In the last several years, fintech firms and other novel financial firms have expressed interest in obtaining master accounts and services with the Federal Reserve. After several proposals and rounds of comments from interested parties, the Federal Reserve Board in mid-August finalized guidelines for evaluating nontraditional financial institutions’ requests to be granted master accounts and access to the Fed’s payment services.
Under the guidelines (PDF), the decision to grant a master account still rests with the Federal Reserve System’s 12 regional Reserve banks. The Board’s intent for the guidelines is to establish a “consistent, comprehensive, and transparent framework for Reserve Banks to analyze access requests on a case-by-case, risk-focused basis reflecting the institution’s full risk profile (including its business model, size, complexity, and regulatory framework) and to mitigate, to the extent possible, the risks identified.” The Board also notes that legal eligibility to obtain an account is not enough to secure one, and that individual Reserve banks retain discretion in granting them.
The framework is based on six risk-based principles, and applicants are divided into three tiers of review based on federal deposit insurance status and supervision by a federal banking regulator.
Master Account Guidelines Consist of Six Principles
The account access guidelines are grounded in six principles ranging from narrow to broad, and state the following:
- Eligibility—Firms must be permitted under the Federal Reserve Act or another federal statute to open an account at a Reserve bank. The guidelines note that a requesting firm “should have a well-founded, clear, transparent and enforceable legal basis for its operations.” The firm’s services should not impede compliance with Bank Secrecy Act and anti-money laundering requirements or regulations, or compliance with consumer laws and regulations.
- Risks to Reserve banks—An account and services if provided to the firm “should not present or create undue credit, operational, settlement, cyber or other risks” to the granting Reserve bank.
- Risks to the payment system—Firms requesting access also “should not present or create undue credit, liquidity, operational, settlement, cyber or other risks to the overall payment system.”
- Risks to U.S. financial stability—The provision of an account and services “should not create undue risk to the stability of the U.S. financial system.”
- Risks to overall economy—Such access also “should not create undue risk to the overall economy by facilitating activities such as money laundering, terrorism financing, fraud, cybercrimes, economic or trade sanctions violations or other illicit activities.”
- Risks to implementing monetary policy—Finally, the provision of an account and services “should not adversely affect the Federal Reserve’s ability to implement monetary policy.”
Access Requests Are Reviewed by Institution Tiers
Tier 1 consists of federally insured eligible institutions, such as chartered banks insured by the Federal Deposit Insurance Corp. These institutions will receive a more streamlined review because they are already subject to a “standard, strict, and comprehensive set of federal banking regulations.” The Board also notes that detailed regulatory and financial information is usually readily available, often publicly. Activities that appear to be higher risk will receive extra attention from Fed evaluators.
Tier 2 encompasses eligible firms that are not federally insured but are subject to prudential (safety and soundness) supervision by a federal banking agency. Many, if not most, of these institutions will have a holding company subject to Federal Reserve oversight.1 Master account applications for firms in this tier would generally be subject to an “intermediate level of review” because they are governed by regulations that, though similar, are not identical to those applicable to federally insured institutions. Applications from U.S. branches and agencies of foreign banks, for example, would garner Tier 2 review.
Tier 3 institutions face the strictest level of review. This group includes eligible institutions that are notfederally insured and are not subject to federal prudential supervision at the institution or holding company level. They are bound by a regulatory framework that differs substantially from that of federally insured institutions. In addition, detailed regulatory and financial information may not exist or be available for these firms.
Next Steps for Implementation
The goal of these guidelines is to create a transparent and equitable framework for Reserve banks to apply to all master account access requests, balancing responsible innovation with prudent risk management. Reserve banks are working together and with the Board to develop a plan to implement these guidelines so that there is consistency across the System.
- Under the guidelines, a non-federally insured institution with a federal charter will only qualify for Tier 2 status if it has a holding company subject to Federal Reserve oversight. A non-federally insured state-chartered institution must be subject to prudential supervision by a federal banking agency, and its holding company (if it exists) must be subject to Federal Reserve oversight to qualify for Tier 2 status.