banks of the FED

We have discussed the counterparties/primary dealers of the Federal Reserve (FED). Before I stated that,

“I hold that these counterparties/primary dealer banks are the very banks that own stakes within the Federal Reserve bank.”

https://cue-talks.blogspot.com/2021/03/the-counterparties-of-federal-reserve.html

 

As I began to dig deeper, I would find that it was some of the primary dealers of the FED but also what is called the Federal Reserve member banks.[1] Member banks of the FED, according to the Federal Reserve Act, are required to subscribe an equal amount of 6 percent of its capital and surplus to the FED in order to be a member.[2] The shares are not voting shares similar to preferred stock,[3] “…  with a par value of $100, and may not be transferred or hypothecated.” (York, 2019, p. 16) This stock “… may not be sold, traded or pledged as security for a loan.” (Bankrate.com)

 

Now that we are aware of what a member bank of the Federal Reserve is, let us go back in time a bit to see who some of the early member banks were. As of May 27, 1914, the New York FED was District No. 2 of the FED.

 

All twelve (12) branches of the FED have member banks. The New York FED is the branch that has counterparties/primary dealers. Let us focus upon particular banks in this instance. Citibank began in the early 19^th century when it was called the First Bank of the United States, in 1811 Congress refused the renewal of their charter so later in 1812 shareholders and other investors incorporated the City Bank of New York. (Britannica, 2011)

 

 

According to the Encyclopedia Britannica,

“Citigroup, American financial services corporation formed in 1998 from the merger of Citicorp (itself a holding company incorporated in 1967) and Travelers Group, Inc. Its headquarters are in New York City.” (Britannica, 2011)

 

We are aware that Citigroup was a member bank of the New York FED in 1914 and a current primary dealer. What is interesting is that they once merged with another primarily dealer,

 

In 1931, Citigroup,

 

“… acquired the Bank of America, N.A. (another descendant of the First Bank of the United States and no relation to the former California-based bank founded by Amadeo Peter Giannini).” (Britannica, 2011)

 

Under the name of BofA Securities, Inc. Bank of America is a primarily dealer of the New York FED. There are other sources that contradict this quote by stating that Bank of America was founded in San Francisco through the 1998 acquisition by NationBank. Regardless, the Bank of America that we have currently is associated with Citigroup and is a primary dealer of the FED. With all of this being said, we are now up to speed on the FED being a private bank owned by private banks via counterparties/primary dealers and member banks which one holds authority on par with the FED while the others owns shares in the FED, though they cannot trade them as one would on the NYSE, Dow, or NASDAQ. Until next time …

References

Bankrate.com. (n.d.). Member Bank. New York, NY. Retrieved March 18, 2021

Britannica, T. E. (2011, November 25). Citigroup. Retrieved March 18, 2021, from Encyclopedia Britannica: https://www.britannica.com/topic/Citigroup

John Downes, J. E. (2010). Dictionary of Finance and Investment Terms (Eighth ed.). Hauppauge: Barron's Educational Series.

Online, O. (2021, March). preferred stock, n.1. Retrieved March 18, 2021, from https://www.lexico.com/en/definition/preferred_stock

York, F. R. (2019, March). Financial Statements The Federal Reserve Bank of New York. New York, NY. Retrieved March 18, 2021, from https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf

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[1] A member bank is a commercial bank that’s part of the Federal Reserve System. These banks maintain reserve deposits in the Federal Reserve Bank in their districts. National banks must be members; state-chartered banks may join by meeting certain requirements. In total, 38 percent of the 8,039 commercial banks in the U.S. are member banks. (Bankrate.com)

[2] Each member bank must hold capital stock in its Fed branch equal to 6 percent of its combined capital and surplus, excluding retained earnings, with 3 percent paid in and the remaining 3 percent held on call. (Bankrate.com)

[3] Stock that entitles the holder to a fixed dividend, whose payment takes priority over that of common-stock dividends. (Online, 2021)

PREFERRED STOCK class of CAPITAL STOCK that pays dividends at a specified rate and that has preference over common stock in the payment of dividends and the liquidation of assets. Preferred stock does not ordinarily carry voting rights. (John Downes, 2010, p. 460)

The Primary Dealers/Counterparties of the Federal Reserve

In this segment we will discuss the Federal Reserve and its counterparts. 

Let us properly define counterparts,

1. A person or thing that corresponds to or has the same function as another person or thing in a different place or situation. (Online, 2021)

We will now look at what the Federal Reserve calls ‘Primary Dealers.’

“Primary dealers are trading counterparties of the New York Fed in its implementation of monetary policy. They are also expected to make markets for the New York Fed on behalf of its official accountholders as needed, and to bid on a pro-rata basis in all Treasury auctions at reasonably competitive prices.” (York, 2021)

The primary dealer banks are a list of twenty-four (24) large banks that must meet a net regulatory amount of capital of $50 million dollars as a broker-dealer or a government securities broker-dealer, or must maintain a $1 billion in Tier 1 capital as a state or federally chartered bank or savings association. (York, 2021)

Some may not be aware that the Federal Reserve is not a part of the federal government. (Louis) Since these banks, which are interchanged at times with others in their place, are operating on the same level with the Federal Reserve as its counterparts, this serves as proof that the Federal Reserve is a private bank owned by private banks. I hold that these counterparties/primary dealer banks are the very banks that own stakes within the Federal Reserve bank.

To give a little more perspective before we part, let us look at what the relationship or proper relationship between the Federal Reserve and the government is …

https://youtu.be/K38khtCrN-4

In the future we will go into the history of some of the banks on the primary dealer list to show the significance of the relationship between them and the Federal Reserve.

 

References

Louis, F. R. (n.d.). Making Sense of the Federal Reserve. St. Louis. Retrieved March 18, 2021

Online, O. (2021, March). counterpart, n.1. Retrieved March 5, 2021, from https://www.lexico.com/definition/counterpart?fbclid=IwAR1CpzEHStnJcef2btKPfGCenklix7FP6D5NYGVhVCmvX3FUCGCdxTBcrBM

York, F. B. (2021). Primary Dealers. New York, NY, United States of America. Retrieved March 5, 2021, from https://www.newyorkfed.org/markets/primarydealers?fbclid=IwAR0CAdQCr4B9xv_UK01aZ_RYala_Lfs4ySo-xY-w3aVRi6L2Nm6oYc-VYEA