Six leading bank associations are unsatisfied with the Federal Reserve’s latest proposed guidelines for granting master accounts to nontraditional banking institutions.
In a joint letter submitted to the Federal Reserve Board of Governors on Friday, the American Bankers Association, Bank Policy Institute, Consumer Bankers Association, Independent Community Bankers of America, Mid-Size Bank Coalition of America and The Clearing House called for more clarity about eligibility and oversight of such accounts.
“Answers to these questions remain paramount to achieve consistent outcomes at the Reserve Banks and equitable access for the institutions they serve,” the groups wrote.
The Fed has been revising its master account guidelines for more than a year. Last May, it floated a broad framework for granting access to the Federal Reserve system for both federally-insured institutions and non-federally-insured institutions.
Last month, after an initial comment period, the Fed updated its proposed structure by dividing applicants into three tiers: federally insured institutions that were subject to prudential oversight, noninsured entities that are subject to prudential oversight and organizations that are neither insured nor prudentially supervised. Tier 1 institutions would face the least scrutiny when applying for accounts while Tier 3 entities would face the most.
Yet, the banking groups say the Fed’s last proposed guidelines are not specific about what types of institutions are eligible for master accounts. They also say the latest proposal lacks specifics about how the review process will be executed or what sort of oversight groups will face once they have been granted accounts.
The groups also want the Federal Reserve Board to have the ultimate say whether an institution is granted a master account, or at least have the ability to block access. Otherwise, they argue, each of the 12 reserve banks will be able to set their own standards for granting accounts.
Currently, granting access to master accounts is at the discretion of regional reserve banks. The process of doing so has faced scrutiny in recent years as financial technology companies increasingly seek to access the Fed’s services.
This issue came to a head during Sarah Bloom Raskin’s confirmation hearing for the Fed’s vice chair for supervision. A former Fed governor and deputy Treasury secretary,
Raskin denied any impropriety in her actions while on the Reserve Trust board, but the implications helped tank her nomination,
The concern among advocates for banks supervised by prudential regulators, such as the Fed, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corp., is that unsupervised fintechs can secure an easier path to a master account simply by finding a reserve bank that is more amenable to them.
In their letter, the associations urged the Fed to spell out how such groups would be supervised if they should attain master accounts. The financial system might otherwise be exposed to a higher level of risk, they said.
“Given these high and unique stakes, it is critical that the standards governing access are clear, transparent and rigorous,” the letter stated.
Meanwhile, the Financial Technology Association, which represents fintechs, expressed support for the Fed's latest proposal. In a letter, the group praised the three-tiered approach to evaluating membership.
Still, the FTA advocated for a few tweaks of its own. It urged the Fed to periodically revisit its risk assessments to move institutions into less burdensome tiers as more information about them becomes available.
“It’s time to modernize Fed account access standards to reflect innovation in the marketplace and meet the needs of consumers,” FTA CEO Penny Lee said in a statement. “We urge the Federal Reserve to level the playing field so that consumers can benefit from lower costs and faster, responsible services.”
