Reserve Trust Raises Questions About Fed’s Guidelines on Master Account Access

The Federal Reserve Board published in March an updated proposal for its guidelines to evaluate requests for accounts and services at Federal Reserve Banks. The new proposal, which added a new chapter to the original guidelines published in May 2021, creates a tiered system based on the risks that an institution may pose to the financial system, and it aimed at facilitating FinTech companies to access master accounts directly without the need to partner with another bank.

The Fed hoped that this proposed guideline would provide more information and clarity about how requests to access the Federal Reserve accounts will be assessed. However, some of the comments from state regulators to these guidelines and recent events affecting state Federal Reserve Banks may add pressure on the Federal Reserve Board to add more clarity.

One of the main complaints from two public institutions that responded to the Fed’s consultation, the Connecticut Department of Banking and the New York State Department of Financial Services, is that the guidelines treated differently state-regulated institutions vis-a-vis federally regulated institutions.

The three-tiered system is likely to be useful for federally-insured institutions, as this offers a “fast-track” mechanism to their requests — but for other institutions, it only adds more uncertainty about how long their requests to access the central bank’s payments system could take, and even if they may eventually be approved or denied. “The Supplemental proposal creates a system grounded in the assumption that state banking regulation and supervision is weaker than federal banking regulation and supervision,” said Shirin Emami, executive deputy superintendent for banking at New York Department of Financial Services.

The regulator concludes saying that “the proposal’s stated intent was to create a transparent and consistent review process, but it fails to provide any clarification as to the nature and scope of any due diligence or review that Reserve Banks will conduct with respect to each tier.”

These concerns, shared also by other respondents to the Fed’s consultation, were mentioned last week in two separate, but related events, involving the Federal Reserve Bank of Kansas City.

The first one is the lawsuit filed by Custodia Bank, a digital asset bank, against the Kansas City Federal Reserve and the Federal Reserve Board to force the institutions to issue a decision on the bank’s application to access a Master Account. The bank claims that after more than 19 months since the application, the banks haven’t issued a decision or provided any explanation. Custodia is seeking not only a decision on its application, but a proper explanation of the reasons to reach that decision. If the judge sides with Custodia, it could force the Federal Reserve Banks to provide information on how they interpret the guidelines.

Read more: Crypto Bank Custodia Sues Federal Reserve Over ‘Black-Box’ Master Account Decision

The second case is the opposite: rather than how Federal Reserve banks grant access to Master Accounts, it is about why they revoked one. U.S. Sen. Pat Toomey sent a letter to Kansas City Fed President Esther George asking her about the bank’s recent decision to revoke the master account for Reserve Trust, which was the first non-bank FinTech to receive a Fed master account.

According to Toomey, he was informed that “the Kansas City Fed recently revoked Reserve Trust’s master account after determining, among other things, that the company is no longer eligible for one.”

Read also: GOP Lawmaker Says Fed Revoked Master Account for FinTech Reserve Trust

The Federal Reserve Board sought to provide more guidelines to ensure that Reserve Banks “use a transparent and consistent set of factors when reviewing requests to access Federal Reserve accounts.” However, it is yet to be seen how the Federal Reserve banks apply these guidelines, and in the case of the Kansas City Fed, this may attract significant interest.