7 minute read | August.22.2022
The Federal Reserve Board recently issued final guidelines for the Reserve Banks to use in reviewing requests from a range of financial services providers for access to Federal Reserve master accounts and payment services. Master account and Federal Reserve services allow institutions to transfer money to other master accountholders directly and hold funds in the Federal Reserve System, while others must go through third parties — which can add cost, delay, and further complication to transactions.
The final guidelines are substantially similar to those proposed in 2021 and a supplement issued earlier this year. They make the application process more transparent by describing the risk factors that a Reserve Bank should take into consideration and by applying a three-tier approach regarding the intensity of a Reserve Bank’s review. However, the guidelines do not broaden the categories of entities that are eligible to apply in the first place, do not establish application processing timelines, and do not provide a clear path forward for entities that lack federal bank supervision, including novel charter types.
Under Principle 1 of the final guidelines, the Reserve Banks will only consider applications by institutions that are legally eligible for access to Reserve Bank accounts and services. Legal eligibility, therefore, remains the key gating issue.
An entity is a legally eligible institution if it is a member bank of the Federal Reserve System or meets the definition of “depository institution” under section 19(b) of the Federal Reserve Act, unless it is otherwise specifically eligible by federal statute.
Section 19(b) of the Federal Reserve Act incorporates key definitions from the Federal Deposit Insurance Act that cover traditional FDIC-insured depository institutions, such as banks and savings associations. It also provides for insured credit unions and members of the Federal Home Loan Bank System. Significantly, depository institutions that are eligible to make an application to become an insured depository institution, but choose not to do so, may apply, but the Federal Reserve and the Reserve Banks maintain that they have the discretion, based on their risk assessment, whether to grant an account and services to such an applicant. Just because an institution is eligible does not mean that the Federal Reserve will grant it access. For instance, a Wyoming-chartered special-purpose institution has been in both application negotiations and litigation with the Federal Reserve over this very issue — and it remains unresolved.
Examples of eligible institutions are grouped below by review tier.
Eligible institutions can expect to undergo one of three levels of review under the final guidelines. All reviews will be on a case-by-case basis.
|These institutions are already subject to comprehensive federal banking regulation; detailed regulatory and financial information is generally readily available.
Not federally insured but are eligible institutions subject by statute to varying degrees of prudential supervision — and if applicable, their holding companies are subject to Federal Reserve oversight
|These institutions are subject to some degree of federal banking supervision. The Reserve Banks have access to significant supervisory information and some level of regulatory authority over these institutions. They may still present greater risks than Tier 1 institutions.
Not federally insured and not considered in Tier 2
|These institutions may be subject to a regulatory framework that is substantially different than the regulatory framework that applies to federally insured institutions; detailed regulatory and financial information may not exist or may be unavailable.
Many financial services companies appear to be ineligible, pending further determination or interpretation:
Special-purpose state-chartered institutions, such as those chartered in Wyoming, are not Tier 2 institutions because (1) they are not state-chartered institutions subject to Federal Reserve oversight (i.e., members of the Federal Reserve System, like some state-chartered trust companies), (2) they do not have holding companies that are subject to Federal Reserve oversight and (3) the question of their eligibility under section 19(b) of the Federal Reserve Act remains unresolved (discussed above). However, if the Federal Reserve Board were to approve membership in the Federal Reserve System for such an institution, it would be subject to Tier 2 review because it would be supervised by the Federal Reserve Board. Short of that, if a court or other authority with appropriate jurisdiction were to determine that they are in fact “depository institutions” for purposes of eligibility, they would be subject to Tier 3 review. Although the final guidelines do not provide a clear path forward for these institutions, they do not appear to absolutely bar them either.
The Reserve Banks are expected to apply the following six principles. The first concerns legal eligibility, the other five concern risks both narrow and broad, encompassing both microprudential and macroprudential considerations.
Provision of a master account and Federal Reserve services to an institution should not present or create certain risks to the:
Eligible institutions that seek master accounts and Federal Reserve services should expect a robust risk-based review that looks at the institution’s compliance with applicable laws and regulations — including banking, consumer financial protection, and financial crimes laws and regulations. In addition, applicants should expect a thorough review of their own risk-management practices (e.g., credit, liquidity), the volume and complexity of their operations, and the extent to which they engage in novel activities.