The Federal Reserve’s Proposed Guidelines on Requests for Accounts and Payment Services at Federal Reserve Banks: Eight Things To Know

The Federal Reserve’s Proposed Guidelines on Requests for Accounts and Payment Services at Federal Reserve Banks: Eight Things To Know

May 6, 2021, Covington Alert

On Wednesday, May 5, 2021, the Board of Governors of the Federal Reserve System (“Federal Reserve” or “Board”) issued a notice requesting public comment on proposed guidelines articulating a series of principles to be used by Federal Reserve Banks (“Reserve Banks”) in evaluating requests for Reserve Bank master accounts and payment services (the “Proposed Guidelines”). The Federal Reserve intends for the Proposed Guidelines to promote key policy goals with respect to the banking system, financial stability, monetary policy, consumer protection, and the payment system. Comments on the Proposed Guidelines are due 60 days after publication in the Federal Register.

The Proposed Guidelines are intended to create a transparent and consistent framework for Reserve Banks to evaluate requests for accounts and services in the face of rapid technological innovations in financial services and the emergence of novel bank charter types.

The Proposed Guidelines state that the Reserve Banks have received an increasing number of requests for access to accounts and payment services from institutions with non-traditional federal and state charter types (e.g., non-federally insured institutions), including fintech companies and cryptocurrency companies. The Proposed Guidelines note that establishing a transparent and consistent framework for all Reserve Banks to use in evaluating applications from both traditional and non-traditional charter types would benefit the financial system by, among other things, limiting forum shopping across Reserve Banks and establishing consistent policies for institutions with similar business models and risk profiles.

The Proposed Guidelines would sidestep the question of what types of financial institutions are eligible for Reserve Bank accounts and services.

Although the Proposed Guidelines would require each applicant to be eligible under the Federal Reserve Act or other federal statute to maintain a Reserve Bank account, the Proposed Guidelines would not provide any explanation or discussion of what types of firms are legally eligible under those statutes. However, the Proposed Guidelines note that the Federal Reserve is considering whether it may be useful to provide further clarity on eligibility under the Federal Reserve Act in the future.

The Proposed Guidelines would reaffirm the Federal Reserve’s existing position that legal eligibility for Reserve Bank accounts and services does not by itself grant a financial institution the right to obtain an account with its Reserve Bank.

Under the Proposed Guidelines, Reserve Banks would maintain discretion to approve or deny access requests from institutions as they see fit.

On their face, the Proposed Guidelines would grant Reserve Banks significant discretion to evaluate and act on applications for Reserve Bank accounts and services, with only limited Board involvement.

Under the Proposed Guidelines, each Reserve Bank would retain discretion to evaluate applications on a case-by-case basis. Although consultation with other Reserve Banks and the Board would be required in a Reserve Bank’s evaluation of two of the six principles articulated in the Proposed Guidelines (i.e., the financial stability and monetary policy principles), the Proposed Guidelines otherwise would not describe any specific Board role or responsibilities in evaluating and/or granting applications.

The Proposed Guidelines articulate six principles, which center on financial stability, monetary policy, and risk management and mitigation, that would guide Reserve Bank evaluation of applications.

In addition to legal eligibility, all Reserve Banks would be required to evaluate the following five principles for each applicant:

1. The provision of an account and services to the institution should not present or create undue credit, operational, settlement, cyber, or other risks to the Reserve Bank;
2. The provision of an account and services to the institution should not adversely affect the Federal Reserve’s ability to implement monetary policy. The provision of an account and services to the institution should not present or create undue credit, liquidity, operational, settlement, cyber, or other risks to the overall payment system;
3. The provision of an account and services to the institution should not create undue risk to the stability of the U.S. financial system;
4. The provision of an account and services to the 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; and
5. The provision of an account and services to the institution should not adversely affect the Federal Reserve’s ability to implement monetary policy.

The Proposed Guidelines would outline a range of more specific factors that Reserve Banks should take into account when evaluating each principle. These factors would relate, for example, to the applicant’s risk management program, compliance with regulatory and supervisory requirements, financial condition, and ability to meet its obligations to the Reserve Bank.

The Proposed Guidelines would not provide any information about the process or methodologies that Reserve Banks would be required to employ when applying the Proposed Guidelines’ six principles, nor what degree of independent diligence and/or examination the Reserve Banks may undertake in verifying whether certain criteria are met.

Because the six principles themselves are expressed at a relatively high level and susceptible to a variety of interpretations in practical application, the Proposed Guidelines would leave open a range of key questions regarding how they are likely to be applied to applicants in practice and thus create uncertainly for the industry and non-traditional charter types in particular. ^[1] These questions likely will need to be identified and resolved through the comment process.
  

The Proposed Guidelines generally would not subject applications by federally-insured institutions to extensive due diligence.

The Federal Reserve anticipates that most applications by federally-insured institutions will be straightforward, because many of the factors listed above are commonly used in the regulation and supervision of these institutions.

The Proposed Guidelines may result in enhanced scrutiny of applicants with non-traditional charters.

Although the Proposed Guidelines may create opportunities for non-traditional charter types to access Reserve Bank accounts and services, these applicants may undergo more extensive due diligence by the Reserve Banks. The Proposed Guidelines would state that such diligence may be appropriate, because these institutions are not subject to the same regulation and supervision regimes as federally-insured institutions. Additionally, when evaluating the financial stability and monetary policy principles noted above, the Proposed Guidelines would require a Reserve Bank to consider not only the risks created by the applicant itself, but also the risks created by a group of like institutions. The Reserve Bank thus would be able to deny an institution’s application because of the collective risks posed by its peer institutions, even if the institution itself poses an acceptable level of risk.

If you have any questions concerning the material discussed in this client alert, please contact the members of our Financial Services practice.

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[1] For example, the Proposed Guidelines would instruct the Reserve Banks to incorporate the assessments of an applicant by its state and federal supervisors “to the extent possible.” In certain respects, the Proposed Guidelines also would call for a Reserve Bank to “confirm” that an institution has acceptable risk management and governance systems in place. The Proposed Guidelines would not directly address the appropriate balance between a Reserve Bank’s reliance on information from other supervisors and its direct confirmation of facts key to its evaluation of an applicant’s request.