On March 1, 2022, the Board of Governors of the Federal Reserve System (“FRS”) re-proposed guidelines that the regional Federal Reserve Banks (“FRBs”) would use to evaluate requests for accounts and payment services (the “2022 Proposal”).1 This proposal is important because institutions with novel types of banking charters increasingly have requested access to FRB services (including FRB accounts) to support the introduction of new financial products and delivery mechanisms for traditional banking services.
The 2022 Proposal expands on FRS’s initial proposal from May 2021 (the “2021 Proposal”)2 by adding a new Section 2 that addresses the regulatory status of an applicant. It generally retains the content from the 2021 Proposal as a new “Section 1.”3 The comment period for the 2022 Proposal will run until April 22, 2022.
In this Legal Update, we describe the content of Section 2 of the 2022 Proposal. Please see our prior Legal Update for a description of the six principles that FRBs would use when deciding whether to grant or deny requests, which are restated as Section 1 of the 2022 Proposal.
Overview of the 2022 Proposal
Section 2 of the 2022 Proposal would establish a three-tiered review framework for the level of due diligence and scrutiny that FRBs would apply to applications submitted by different types of institutions. As discussed below, the three tiers correspond to the different types of institutions requesting access.
Tier 1 would consist of eligible institutions that are federally insured. FRS notes that these institutions are already subject to a “standard, strict, and comprehensive set” of federal banking regulations and can make detailed regulatory and financial information readily available to FRBs. Accordingly, applications by Tier 1 institutions generally would be subject to a less intensive and more streamlined review, although FRBs would retain the authority to deny an access request by any institution.
Tier 2 would consist of eligible institutions that are not federally insured but that are subject to federal prudential supervision at the institution and, if applicable, the holding company level. FRS notes that these institutions are subject to a “similar, but not identical, set” of regulations as federally insured institutions and detailed regulatory and financial information may be less available to FRBs. Accordingly, account access requests by Tier 2 institutions would generally receive an intermediate level of review.
Notably, the 2022 Proposal explicitly states that Tier 2 institutions must be subject to prudential supervision by a federal banking regulator by statute. In contrast, a holding company of a Tier 2 institution must be subject to FRS oversight by statute or by commitments. It is unclear how these limitations would apply to certain financial groups where the holding company is subject to federal oversight by a regulator other than FRS (e.g., parents of industrial loan companies under the FDIC’s Part 354) or where the applicant has agreed to prudential supervision by a federal banking regulator (e.g., agreement corporations under 12 U.S.C. § 603).
Tier 3 would consist of eligible institutions that are not federally insured and that are not subject to federal prudential supervision at the institution and holding company levels. FRS notes that these institutions may be subject to a supervisory or regulatory framework that is substantially different from, and less rigorous than, the supervisory and regulatory framework that applies to federally insured institutions and may not have detailed regulatory and financial information available. Accordingly, Tier 3 institutions generally would receive the strictest level of review.
The 2022 Proposal addresses commenters’ concerns that the risks presented by applicants with novel charter types warrant increased scrutiny by FRBs. While these concerns were not universally shared, FRS noted that it was proposing the tiered framework to provide additional clarity regarding the review process for different types of institutions. The proposal also is consistent with the report on stablecoins that was recently issued by the President’s Working Group on Financial Markets, which recommended that stablecoin issuers be federally insured depository institutions with consolidated supervision at the holding company level by the FRS to mitigate risks.4
FRS did not address commenters’ concerns that any distinction among categories of charters violates the non-discriminatory access and pricing policies for FRB services.5 While FRBs may have broad discretion to grant and deny applications for services, the establishment of a policy that explicitly differentiates based on charter type may result in challenges by Tier 2 and Tier 3 institutions.
Further, the 2022 Proposal does not provide clarity around whether FRBs would actually grant applications for Tier 2, let alone, Tier 3, institutions. As was noted by commenters on the 2021 Proposal, FRBs are not required to act on an application within a specified period and some applications apparently have been pending for as long as four years.6 This undefined review period is significant because it may preclude applicants from seeking judicial review of what are effectively denials.7
1 Press Release, Federal Reserve Board invites public comment on supplement to its May 2021 proposal (Mar. 1, 2022), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20220301a.htm; 87 Fed. Reg. 12,957 (Mar. 8, 2022).
2 Press Release, Federal Reserve Board invites public comment on proposed guidelines to evaluate requests for accounts and payment services at Federal Reserve Banks (May 5, 2021), https://www.federalreserve.gov/newsevents/pressreleases/bcreg20210505a.htm; 86 Fed. Reg. 25,865 (May 11, 2021).
3 The 2022 Proposal makes a minor correction to clarify that FRBs do not have the authority to establish the interest on reserve balances rate and separates the criteria that FRBs would use to assess an applicant’s anti-money laundering and sanctions compliance activities.
4 Please see our Legal Update on the stablecoin report: https://www.mayerbrown.com/en/perspectives-events/publications/2021/11/us-financial-regulators-release-muchanticipated-report-on-stablecoins.
7 See Jon Hill, NY Fed Beats “Narrow Bank” Master Account Suit, LAW360 (Mar. 25, 2020) (“Because the denial has not occurred, TNB has no qualifying imminent injury and thus this case must be dismissed on standing grounds.”).