On August 15, 2022, the Board of Governors of the Federal Reserve System (the "Federal Reserve") finalized guidelines that the regional Federal Reserve Banks ("Reserve Banks") will use to evaluate requests for accounts and payment services (the "Guidelines").1 The Guidelines are important because institutions with non-traditional types of banking charters (non-FDIC insured state banks and trust companies) increasingly have requested access to Reserve Bank services (including master accounts) to support the introduction of new financial products and delivery mechanisms for traditional banking services.
Consistent with the proposed versions, the final Guidelines establish six principles that Reserve Banks will use when deciding whether to grant or deny requests and a three-tiered review framework for the level of due diligence and scrutiny that Reserve Banks will apply to applications submitted by different types of institutions.
The Guidelines are immediately effective, and Reserve Banks already have indicated that they will use the Guidelines when reviewing access requests.2 In this Legal Update, we describe the key changes from the proposed versions of the Guidelines. (Please see our prior Legal Updates for detailed summaries of the March 2022 and May 2021 proposals.)
Changes from Proposed Versions
Roles and Responsibilities
The introduction to the original six principles has been revised to more clearly describe the relationship between the Federal Reserve and Reserve Banks. It now states that the Guidelines are issued under the Federal Reserve's general supervisory authority over the Reserve Banks under the Federal Reserve Act and that individual Reserve Banks make the case-by-case decisions on whether to open a master account or grant access to services. This clarification is likely related to recent litigation that focuses on the roles and responsibilities of the Federal Reserve and Reserve Banks.3
Similarly, several places in the Guidelines replace references to coordination and collaboration between the Federal Reserve and Reserve Banks with the term "consultation," which, again, may be designed to emphasize the limited formal involvement of the Federal Reserve in the decision-making process.
The Guidelines made non-substantive changes to the discussion of how an institution's eligibility for a master account and payment services affects the evaluation of a request. However, this discussion, and the associated principle, remain the key step zero for any discussion of access requests. This is because no level of risk management by an institution or exercise of discretion by a Reserve Bank can overcome ineligibility for services under the Federal Reserve Act.4 It therefore is somewhat disappointing that the preamble to the Guidelines states that the Federal Reserve considered clarifying and interpreting the meaning of legal eligibility but determined it was not necessary to do so at this time.
The Guidelines instruct Reserve Banks to use a broader analysis when determining if approval of a request may affect the Federal Reserve's ability to implement monetary policy. Instead of considering only if the applicant's access could affect the Federal Reserve's ability, the Guidelines instruct Reserve Banks to also consider if granting access to a group of institutions that are similar to the applicant could affect the implementation of monetary policy. This may reflect concerns from those such as Federal Reserve Chair Jerome Powell that the approval of any single request would set a precedent for other requests.5
Tiered Framework for Due Diligence
The Guidelines retain the three-tiered review framework for the level of due diligence and scrutiny that Reserve Banks will apply to applications submitted by different types of institutions but now emphasize that reviews will be conducted on a "case-by-case, risk-focused basis." This approach is somewhat inconsistent with the systemic considerations change discussed above, and this inconsistency is not explained.
The Guidelines clarify the definitions of Tier 2 and Tier 3 institutions. In particular, they redefine a Tier 3 institution as an eligible institution that is not a Tier 1 or Tier 2 institution. The other changes are subtle and reflect the Federal Reserve's intent to provide more comparable treatment between non-federally insured institutions chartered under state and federal law. For example, the revised wording is intended to make it clear that a non-federally insured institution chartered under federal law (e.g., national trust banks) will be considered in Tier 2 only if the institution has a holding company that is subject to Federal Reserve oversight.
The Guidelines contain a new footnote addressing Tier 2 institutions. It states that non-federally insured institutions that are chartered under state law would be subject to prudential supervision by statute if they become members of the Federal Reserve System. This change may provide an opportunity for some uninsured state banks and state trust companies to obtain eligibility for master account services by becoming a member bank of the Federal Reserve System. Whether this is possible depends on state law authorizing membership and the willingness of the Federal Reserve and Reserve Banks to grant membership. However, such institutions would then become subject to some of the more burdensome federal banking regulations, such as restrictions on affiliate transactions and regulatory capital requirements.
The Guidelines also explicitly state that Edge Act and agreement corporations and US branches and agencies of foreign banks generally would be Tier 2 institutions.
The preamble to the Guidelines discusses the confidentiality of requests and states that the identity of institutions that maintain accounts at Reserve Banks, or that request access to accounts and services, is considered confidential business information, and, therefore, public disclosure of account status by a Reserve Bank would not be appropriate. However, an institution may choose to self-publicize their account and service requests and status.
The finalization of the Guidelines removes one impediment that eligible institutions with non-traditional types of charters faced when seeking to obtain master accounts and services from Reserve Banks. However, it does not provide a clear path to account access because applicants still must contend with an application process that provides substantial discretion to the Reserve Banks.
Additionally, the Guidelines do not prescribe a timeframe or any deadline for Reserve Banks to act on access requests. Federal Reserve Governor Michelle Bowman recently stated: "More work remains to be completed before a process is established to fully implement the guidelines [and] there is a risk that this publication could set the expectation that reviews will now be completed on an accelerated timeline."6 This statement should temper expectations that Reserve Banks will act quickly on master account requests, and, consistent with that view, the Federal Reserve recently asserted in litigation that a processing time of "years" does not amount to an unreasonable delay.7
The Guidelines also do not resolve the ongoing debate around legal eligibility for master account access. While they implicitly recognize the idea that an uninsured institution could gain access by becoming a member of the Federal Reserve System, they do not address the issue of whether an uninsured state bank or state trust company may gain access by being a bank that is eligible to make an application to become an insured bank under the Federal Deposit Insurance Act. This point and other aspects of the definition of eligible institution remain opaque to many stakeholders and could benefit from further clarification.
1. Press Release, Federal Reserve Board announces final guidelines that establish a transparent, risk-based, and consistent set of factors for Reserve Banks to use in reviewing requests to access Federal Reserve accounts and payment services (Aug. 15, 2022), https://www.federalreserve.gov/newsevents/pressreleases/other20220815a.htm; 87 Fed. Reg. 51,099 (Aug. 19, 2022).
2. Jon Hill, Fed Says Crypto Bank Can't Sue Its Way To Account Decision, Law360 (Aug. 17, 2022) (statement by the Federal Reserve Bank of Kansas City).
3. See Jon Hill, Crypto Bank Sues Fed Over 'Kafkaesque' Account Delay, Law360 (June 7, 2022) (complaint by Custodia Bank).
4. Eligible institutions include member banks, depository institutions, US branches and agencies of foreign banks, Edge Act and agreement corporations, designated financial market utilities, and certain other entities that are authorized to have a master account (e.g., US Department of the Treasury). See Federal Reserve Banks, Op. Cir. 1 at 5 (Aug. 16, 2021).
5. Jeff John Roberts, Fed Chair Defends Blocking Wyoming Crypto Banks, Including Kraken, Decrypt (Jan. 11, 2022) ("If we start granting these, there will be a couple hundred of them soon").
6. Statement by Governor Bowman (Aug. 15, 2022), https://www.federalreserve.gov/newsevents/pressreleases/bowman-statement-20220815.htm.
7. Jon Hill, Fed Says Crypto Bank Can't Sue Its Way To Account Decision, Law360 (Aug. 17, 2022) (Federal Reserve quoting from caselaw holding that "delays between three to five years are often not unreasonable").
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