Regulation I: What It Means, How It Works

What Is Regulation I?

Regulation I is a requirement enforced by the Federal Reserve on member banks. Regulation I stipulates that any bank that becomes a member of the Federal Reserve must acquire a certain amount of stock in its Federal Reserve Bank.  Regulation I states the procedures for banks to purchase and redeem Federal Reserve Bank capital stock. The bank cannot use this stock as collateral.

Understanding Regulation I

Federal regional banks issue shares of its stock to Federal Reserve member banks. This is not the same as owning stock in private companies like Microsoft or General Electric, in that the stock cannot be traded or sold on a market or exchange. Federal Reserve bank branches are not operated for profit, and ownership of a certain amount of stock is a condition of membership in the Federal banking system.

Federal Reserve member banks are required to buy stock that equals at least 6% of their capital and surplus. Reserve Bank stock cannot be transferred to another party and pays dividends every six months. Banks must ensure that the ratio of the stock held to their capital and surplus remains constant at 6% or more at all times. Banks must pay in 3% of their capital and surplus holdings. Generally, banks must subscribe to, or purchase, capital stock from their District Federal Reserve Bank.

Regulation I Compliance

Regulation I outlines procedures for Federal Reserve member banks to stay in compliance with capital stock subscription requirements, as well as procedures for banks wishing to become Federal Reserve member banks. Regulation I addresses both the issuance and cancellation of capital stock in the Federal Reserve bank, how to deal with changes that might occur to a member bank’s capital or surplus, and how banks might enter or leave the Federal Reserve banking system.

Under Regulation I, a bank that wants to become a member of the Federal Reserve banking system must file an application for stock with the District Federal Reserve bank in the district where it is located. The regulation also lays out procedures for the cancellation of this stock if the bank should withdraw from or involuntarily or voluntarily end its membership in the Federal Reserve System. Circumstances under which this might occur include the bank going out of business, its merger with a nonmember bank, or its liquidation.

Additional Functions of Regulation I

Regulation I also outlines the procedure for determining how much Federal Reserve stock a member bank should buy, including procedures for adjusting that amount in accordance with changes to the member bank’s liquid assets. Furthermore, the regulation specifies how dividends are to be assessed and how records of member banks’ holdings of Federal Reserve Bank capital stock are to be recorded in the Reserve Bank’s books.