Banks, fintechs both want more transparency for Fed master accounts

Banks and nonbanks alike want to know more about who can get an account with the Federal Reserve and how.

Calls for greater transparency follow the Fed’s establishment of a three-tiered evaluation process for master account applications. They also come as pending legislation and a lawsuit threaten its autonomy on the matter.

The Fed is already considering further changes to its master account management practices. Earlier this month it asked the public to weigh in on a proposed requirement of regional banks to make quarterly disclosures about the master account holders and applicants in their districts. But some are pushing for the central bank to go further.

Paige Pidano Paridon, senior vice president and senior associate general counsel at the Bank Policy Institute, said the industry group would like the Fed to the application process for master accounts — which provide a single point of access for the central bank’s various financial services — after the banking holding company application process. This would entail a published notice of intent and a public comment period. 

The Federal Reserve has started the process of making its master account application and service rolls public, but both banks and fintechs say the central bank should push master account transparency even further.

Bloomberg News

“Given the potential risks posed and the universal interest to maintain a safe and reliable payments system, it’s important that [the public] have a chance to weigh applications,” Pidano Paridon, said. “We also think that for purposes of ensuring the public, as well as those that already have access, that appropriate requirements and restrictions should be imposed … and made public.”

More disclosure about why master accounts are granted or denied could also benefit new entrants with novel business models, according to one regulatory attorney who requested anonymity because they consult both traditional banks and financial technology firms on master account practices. Further transparency is necessary, they said, given the lack of detail in the Fed’s new evaluation guidelines.

“The criteria are just so mushy that you’re not quite sure what you have to demonstrate,” the attorney said. “Over time, mushy criteria can be OK once there’s a track record of people actually applying and getting approved. But, right now, there’s no such track record for non-banks — and to the extent banks are involved, there’s simply nothing out there about criteria used to grant or deny.”

In August, the Fed finalized guidelines for assessing master account applicants on a three-tiered basis. Federally insured banks enjoy the most streamlined process, those that are federally supervised but not federally insured face a slightly more rigorous approval process, and non-supervised, non-insured banks are the most scrutinized.

Groups at all three levels are examined for eligibility under the Federal Reserve Act as well as five categories of risks: those pertaining to the reserve banks, the payment system, U.S. financial stability and the implementation of monetary policy.

Despite their lack of specificity, the guidelines have been well received both by traditional banks and new entrants with novel business models.

Joseph Silvia, a Chicago-based regulatory lawyer with the law firm Dickinson Wright, said the guidelines give nontraditional banks and fintechs a better sense of what information they will need to provide the Fed up front when they apply for a master account. This makes for a more streamlined process than the old model, in which institutions applied then waited for the Fed to request more information.

Not only does this leave an opening for groups that are not federally insured or supervised to gain access to the Fed’s payment system, provided they meet the same criteria as their regulated peers, Silvia said, but it also gives a frame of reference for groups that how to apply for an account in the future.

“It’s a starting point for institutions, especially institutions in the Tier 3 category, to work towards in the event that they start seeing some of their peers applying and receiving master counts,” he said. “It gives them some guidelines as to where they think their strategy might fit in.”

Clifford Stanford, an Atlanta-based regulatory lawyer with the law firm Alston & Bird, said the framework, in tandem with the greater transparency initiatives proposed this month, gives nontraditional applicants clear guidance on how to position themselves for master accounts. 

“The new master account framework and the Fed’s recent proposed publication of a list of banks with master accounts provides some insight into how the Fed will view “novel” charter types, and thus investors and organizers want to do what they can to take as much “novelty” off the table as they can,” Stanford, a former enforcement and applications attorney with the Federal Reserve Bank of Atlanta, said.

Pidano Paridon said she’s encouraged to see the Fed stand by the guidelines in the face of recent legal challenges. The central bank is currently fending off a lawsuit from Custodia Bank, a Wyoming-chartered digital asset bank that is suing the Fed over its application for a master account.

The Fed has cited its newly finalized three-tiered system in court filings as evidence of its measured approach to evaluating master account applications. While the dispute is poised to head to trial, Pidano Paridon said the fact that the Fed has argued the case to this point shows it is standing by its principles.

“There seems to be indications that the Fed is really concerned about the risk in these entities and doesn’t seem to be backing down,” Pidano Paridon said. “It’s within the guidelines and they’re staying true to that, which is to say that significant scrutiny needs to be applied to these entities.

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