Talking Tier 3 Master Account Requests
Also: the RECOUP Act, Corner Post v. the Fed, and re-presentment NSF fees
Looking at the Tier 3 master account applicants
As it is now required to do by statute, the Federal Reserve Board on Friday published a database of financial institutions with access to, or that have requested to access, Federal Reserve Bank master accounts and services.
There are a few angles to possibly take with this, but for present purposes I thought it could be interesting to look at the “Tier 3” applications for master accounts received by the Federal Reserve Board.
Tier 3 is the phrase used by the Board under its 2022 guidelines to denote the master account applications that should generally expect to “receive the strictest level of review” because, among other things, the institutions filing them “may be subject to a supervisory or regulatory framework that is substantially different from, and possibly weaker than, the supervisory and regulatory framework that applies to federally-insured institutions, and as a result may pose the highest level of risk.”
Tier 3 Requests Still Pending
The Board’s release on Friday described the Access Requests portion of the master account database as including “financial institutions that have requested access to master accounts and services after December 23, 2022, or had a request pending on that date.” Elsewhere, the Board says the data is as of May 31, 2023, so I am assuming in this post that, taken together, this means that if a bank is listed as having a request pending then the request was still pending as of two weeks ago.1
Puerto Rican Banks
Of the sixteen requests for master account access still pending, eight of them are from firms organized under the laws of Puerto Rico, and four of these eight have been pending since 2020. I am not sure about the specifics of what is going on with each bank, but for general background see Julie Hill’s discussion here of Puerto Rican “offshore” banks and the difficulties they have faced in the master account process.
Wyoming SPDI Banks
Three Wyoming Special Purpose Depository Institutions — Bankwyse, Commercium Financial, and Kraken Financial — still have master account applications pending. The Federal Reserve Bank of Kansas City has already rejected the application of one Wyoming SPDI, Custodia, although that rejection is still subject to litigation.
This reveals my ignorance more than anything else, but I actually did not know that Kraken’s master account application was still pending. Its application was filed in October 2020, a few weeks before Custodia’s.
The Narrow Bank
TNB USA’s application for a master account, first filed in 2017, is still pending. This is the company with a “narrow bank” business model that sued the Federal Reserve Board in 2018 seeking to compel the Board to grant it master account access. In 2020, a court rejected this lawsuit on jurisdictional grounds, saying that TNB did not have standing to sue as its application had not yet been denied, and thus it had not yet suffered an injury.
The court in Spring 2020 also thought it prudentially unwise to decide the case on the merits, as “The FRBNY could decide tomorrow to provide TNB a master account, rendering the entire case moot, and my interpretation of the Federal Reserve Act improper.”
Currency Reserve Bank
Currency Reserve Bank is a proposed Connecticut bank. It is tough to find much information in easily available written form about what this bank proposes to do,2 but this Connecticut Department of banking notice from a few months ago (bolding in original) includes at least one name you might recognize.
A hearing will be held on the application of Vivek Tyagi, Matthew H. Hurlock, Randal K. Quarles, Richard Ravitch, Zach D. Larkin, and Greg M. Giordano to organize Currency Reserve Bank, Greenwich, Connecticut, as a Connecticut uninsured bank pursuant to Section 36a-70(t) of the Connecticut General Statutes. The hearing will take place on April 12, 2023 at 10:00 a.m. at the Department of Banking, 260 Constitution Plaza, Hartford, Connecticut, via videoconference, and via teleconference (860) 840-2075, Conference ID: 756 632 340#.
At the hearing in question, Mr. Tyagi described the bank’s proposed business model as follows:
Currency Reserve aspires to be an appropriately capitalized state bank with principal offices in Greenwich, Connecticut. As described in the application documents submitted to the Department … we plan to safely and responsibly engage in bank note distribution of U.S. dollars and, to a lesser extent, other currencies, to retail and wholesale financial institutions, central banks, and non-bank financial institutions. Currency Reserve hopes to enhance the resilience of the U.S. bank note distribution system overall, and in that support the United States’s strategic interests in maintaining the U.S. dollar’s primacy as the world’s reserve currency.
Banking Circle US
Banking Circle US is another Connecticut bank seeking a master account. In a 2021 public hearing, it explained its intended business model in the United States as follows.
Banking Circle is a fully clouded scalable financial infrastructure provider building the first and only real-time clearing cell network globally. Our mission is to build proprietary access to all of the world's major currencies on one platform and create a financial ecosystem that cuts out the time and cost of cross-border payments, enabling a new way for financial institutions and corporates to serve as our end merchants. […]
Banking Circle in Europe delivers access to 12 local clearance schemes through a combination of direct clearing and partner banks, enabling cross-border payments of 25 currencies. We will also build partnerships with banks globally, enabling the payout capability clients need in geographies and currencies where we do not currently offer local currency.
