Federal Reserve Governor Christopher Waller said the Fed should explore the idea of a “skinny master account.”
Details: Speaking at the Payments Innovation Conference in Washington, D.C., Waller said:
He has asked Fed staff to explore the idea of a payment account, or “skinny” master account, which would provide basic Fed payment services to legally eligible institutions that conduct payment services primarily through a third-party bank that has a full-fledged master account.
These payment accounts would have a streamlined timeline for review, would not have daylight overdraft privileges, would not be eligible for discount window borrowing, and would not have access to all Fed payment services.
The Reserve Banks would not pay interest on balances in these skinny accounts, and balance caps may be imposed.
Background: Nonbank entities and crypto institutions are trying to obtain access to master accounts—industry settlement accounts that are traditionally limited to depository institutions that are highly regulated and pose limited risk to the banking system.
ICBA View: ICBA is concerned with any proposal to grant master account access to nonbank entities with novel charters. As reported in Independent Banker magazine, ICBA supports limiting master account access to only those institutions that meet the financial services sector’s highest standards to protect the safety of the U.S. banking system.
Reserve Bank Discretion: ICBA in August 2024 told a U.S. appellate court that federal law provides the Federal Reserve Banks with the discretion to deny or grant master account access. In a friend-of-the-court brief filed with the U.S. Court of Appeals for the Ninth District, ICBA said federal law permits the Reserve Banks statutory discretion to grant or deny applications for master account access to ensure that such accounts are given only to institutions that are found, on an ongoing basis, to have the financial and operational ability to safely and securely have direct access to the federal banking network.
Custodia Bank Ruling: A federal judge in 2024 largely upheld the Fed’s master account denial of Custodia Bank, a Wyoming state-chartered special-purpose depository institution that focuses on crypto services and other novel activities and is not FDIC-insured. ICBA commended the Fed’s response to the Custodia application, saying the agency’s actions appropriately safeguard the banking system from the risks posed by novel institutions.