WASHINGTON — The Federal Reserve proposed new guidelines for the system's regional banks when considering giving access to fintech firms that have obtained a banking charter.
The U.S. central bank's guidance released Wednesday could have huge ramifications for whether companies with narrow-purpose charters — often lacking Federal Deposit Insurance Corp. approval — can gain entry to the vaunted Fed system.
The Fed's new policy to some extent would leave the decision up to the 12 regional offices spread throughout the country. The Federal Reserve Banks don’t provide bank accounts and services to individuals, but rather to banks and government entities, and in certain limited cases, de novo institutions.
The guidance lays out six proposed principles for the Reserve Banks to consider when a fintech firm requests access. Those include that an applicant must be legally eligible under the Federal Reserve Act or another applicable federal statute. The Federal Reserve Act generally grants eligibility to depository institutions as defined by the law.
To be granted access, an applicant also would not present "undue" risk across the financial system, and "should not adversely affect the Federal Reserve’s ability to implement monetary policy."
While the guidelines suggest that the Fed would limit access to firms that meet traditional legal criteria under the Federal Reserve Act, the agency appears open to allowing entry for certain nontraditional charter types.
The Office of the Comptroller of the Currency has recently approved non-FDIC-insured trust charters for cryptocurrency firms, and designed a special-purpose fintech charter that is mired in legal dispute. A key unresolved question is whether firms lacking FDIC backing will be granted access to the Fed's payments system.
“The Reserve Banks are receiving an increasing number of inquiries and access requests from institutions with such non-traditional charter types, which raise important interpretive and policy issues for the Federal Reserve regarding whether these non-traditional charters would become Federal Reserve members or should have access to Federal Reserve accounts and services,” the Fed said in its guidance.
In a statement, Federal Reserve Gov. Lael Brainard said a key objective for the central bank is to ensure that requests for Fed services are weighed using a consistent set of standards.
“With technology driving rapid change in the payments landscape, the proposed Account Access Guidelines would ensure requests for access to the Federal Reserve payments system from novel institutions are evaluated in a consistent and transparent manner that promotes a safe, efficient, inclusive, and innovative payment system,” Brainard said.
One of the criteria proposed by the Fed would be that institutions applying for access should have "an effective risk management framework and governance arrangements to ensure that the institution operates in a safe and sound manner."
An applicant's risk management framework "should be subject to oversight by a board of directors (or similar body) as well as oversight by state and/or federal banking supervisor(s)."
The proposed set of guidelines include evaluating whether a firm would “present or create undue credit, operational, settlement, cyber or other risks” to both the Reserve banks and the payments system as a whole, and if it has an effective risk management framework and adequate capital and liquidity.
Companies would also have to demonstrate that they do not facilitate money laundering, terrorist financing, fraud or other illegal activities.
Over the past year, the OCC has accelerated its efforts to make its national charter more appealing for fintech firms that may not want to be regulated as full-service banks. A key component of that appeal has been the potential for firms to avoid the requirement of deposit insurance.
Digital asset firms such as Anchorage and Paxos have received OCC approval for national trust charters in recent months, which do not require firms to apply for deposit insurance.
According to the Fed's proposed guidance, a lack of deposit insurance may be cause for scrutiny. While the Fed wrote that approving federally insured institutions for access "will be fairly straightforward in most cases," it cautioned that "Reserve Bank assessments of access requests from non-federally insured institutions may require more extensive due diligence."
"If the institution is not subject to capital requirements similar to a federally-insured institution, the potential for sudden and significant deposit inflows into that institution is particularly large, which could disintermediate other parts of the financial system, greatly amplifying stress," the Fed wrote in its proposed guidance.
The Fed is asking for public feedback on whether the proposed guidelines cover all potential risks and if they “support responsible financial innovation.” Comments will be accepted for 60 days after the proposal is published in the Federal Register.
