Fed offers criteria for fintechs seeking central banking services
WASHINGTON – The Federal Reserve has proposed new guidelines for regional banks in the system when considering giving access to fintech companies that have obtained a banking charter.
The U.S. central bank‘s guidelines released on Wednesday could have huge ramifications on whether companies with restricted-use charters – often without Federal Deposit Insurance Corp. approval. – can enter the Fed’s much-vaunted system.
The Fed’s new policy would to some extent leave the decision to 12 regional offices across the country. Federal reserve banks do not provide banking accounts and services to individuals, but rather to banks and government entities and, in some limited cases, de novo institutions.
The guidance sets out six proposed principles that reserve banks should consider when a FinTech company requests access. These include that a candidate must be legally eligible under the Federal Reserve Act or other applicable federal law. The Federal Reserve Act generally grants eligibility to depository institutions as defined by law.
To gain access, a candidate would also not present an “undue” risk throughout the financial system and “should not interfere with the ability of the Federal Reserve to implement monetary policy.”
While the guidelines suggest the Fed would limit access to companies that meet traditional legal criteria under the Federal Reserve Act, the agency appears open to allowing entry for certain non-traditional charter types.
The Office of the Comptroller of the Currency recently approved uninsured FDIC trust charters for cryptocurrency businesses and designed a special-purpose fintech charter that is mired in a legal dispute. A key unresolved question is whether businesses that do not have FDIC backing will have access to the Fed’s payment system.
“Reserve banks are receiving an increasing number of inquiries and access from institutions with these non-traditional charters, which raises important interpretive and policy questions for the Federal Reserve regarding the issue of whether those non-traditional charters would become members of the Federal Reserve or should have access to Federal Reserve accounts and services, ”the Fed said in its guidelines.
In a statement, Federal Reserve Governor Lael Brainard said one of the central bank‘s main goals is to ensure that requests for Fed services are assessed using a consistent set of standards.
“With technology driving rapid changes in the payments landscape, the proposed guidelines for access to accounts would ensure that requests for access to the Federal Reserve’s payments system from innovative institutions are assessed in a consistent manner. and transparent that promotes safe, efficient, inclusive and innovative payment. system, ”Brainard said.
One of the criteria proposed by the Fed would be that institutions requesting access should have “a risk management framework and effective governance mechanisms to ensure that the institution operates in a safe and healthy manner.”
A candidate’s risk management framework “should be subject to oversight by a board of directors (or similar body) as well as oversight by one or more state banking supervisory authorities and / or federal. “
The proposed set of guidelines is to assess whether a business “would present or create undue credit, operational, settlement, cyber or other risks” to both reserve banks and the payments system as a whole, and whether it has an effective risk management framework and adequate capital and liquidity.
Companies should also 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 attractive to fintech companies that might not want to be regulated as full-service banks. A key element of this call was the ability for businesses to avoid the requirement for deposit insurance.
Digital asset companies such as Anchorage and Paxos have received OCC approval for National Charters of Trust in recent months, which do not require companies to apply for deposit insurance.
Depending on the directions proposed by the Fed, a lack of deposit insurance may be a subject of review. While the Fed wrote that approving federally insured institutions for access “will be fairly straightforward in most cases,” it warned that “the Reserve Bank’s assessments of requests for access from non-federally insured institutions may require more in-depth due diligence ”.
“If the institution is not subject to capital requirements similar to those of a federally insured institution, the potential for sudden and large inflows of deposits into that institution is particularly great, which could disintermediate other parts of the financial system, greatly amplifying the stress, ”the Fed said in its proposed guidance.
The Fed is seeking public input on whether the proposed guidelines cover all potential risks and whether they “support responsible financial innovation.” Comments will be accepted for 60 days after the proposal is posted in the Federal Register.