So what are we doing in the U.S. and why? We will launch Banking Circle US in Stamford, Connecticut, in 2021, which will focus on providing domestic cross-border payments, FX, and deposit accounts to U.S. and foreign banks and payments of businesses.
Banking Circle US has since been granted a temporary certificate of authority by Connecticut, with the certificate later extended to the end of September 2023.
Acceleron Bank
Acceleron Bank is a proposed Vermont bank that says it wants to provide technology to help community banks and credit unions level the playing field. More specifically:
MOST INTERNATIONAL PAYMENTS ARE DONE IN US DOLLARS.
Customers can obtain better payment terms if they pay in foreign currency. At Acceleron, we created NudgeConvert to give customers an advantage where it counts - PRICE.
NudgeConvert is the first-of-its-kind, real-time payments solution. Using NudgeConvert will enable banks and credit unions to convert US dollar cross-border payments into foreign exchange payments for their customers and members, ultimately leading to an increase in non-interest income when clients choose to convert.
The Council for Education
The Council for Education is a “a public-interest organization advocating for federal student loan borrowers.” From the current version of its website, its reason for seeking a master account, or even its connection to banking, is not totally clear.3
Another Tier 3 Request Rejected
The Board’s new master account database also reveals that on May 31, 2023, the master account application of PayServices, Inc. was rejected.
PayServices, Inc. had previously applied three times, and later withdrew three times, with the FDIC for deposit insurance in connection with the proposed chartering of an insured Florida bank.
A de novo with a unique business plan is hopeful the third time is the charm for applying for deposit insurance from the Federal Deposit Insurance Corp.
PayServices Inc., a monetary services business based in Florida that aims to provide governments and businesses with auditable, end-to-end traceability in banking and financial compliance, has withdrawn its application twice and filed for a third time March 16 after feedback from the FDIC. Still, the company's founder, Lionel Danenberg, said during an interview they "aren't afraid to have a marathon" in order to gain approval.
Danenberg said the company's unique technology is capable of overcoming compliance hurdles in correspondent banking and combating fraud by streamlining the financial compliance process. During this compliance process, PayServices needs to hold funds in an account for the duration of a transaction, which means the company needs access to a bank account or a banking license of its own to do business.
PayServices withdrew its FDIC deposit insurance application most recently in March 2022, only a few days after re-filing for the third time. According to the Board’s master account database, PayServices then applied for a master account in August 2022.
The RECOUP Act
The Chair and Ranking Member of the Senate Banking Committee have released the “Recovering Executive Compensation Obtained from Unaccountable Practices Act of 2023,” better (?) known as the RECOUP Act. A markup is scheduled for next week.
The RECOUP Act would make a few changes to existing law.
Expanded Prohibition Authority.
Assuming the (unchanged) requirements of Section 8(e)(1)(B) are satisfied,4 the federal banking regulators would gain new authority to remove from office and prohibit from further participation in the banking industry any “senior executive” who through gross negligence “failed to carry out the responsibilities of the senior executive for governance, operations, risk or financial management.”
In addition, a senior executive could also be removed if he or she has:
Breached any fiduciary duty owed to the bank, if the breach is defined and determined to require grossly negligent, reckless or willful conduct;
Failed to appropriately implement financial, risk, or supervisory reporting information systems or controls; or
Having implemented the controls described above, failed to oversee their operations.
For purposes of the above, a senior executive would be “an individual who has oversight authority for managing the overall governance, operations, risk, or finances” of a bank or a holding company, “including the president, chief executive officer, chief operating officer, chief financial officer, chief risk officer, chief legal officer, chairman of the board, an inside director of the board of directors, and an individual who occupies an equivalent position.”
These prohibition provisions would apply to all banks.
Governance and Accountability Standards.
All banks and holding companies with total consolidated assets of more than $10 billion would be required to adopt “governance and accountability standards” in their bylaws, articles of incorporation, or equivalents, intended to “promote safety and soundness, responsiveness to supervisory matters, and responsible management.”
At a minimum, such standards would be required to include:
Requirements for appropriate risk management and responsiveness to supervisory matters;
Accountability and corporate governance mechanisms and controls “such as”:
Ensuring senior executives and board are implementing reporting or information system or controls and overseeing such systems appropriately and prudently;
Ensuring that management does not deviate from sound governance, internal control, or risk management; and
Ensuring appropriate long-term risk management tailored to long-term economic conditions.
