Letters to Regulators: Comments to the Federal Reserve on Firms’ Eligibility to Gain Access to Privileged Fed Reserve Accounts and Services

View or download a PDF of the letter here.

April 22, 2022 

Ann E. Misback, Secretary
Board of Governors of the Federal Reserve System
20th Street and Constitution Avenue NW Washington, DC 20551 

Re: Request for Comment: Guidelines for Evaluating Account and Services Requests (Docket No. OP-1765) 

Dear Ms. Misback: 

Americans for Financial Reform Education Fund respectfully submits comments on the  Federal Reserve Board’s guidelines for evaluating account and services requests.  Americans for Financial Reform Education Fund is a nonpartisan and nonprofit coalition of  more than 200 civil rights, consumer, labor, business, investor, faith-based, and civic and  community groups deeply concerned about the negative impacts of the highly consolidated  banking system on the economy, communities, consumers, and businesses. 

We support the guidance’s provision of a clear, consistent, and enforceable legal basis that  will be used across all the Reserve Banks. Additionally, we support the provision of a  framework for evaluating risk to the Federal Reserve Banks, the payments system, and the  broader U.S. financial system.  

However, although the guidance gives detailed factors to consider when Reserve Banks are  evaluating an application, it falls short by not outlining what firms are eligible to apply in  the first place. Additionally, we believe applicants who fall under Tier 3, that is applicants  who have neither deposit insurance nor are subject to prudential supervision by a federal  banking agency, pose significant threats to our financial system. Although the guidance will  subject these types of applications to the strictest level of scrutiny, it still provides a path to  entry to approval and access to the payment infrastructure, a primary benefit of obtaining a  traditional banking charter. 

While we can imagine a future regulatory framework that allowed fintech companies who  did not replicate the traditional banking model by bundling payments, lending, and deposits, to gain access to the Fed’s payment system with proper safeguards and  responsibilities, the current realities do not allow for this. State and federal chartering  authorities have attempted to create new charters for fintech firms, but in fact allow these  fintech firms to be a bank in everything but name.1 State banking regulators are continuing to provide charters to companies viewed as “innovative” –for example, the special  depositary institutions in Wyoming and digital asset depositaries (DADs) in Nebraska– without subjecting them to sufficient regulation, which makes it particularly important for  the FRB to remain vigilant with regard to who it grants access to its payments’  infrastructure.  

This infrastructure includes the ability to send and receive payments via the FedWire and  Federal Reserve Automated Clearinghouse (FedACH) systems, access to custody and  settlement services and the planned FedNow real-time payments network, and the ability  to obtain intraday overdraft credit.2 Additionally, Federal Reserve member banks elect the  directors of the Federal Reserve Banks and thus help shape monetary policy.3 

As it stands, access to this privilege should be reserved for institutions that are subject to  the suite of federal banking regulations designed to protect consumers and the larger  economy. By providing Tier 3 applicants a path to approval, the FRB is implicitly sending  the message that firms can receive the same benefits as an insured depositary institution  without the regulation that comes with it. We believe this will encourage applications from  novel charters and further fuel growth in an industry that has flouted consumer  protections.4 

We echo the concerns the Board and its staff have expressed about the dangers of  expanding charters and the powers and privileges of banking to firms that are not subject  to consolidated supervision.5 Robust supervision and regulation have historically and  necessarily gone hand-in-hand with the federal government’s delegation of powers over  the money supply to private firms.6 

The risks created by these novel charters gaining access to the national payment system  are very real. It will compromise consumer protection by allowing firms to preempt state  consumer protection laws, be exempt from community reinvestment requirements and  lack federal deposit insurance. Additionally, it will distort competition in commercial  markets by affording some non-banks access to Federal Reserve accounts and services but  not their competitors. 

We also highlight the scholarship detailing the risks and damage to the architecture of  financial institution regulation caused by the Federal Deposit Insurance Corporation  reopening deposit insurance to new industrial loan companies (“ILCs”).7 Granting Federal  Reserve account and payments system access to ILCs, given the lack of consolidated  supervision, introduces exactly the type of risk the proposed guidance was designed to  prevent. Likewise, the growing number of ILC applications and the popularity of the ILC  charter among financial technology firms suggest that these applications will become more  frequent. 

The expansion of non-bank bank charters–and subsequently calls for greater access by  non-bank financial firms to Fed master accounts and financial services–have often been  linked to promises of greater financial inclusion and wider access to financial services.8 

However, it is far from clear what actual binding commitments financial regulators have  obtained in terms of greater financial inclusion and access in exchange for granting non bank bank charters. We do not have data on which customers and communities would benefit, and whether these customers who have historically been victims of financial  malfeasance and discrimination, such as redlining and predatory sub-prime lending would  do so. Claims of greater access too often have turned out in practice to be either empty, or a  cover for targeting of predatory products.9 Vague promises of greater access cannot justify  firms enjoying the privileges of Fed accounts and services. 

In this regard, we would like the FRB to be cognizant of the many state proposals to create  public banks. Public banks, such as the Bank of North Dakota (BND) and the Territorial  Bank of American Samoa (TBAS), have been proven to serve the needs of their surrounding  communities.10 When the only banks in the American Samoa—Bank of Hawaii and ANZ  Amerika Samoa—TBAS filled the gap created to provide basic banking services to the  residents of the territory.11 Similarly, North Dakota provided the greatest amount of PPP  loans, relative to the state’s workforce, when compared to the other states primarily  because of their state bank.12 The Fed’s current framework does not account for the unique  structures of these institutions, which typically do not have federal deposit insurance. The  TBAS waited almost two years to receive a routing number, which is given on the basis that  an institution is eligible to open a master account.13 As the demand for public banking  grows, we think it would be a mistake for the FRB to evaluate these institutions using the same metrics and risk-rating guidelines it uses to evaluate private enterprises.  

As TBAS and the Bank of North Dakota show, there are better ways of expanding access to  banking services to the unbanked and underbanked, including public options such as  proposals for Fed Accounts for All.14 Public options would offer true access with consumer  protections and affordable prices, but without selectively favoring financial firms that are  subject to light consumer protection, prudential regulation, or supervision. 

To discuss these issues further please contact Renita Marcellin at renita@ourfinancialsecurity.org


Americans for Financial Reform Education Fund