Historically, there have not been standards, rules or processes for admission for banks to the Federal Reserve’s wire and automated clearing house (ACH) networks – the critical pipes in the U.S. payments system that together process almost $900 trillion in transactions per year.
The Federal Reserve Board now seeks to remedy that, with a public comment period ending July 12 on new proposed access guidelines. The Fed is spot on in bringing consistency to this arcane but important process and focusing on the adequacy of “risk management and mitigation” for applicants. Banks with direct access to the payments networks could imperil the system as a whole so they must operate in a safe and sound manner. But we also need guidelines that enable and encourage innovation to meet the evolving needs of U.S. consumers and businesses. This obligation is especially important given the dominance of Fed operated networks in payments, and will become even more critical as the Fed moves towards real time payments.
While a step in the right direction, the Fed proposal ties a presumption of solid regulation to whether a bank has deposit insurance rather than to whether it is adequately supervised. There have long been many well-regulated banks that do not accept insured deposits, and the growing diversity in business models and charters will increase their numbers.
For instance, the 50 or so OCC-chartered and -supervised non-depository trust companies are far from “nontraditional”; some were chartered almost 150 years ago and many have long enjoyed direct access to the payments system. All are required to be members of the Federal Reserve and are subject to the same high standards applicable to insured national banks (including capital requirements, liquidity, compliance, and risk management). The only material differences are that they do not take insured deposits and generally do not make loans.
Is it really the Fed’s intent to push these longstanding and well regulated chartered trust companies out of the payments system?
When it comes to state chartered special purpose depositories, banks and trust companies, the Fed arguably faces a more complex challenge in crafting these guidelines. Like national trust banks, uninsured state banks have solid arguments in favor of legal eligibility for payments system access – indeed, the Fed has previously approved such firms . But, unlike all insured banks and national trust banks, uninsured state chartered banks are not subject to federal banking agency supervision. As with national trust banks, the answer is for the Fed to focus on the adequacy of each state’s regulation, rather than whether an applicant has deposit insurance. Every bank eligible to apply for payments system access is already regulated, so the Fed ought to minimize unnecessary regulatory burden and ensure consistency and fairness by deferring to those primary supervisors unless it identifies specific issues.
Finally, the draft guidelines explicitly provide broad discretion for each regional Federal Reserve Bank to impose company-specific limitations or conditions on any approval. Per the Fed’s draft itself, a key objective in the guidelines is to ensure fairness and consistency across regions. Therefore, any such company-specific limitations or conditions should be coordinated and applied consistently throughout the Federal Reserve System to ensure fairness and to prevent forum shopping.
Safety and stability demand that the Fed ensure that entities with access to its payments networks have high standards of risk management. Fairness and innovation demand that every entity which (a) is legally eligible and (b) does meet those high standards must be granted access. We struggle to see a substantive or policy basis for an approach that uses deposit insurance as an imperfect proxy, particularly given the long and successful history of uninsured national trust banks.