Clawback authority in the event the bank or holding company fails, such that the board of directors would be permitted (but not required) to claw back bonuses or other incentive or equity-based compensation received by the senior executive from the bank or holding company during the 24 months before its failure, along with any profits realized by the executive from sales of securities over that period.
This provision would not apply to a senior executive who has been employed for less than 12 months and whose conduct did not contribute to the failure of the bank or holding company.
In addition to requiring this clawback authority in the bank’s governing documents, a separate provision of the RECOUP Act would amend Section 8(b) of the FDI Act to give the FDIC authority to clawback this compensation from a bank in receivership, as well as “compensation that is granted or vested based wholly or in part upon the attainment of any financial reporting measure or other performance metric.”5
The FDIC’s clawback authority would not apply to banks with total consolidated assets of less than $10 billion.
Increased Civil Money Penalties. Section 8(i) of the FDI Act lays out tiers of civil money penalties. The maximum penalty that could be imposed on an individual for a third-tier violation would be increased from $1 million to $3 million.
Initial Thoughts
The brewing drama with Senators who may have preferred a different approach is probably the real headline, but setting that aside here are four other initial thoughts and questions.
Assuming the RECOUP Act had been in place before the events of this spring, how would its prohibition provisions have been applied in practice to the “senior executives” of the failed banks? In particular, how broadly through the ranks of senior executives would or should prohibition orders have been issued under the statute as drafted? For instance, if failing to implement (or failing to oversee when implemented) financial, risk, or supervisory reporting information systems or controls is sufficient to permit prohibition, that sort of failing could plausibly be laid at the feet of a number of different executives, depending on the fact pattern.
The RECOUP Act has a rule of construction saying nothing in it “may be construed to amend or alter the authority of the” FDIC or any other federal banking regulator. Maybe that means this is a silly question to ask, but just logically if not legally, how should the new prohibition provisions be understood in the context of the existing provisions which, among other circumstances, already allow for prohibition in the event that an institution-affiliated party engages in an unsafe or unsound practice?
The bill has two separate carveouts for community banks. First, community banks are not required to adopt the governance standards. Second, the FDIC does not have clawback authority with respect to failed community banks. The first carveout seems reasonable enough — adopting these new governance standards could be a fairly significant undertaking for many community banks, and I can see how the costs would outweigh the benefits. But on the second carveout, other than the obvious answer that it was necessary to get majority support, is there any credible justification for shielding 96% of banks6 from the proposed new FDIC clawback authority?7
In a few places in the governance and accountability standards boards of directors would be expected to “ensure” certain results from senior management. Moving away from this sort of phrasing was recently a focus of the federal banking regulators, reasoning that certain results are more appropriately viewed as within management’s control, and that the board’s role is one of oversight.8 So for instance in 2021 the Federal Reserve Board revised various supervisory letters to remove references to “ensure” and to otherwise make the letters consistent with the Federal Reserve Board’s supervisory expectations for boards of directors.9 The OCC had earlier made similar revisions in 2020 to its Director’s Book.
The FDIC revisits its Financial Institution Letter on re-presentment NSF fees
This is a bit outside of my wheelhouse and I am not sure what to make of it, but the FDIC late on Friday afternoon issued a revised version of a Financial Institution Letter it first published in August 2022 on re-presentment of NSF fees.
Here is how the FDIC described the underlying issue in the August letter (unchanged in the new version).
Many financial institutions charge [non-sufficient funds] NSF fees when checks or Automated Clearinghouse (ACH) transactions are presented for payment, but cannot be covered by the balance in a customer’s transaction account. After receiving notice of declination, merchants may subsequently resubmit the transaction for payment. Some financial institutions charge additional NSF fees for the same transaction when a merchant re-presents a check or ACH transaction on more than one occasion after the initial unpaid transaction was declined. In these situations, there is an elevated risk of violations of law and harm to consumers.
Now, in light of “additional data about the amount of consumer harm associated with the issue at particular institutions and on-going and extensive challenges in accurately identifying harmed parties” the FDIC has made changes to “clarify its supervisory approach,” as marked below.
Is it too late for this lawsuit over Reg II?
Corner Post is a convenience store and truck stop in Watford City, North Dakota. In 2021 it sued the Federal Reserve Board over Regulation II, the Board’s regulation implementing an interchange fee cap as required by the Durbin Amendment.
Corner Post’s grievance goes like this:
The Board’s proposed rule set the cap at 12 cents per transaction. But in response to pressure from big banks, the Board changed course in its final rule. In July 2011, the Board set the interchange-fee cap at 21 cents per transaction and an ad valorem component of .05% of the transaction’s value. … The Board has never explained how a fee cap resulting in bank profits of between 320% and 483% per transaction is “reasonable and proportional to the cost incurred by the [bank] issuer with respect to the transaction.” 15 U.S.C. §1693o-2(a)(2).
