Regulation I: What It Means and How It Works

What Is Regulation I?

Regulation I is a Federal Reserve requirement stipulating any bank that becomes a member of a District Federal Reserve Bank must acquire an amount of stock in that District Federal Reserve Bank equal to 6% of its capital and surplus. Regulation I states the procedures for banks to purchase and redeem Federal Reserve Bank capital stock and prohibits banks from using this stock as collateral.

Understanding Regulation I

Federal regional banks issue shares of 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 dividends are paid 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 (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.

The Bottom Line

The Federal Reserve's Regulation I requires all member banks to purchase Federal Reserve stock equal to 6% of their capital and surplus when they become members of a reserve bank.