On May 5, 2021, the Board of Governors of the U.S. Federal Reserve System (the Board) released a request for comment on proposed guidelines (the Guidelines) for evaluating requests for master accounts1 (Accounts) and Federal Reserve financial services2 (Services). Although some in the fintech community optimistically view the Guidelines as a signal that neutral standards will facilitate greater availability of Accounts and Services, it is just as likely, if not more so, that the Guidelines will set a high bar that few applicants will be able to meet.
The Guidelines provide that as “novel charter types” are being authorized or considered at the state and federal level, and technological progress fuels new ways of providing traditional banking services and spurs the introduction of new financial products and services, the Board is facing an increase in inquiries and requests regarding access to Accounts and Services. Given the number and novelty of these requests, the Guidelines would require Reserve Banks to apply a transparent and consistent framework to requests for Accounts and Services access while taking into account both the business model of the applicant and the risks that granting such access could pose to the broader financial system.
Once finalized, the Guidelines could significantly affect the business case for certain “non-traditional charters,” such as the Wyoming Special Purchase Depository Institution charter, nondepository trusts, and the Office of the Comptroller of the Currency (OCC) fintech charter, that have sparked the interest of financial technology companies eager to avoid 50-state licensing obligations and to gain access to Accounts and Services. Indeed, the Board specifically expresses the expectation that while most applications by federally insured institutions will be “relatively straightforward,” applications by uninsured institutions will “likely require more extensive due diligence.”
The Guidelines consist of a set of six principles focused on risk management and mitigation that Reserve Banks would be expected to consider when reviewing requests by institutions for access to Accounts and Services. The standards also may be applied retroactively to existing accounts based on significant changes in risk posed by the specific institution or Account. The first principle specifies that only institutions that are legally eligible for Accounts and Services are in scope, while the remaining five principles address the specific risks posed by the institutions requesting access to Accounts and Services.
In addition to evaluating the safety, soundness, and stability of the applying institution, Reserve Banks would also be directed to consider whether granting access would present “credit, liquidity, operational, settlement, cyber or other risk to the overall payment system.” This reference indicates that the Guidelines are intended to provide a reasoned basis for Reserve Bank actions and avoid — or at least mitigate risk associated with — disputes over failures to grant access to Accounts and Services.3 In this regard, the Board articulates a clear position that the eligibility to access Accounts and Services, which may itself be a subject of future rulemaking, does not confer a right to such access.
The six principles set forth in the Guidelines state the following:
Principle 1: Each institution requesting an Account or Services must be eligible under the Federal Reserve Act or another federal statute to maintain an Account at a Reserve Bank and receive Services and should have a well-founded, clear, transparent, and enforceable legal basis for its operations.
Principle 2: The provision of an Account and Services to an institution should not present or create undue credit, operational, settlement, cyber, or other risks to the Reserve Banks. For this purpose, Reserve Banks are compelled to confirm that the applicant has an effective risk management framework and governance arrangements, is operating in a safe and sound manner, and is able to meet all of its obligations.
Principle 3: The provision of an Account and Services to an institution should not present or create undue credit, liquidity, operational, settlement, cyber, or other risk to the overall payment system. The Guidelines mandate that Reserve Banks particularly consider in their evaluation the extent to which the use of an Account and Services by an institution might restrict funds from being available to support the liquidity needs of other institutions.
Principle 4: The provision of an Account and Services to an institution should not create undue risk to the stability of the U.S. financial system.
Principle 5: The provision of an Account or Services to an institution should not create undue risk to the overall economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, or other illicit activity. Reserve Banks should confirm that the institution has an anti-money-laundering program and complies with the Office of Foreign Assets Control regulations.
Principle 6: The provision of an Account or Services to an institution should not adversely affect the Board’s ability to implement monetary policy, altering the level and variability of reserves and key policy interest rates, the structure of key short-term funding markets, or the overall size of the consolidated balance sheet of the Reserve Banks.
Finally, the Guidelines note that Reserve Banks will maintain discretionary authority to grant or deny requests.
The Board’s request for comments provides a good opportunity for fintech companies and entities not insured by the Federal Deposit Insurance Corporation to make their case regarding a neutral set of standards for access to Accounts and Services provided by the Federal Reserve Banks, while others will certainly make that case that those standards should protect the security, integrity, and stability of the Federal Reserve System and the institutions that rely on it. Comments will be accepted for 60 days after publication in the Federal Register, which occurred on May 11, 2021.
1“Accounts” excludes (1) accounts provided under fiscal agency authority, (2) accounts of Federal Reserve Banks (Reserve Banks) with foreign banks, (3) joint account requests, and (4) account requests from designated financial market utilities.
2“Services” includes (1) currency and coin services; (2) check clearing and collection services; (3) wire transfer services; (4) automated clearinghouse services; (5) settlement services; (6) securities safekeeping services; (7) Federal Reserve float; and (8) and any new services that the Federal Reserve offers, including but not limited to payment services to effectuate the electronic transfer of funds. "Services” do not include transactions conducted as part of the Board’s open market operations or administration of the Reserve Banks’ Discount Window.
3Notably, in the wake of the financial crisis, the Board failed to grant or deny access for an Account to TNB USA Inc. (TNB), whose business model was limited to accepting deposits and placing those deposits into a TNB Master Account at the Federal Reserve Bank of New York, thus permitting depositors to earn higher rates of interest than otherwise available in the market. The Federal Reserve Bank of New York did not resolve the request for a period a little shy of a year. In response, TNB filed suit. See TNB USA Inc. v. Federal Reserve Bank of New York, 2020 WL 1445806 (S.D.N.Y. 2020).
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