Master Account
Custodia Bank v. Federal Reserve Board of Governors and Federal Reserve Bank of Kansas City
Date: Sept. 4, 2024
Issue: Whether the Federal Reserve and the Federal Reserve Bank of Kansas City illegally delayed Custodia Bank’s application process to deny critical payment services.
Case Summary: ABA filed a coalition amicus brief urging the Tenth Circuit to affirm a Wyoming federal district court decision ruling the Kansas City Fed did not have to grant Custodia’s request for a master account despite Custodia being legally eligible to obtain one.
Custodia is a Wyoming-chartered special-purpose depository institution. A master account is a type of bank account granting access to the Federal Reserve’s payment networks. Without this account, banks must rely on a partner bank for access. Master accounts are highly sought after by fintech firms trying to avoid added costs and risks associated with these partnerships. Custodia received a Wyoming special-purpose depository institution charter, a crypto-friendly banking license. These charters allow companies to accept deposits, provide custody services, and engage in other banking activities such as payments.
Custodia sued the agencies alleging they unlawfully refused to act on its master account application. Custodia claimed it submitted a valid application for a master account to the Kansas City Fed, but the agencies illegally delayed the application process. According to Custodia, the agencies must take final action on an application within one year under 12 U.S.C. § 4807. However, the district court ruled the Kansas City Fed was not required to grant Custodia’s request for a master account even though it was legally eligible. The court also ruled Custodia lacks standing because it did not challenge a final agency action under the Administrative Procedure Act. The court also ruled the Kansas City Fed had the discretion to grant or deny master accounts to otherwise legally eligible depository institutions.
On appeal, ABA filed its brief supporting the agencies, arguing the Federal Reserve Banks have statutory discretion to grant or deny a master account. In ABA’s view, the “plain language of the relevant statutes can only reasonably be read to give the Federal Reserve Banks discretion in granting or denying requests for master accounts.” Section 342 of the Federal Reserve Act provides that “any federal reserve bank “may” receive from any of its member banks, or other depository institutions … deposits of current funds in lawful money.” ABA explained the term “may” clearly connotes discretion. Accordingly, Section 342 does not “impose upon reserve banks any obligation to receive checks for collection” but rather merely confers authority to do so.
ABA also highlighted that the district court correctly determined Section 248a of the FRA does not require Federal Reserve Banks to issue master accounts to nonmember depository institutions. Section 248a provides that “all Federal Reserve bank services” covered by a Board-created fee schedule “shall be available to nonmember depository institutions,” and subject to certain exemptions “such services shall be priced at the same fee schedule applicable to member banks.” Custodia argued the district court’s approach renders the phrase “shall be available” unnecessary. However, ABA explained that Section 248a merely “instructs the board to put into effect a schedule of fees for certain services based on certain principles.” Section 248a does not indicate “all” or “any” depository institution must be allowed to access the listed services; it merely declares that those services will generally be available to nonmember depository institutions under the same fee schedule applicable to member banks.
ABA also argued stripping Federal Reserve Banks of their discretion would undermine the safety and integrity of Federal Reserve Services and the Federal Reserve system. ABA explained that requiring the Federal Reserve banks to provide every “novel” state-chartered institution with a master account would strip Fed banks of their ability to ensure such institutions do not imperil the safety and integrity of the federal banking system. This is because novel state-chartered institutions are not subject to the comprehensive regulation applicable to federally regulated banks and institutions. Finally, ABA argued allowing automatic access to master accounts will undermine the integrity and carefully crafted protections of our financial system.
Bottom Line: The agencies have requested oral arguments in this appeal that have not yet been scheduled as of Oct. 1, 2024.
Document: Brief
