US Federal Reserve Prepares Master Account Register

January 23, 2023
The US Federal Reserve is building a public database of payment system participants as the transparency of granting valuable access to the central infrastructure is becoming a more pressing issue.

The US Federal Reserve is building a public database of payment system participants as the transparency of granting valuable access to the central infrastructure is becoming a more pressing issue.

As one of its last actions before closing off for the Christmas holiday, Congress passed its annual defence budget bill, which included a significant piece of legislation regarding the Federal Reserve’s master accounts.

The master account bill, originally proposed by now-retired Senator Pat Toomey, a senior Republican from Pennsylvania, requires the Fed to set up a database of those entities that have access or sought to have access to the central payment system.

The database must be “public, online, and searchable” and contain the name of existing participants and the date of the approval of their application.

It should also include information on pending applications, including name, date of submitting the application and, later, whether it was approved, rejected or withdrawn.

Although many markets, including the UK and the eurozone countries, already publish a list of payment system participants, this has not been the case in the US.

Last year, the Fed’s exercise for granting and revoking master accounts came under fire several times from businesses and lawmakers alike.

Last February, Toomey uncovered a disputable case whereby the Kansas Fed first denied the master account application of a non-bank fintech called Reserve Trust, but then granted the application after former Fed governor Sarah Bloom Raskin joined the fintech’s board of directors.

Reserve Trust is the first and, as Toomey said, “appears to be” the only non-bank fintech company with a Fed master account despite several others having applied for one.

However, as long as Toomey was in Congress, the legislator did not get a reply from the Kansas Fed or the Fed board regarding the details of the Reserve Trust application process.

It should be noted that only banks can get a master account with the Fed. For payment firms, a major motivation for seeking a bank charter is to get direct access to the wholesale payment systems and related Fed payment services, which brings a number of benefits for payment firms.

For example, Brigit Carroll, Wise’s policy and campaigns manager for North America, recently told VIXIO that when her company joined the UK’s Faster Payments as a direct participant, it cut 20 percent of its cost and reduced transfer time from 15 minutes to two seconds.

To do this, Wise also became the first non-bank to gain a settlement account with the Bank of England.

Meanwhile, crypto bank Custodia, a Wyoming state-chartered bank, applied for a Fed master more than two years ago and has been waiting for a decision since then.

“Events and information gleaned over the last year have raised significant policy questions about the Fed’s approach to awarding master accounts,” Toomey said.

“Access to the Fed’s payment system is a highly valuable public good and Congress has a responsibility to taxpayers to ensure regulators give out public goods in a fair and consistent manner,” the senator stressed when his bill got successfully attached to the defence bill.

Fed response

Understanding the pressure and the need for increased transparency, the Fed had also taken several steps to address these concerns.

In August 2022, the Fed adopted guidelines that set clear and uniform rules on how reserve banks should evaluate applications by new types of banks, such as Wyoming-chartered crypto banks.

According to the Fed, the guidelines are aimed at increasing the consistency and transparency in the reserve banks’ process for assessing master account requests.

Additionally, in November, ahead of the passage of Toomey’s bill, the Fed proposed to publish a quarterly list of payment system participants. The bank emphasised that such a list would provide “a transparent and accessible” source of information for the public.

The draft rule was similar to Toomey’s bill but it did not go as far as to publish information on ongoing and rejected applications nor on the dates of the applications. The comment period for the Fed proposal closed last week (January 17).

In response to the consultation, the American Bankers Association (ABA) said it supports the Fed’s proposal but suggested it go even further than what is required by law.

Specifically, the banks’ lobby group recommended the Fed list the city and state where the participant is located and its charter type.

Additionally, although the association agrees that a quarterly update is sufficient for the general list, it asks the Fed to publish new ongoing requests “as soon as possible before the agency’s evaluation process is complete”.

The Fed has now six months to set up the database as required by the recently passed law.

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