Whatever the merits of that complaint, Corner Post never was able to litigate it. Instead, the district court dismissed Corner Post’s complaint as time barred, saying that the statute of limitations for making a facial challenge to the regulation under the Administrative Procedure Act had expired in 2017, six years after the regulation was published, and long before Corner Post sued. The Eighth Circuit then affirmed.
Now Corner Post is asking the Supreme Court to get involved. The company’s argument is that setting 2017 as the deadline to bring a facial challenge is a bit harsh, considering Corner Post did not open for business until 2018. They say that the better rule is the one adopted by the Sixth Circuit, which (according to Corner Post’s characterization at least) says that a challenge to an agency action first accrues upon injury to the plaintiff rather than publication of the agency action.
Corner Post’s petition asking the Supreme Court to hear its case was filed in April. Friday was the deadline for the Federal Reserve Board to respond. Unsurprisingly, the Board’s response says there is no need for the Supreme Court to get involved.
First, the Board says the Eighth Circuit’s decision was correct:
Petitioner contends (Pet. 20-31) that, under Section 2401(a), a newly incorporated entity has six years to file APA challenges against any pre-existing agency regulations that might affect its interests, regardless of how long ago those agency regulations were adopted and regardless of whether the agency has taken any steps to enforce the regulations against the newly incorporated entity. The court of appeals correctly rejected that contention, and its decision is consistent with other circuits’ decisions concerning the time limits for pursuing facial challenges to agency rules.
Second, the Board says that even if the question was otherwise one the Court ought to decide, there is some weird procedural stuff here which should raise questions:
This case involves an atypical fact-pattern in which petitioner joined a pre-existing suit filed by other plaintiffs whose own claims were untimely at the time the suit was commenced. Even on petitioner’s theory, this civil action as first filed in 2021 was time-barred because the original plaintiffs (NDRA and NDPMA) could have brought suit in 2011 when the Board adopted Regulation II. Petitioner is a member of those plaintiff associations and joined the case only when the timeliness of their claims was contested, and all of the plaintiffs were represented below by the National Retail Federation, itself one of the challengers in [previous D.C. Circuit litigation over Regulation II]. Petitioner’s coordination with those related parties for the evident purpose of circumventing the limitations bar to their own claims—and the preclusive effect of the decision in [the D.C. Circuit]—raises serious questions about the equity of considering petitioner’s challenge.
Based on nothing other than the fact that it is the typical outcome for the vast majority of cert petitions,10 I assume the Court will decline to take up the case.
Thanks for reading! Thoughts on this post, or any other criticisms or feedback you have to share, are always welcome at bankregblog@gmail.com.
One thing that makes me maybe question this is the fact that Tier 2 applicant Protego Trust Bank, N.A. still has its master account application, filed in August 2022, listed as pending. Protego’s authorization from the OCC to charter Protego Trust Bank as a national trust bank expired earlier this year, so all else equal I would have figured the master account application would have been withdrawn, but I expect there is a wrinkle I am missing.
An entity called Currency Reserve, which shares a few management team members with the organizers of Currency Reserve Bank, has a pretty bare bones public website.
A Google search turns up a no longer active version of the Council’s website saying that “The Council for Education is developing a new automated bookkeeping service for a Stablecoin Bank.” I am not sure of the current size of the organization, but a 2013 court case described the Council for Education as being led by an individual who is the organization’s “president and secretary and its sole officer, director and employee.”
These provisions require that “by reason of” the conduct at issue (i) the bank or business institution suffered or will probably suffer financial loss or other damage; (ii) the interests of the bank’s depositors were or could be prejudiced; or (iii) the party received financial gain or other benefit by reason of the conduct at issue.
The language here also refers to purchases or sales of securities, rather than just sales as in the earlier provision of the RECOUP Act.
My math here is just taking the 160 banks with total assets above $10 billion as of December 31, 2022, per the FDIC’s BankFind tool and dividing by the 4135 total insured commercial banks as the end of 2022, again per the FDIC. I would not take these numbers seriously down to the decimal point, as a few banks have opened - or, more notably, closed - since then.
Richard Hunt asked a similar question a few weeks ago about Senator Warren’s clawback bill.
“A strong and effective board provides strategic leadership and oversight, which is much more challenging and important than checking off lists of assigned tasks,” a member of the Board of Governors said in 2017.
In cases where there is a split between circuits the Court is at least a little more likely to agree to hear a case, but see pages 18-21 of the Board’s response for an argument that the Sixth Circuit decision cited by Corner Post as evidence of a circuit split is not really at odds with the Eight Circuit’s decision in this case.