Federal Reserve Board of Governors proposes guidelines allowing special purpose bank charters access to payment services at the Federal Reserve banks

On May 5, 2021, the Federal Reserve Board released proposed guidelines for evaluating requests for accounts and payment services at Federal Reserve Banks (the Account Access Guidelines). The release is designed to provide a consistent and transparent mechanism for review and consideration of access to payment services by "emerging technologies, including from institutions with novel types of banking charters designed to support such innovation."

Given the increase in special purpose state and federal charter applications being considered and approved across the country, Reserve Banks are receiving an increasing number of inquiries and access requests from such applicants and institutions. The Board noted that such requests may have, "ramifications for the broader financial system." The Account Access Guidelines summarize the Federal Reserve System’s legal authority and reflect an analysis of its policy goals of (i) ensuring the safety and soundness of the banking system; (ii) effectively implementing monetary policy; (iii) promoting financial stability; (iv) protecting consumers; and (v) promoting a safe, efficient, inclusive, and innovative payment system.

The approach set forth in the Account Access Guidelines is intended to recognize that account and services access decisions made by individual Reserve Banks could have implications for broader Federal Reserve policies and objectives. Further, an institution's charter and level of supervision and regulation could impact risks posed to the Federal Reserve, the payments system, and the financial system more broadly.

The framework of the Account Access Guidelines directs Reserve Banks to assess potential risks and identify risk mitigants on both the institution side (including capital, risk frameworks, state and federal supervision, etc.) and the Reserve Bank side (including account agreement provisions, restriction on financial services accessed, account risk controls, denial of account requests, etc.). The concepts outlined in the Account Access Guidelines are based on risk management and mitigation, systematically evaluating each major type of risk to promote a level playing field in which legally eligible institutions with similar risk profiles will be treated in similar ways across Reserve Banks. Requests for access from non-federally insured institutions would likely prove more comprehensive and require more extensive due diligence by the Reserve Bank.

Typical Reserve Bank risk management practices include monitoring the condition of institutions with accounts and services on an ongoing basis using supervisory ratings, capitalization data, and supplementary information, which are used to determine whether risk controls or other restrictions should be placed on an institution’s account. If adopted, the Federal Reserve Board indicated that the Account Access Guidelines would likely be used to re-evaluate the risks posed by an institution in cases where there are material changes to an institution’s risk profile, including presumably changes in an institution’s charter and regulatory profile.

In the Account Access Guidelines, the Board proposes six principles for Reserve Banks to assess, and explicitly notes, however, that the Reserve Bank maintain "discretionary authority to grant or deny requests." Through increased consistency and transparency, the Board seeks to prevent a potential requesting party from designating its headquarters location in an effort to seek review from a more accommodating Reserve Bank – a practice referred to as "forum shopping." However, that concern is balanced with an interest in maintaining discretion for each Reserve Bank so that an individual Reserve Bank’s decision does not create precedential policy for the Federal Reserve System as a whole. Each of the six principles is discussed briefly below:

1. Eligibility. Requesting institutions must be eligible under the Federal Reserve Act or other federal statute to maintain an account at a Federal Reserve Bank. This principle would generally exclude (i) institutions that are not member banks (and we note that the National Bank Act requires all national banks to be Federal Reserve members); or (ii) institutions that are not depository institutions under Section 19(b) of the Federal Reserve Act. The Account Access Guidelines, however, appear to create ambiguity in what would otherwise be an objective principle by saying that the requesting institution "should have a well-founded, clear, transparent, and enforceable legal basis for its operations." This eligibility principle then advises Reserve Banks to "assess the consistency of the institution’s activities and services with applicable laws and regulations," presumably opening the door for a Reserve Bank determination that activities authorized by a chartering regulator are inconsistent with applicable laws and regulations. Further, an otherwise eligible requesting institution may fail the eligibility principle if the design of its services impedes compliance by customers with sanctions laws, the anti-money laundering requirements, or consumer protection laws and regulations, again opening the door for a Reserve Bank to second-guess an assessment previously made by the chartering regulator.
2. Credit, operational, settlement, cyber or other risks assessments. A Reserve Bank should consider a risk assessment undertaken by the requesting institution’s state and federal regulators, along with its own independent assessment of these identified risks. The independent assessment (supported by internal testing and audit review) should consider policies, procedures, staffing, and controls designed to address particular risks posed by business lines, products, and services. Board of director governance and substantial compliance with supervisory and regulatory requirements are also considerations for the Reserve Bank’s risk assessment. Successful requesting institutions must demonstrate "an operational risk framework designed to ensure operational resiliency" and sound financial condition, including adequate capital, sufficient liquidity, and an ability to continue operations and meet Reserve Bank agreement terms even during periods of idiosyncratic or market stress.
3. Risks to payment system. In reviewing a request for an account or access to payment services, the Reserve Bank should also consider whether approval of the request would "present or create undue credit, liquidity, operational, settlement, cyber or other risks to the overall payment system." This requires requesting institutions to have effective risk management framework and governance arrangements to limit the impact that idiosyncratic stress, disruptions, outages, cyber incidents, or other incidents at the requesting institution might have on other participants and the payment system broadly.
4. Risks to the stability of the US financial system. Provision of a Federal Reserve account and payment services to a requesting institution should not, in the Reserve Bank’s judgement, create undue risk to the stability of the US financial system. This assessment may involve consultation across Reserve Banks to confirm whether access for the specific requesting institution or for a group of "like institutions" could introduce financial stability risk. In this regard, Reserve Banks should consider "the extent to which, especially in times of financial or economic stress, liquidity or other strains at the [requesting] institution may be transmitted to other segments of the financial system" or affect deposit balances.
5. Risks to the overall economy. "Provision of an account and services to [a requesting] 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." Particular focus on sanctions, money laundering, and terrorist financing risk posed by the introduction of new participants in the payment system should be of particular interest to a Reserve Bank as it reviews proposals for access to payment services.
6. Impact on the Federal Reserve’s ability to implement monetary policy. Provision of an account and payment services to a requesting institution should not adversely affect the Federal Reserve’s ability to implement monetary policy. As with the fourth principle above, this assessment may involve consultation across Reserve Banks to confirm whether access for the specific requesting party or for a group of "like institutions" could impact the Board’s implementation of monetary policy, including impacts on the level and variability on demand for and supply of reserves, volatility in interest rates, short-term funding market structures, and the relative size of the Reserve Banks’ balance sheets.

While the concepts outlined in the Account Access Guidelines remain, in some regards, conceptual and high-level, it is encouraging to note that the Federal Reserve Board is actively positioning itself to allow increased access for non-traditional banking institutions. One may expect that "early movers" in the space, once the Board’s position is more firmly adopted, may be able to enjoy a competitive advantage as compared to others who do not take advantage of direct access to the products and services, payment or otherwise, offered by the Federal Reserve System.

The Federal Reserve Board invites public comment on the Account Access Guidelines which will be accepted for 60 days after publication in the Federal Register.