The Federal Reserve Board should not open the door to its payment services for uninsured fintech firms, the National Community Reinvestment Coalition (NCRC) and partner groups wrote in a comment letter. Instead, the Federal Reserve should require all financial institutions seeking direct access to the Fed’s central bank payment systems to obtain deposit insurance and to be subject to consolidated supervision.
The letter was in response to a recent Fed proposal to create a tiered process for reviewing applications for a “master account” with the central bank. The proposed system would promise a more stringent review for uninsured fintechs but would potentially provide them access to the Fed’s payment systems if they passed such a review.
The proposed application process “allows for evasions of vitally important banking laws and encourages regulatory arbitrage […and] will create substantial risks to the financial system,” NCRC, the Center for Responsible Lending (CRL) and the National Consumer Law Center (NCLC) (on behalf of its low-income clients), and Arthur E. Wilmarth, Jr., Professor Emeritus of Law at George Washington University Law School wrote in the letter.
“Providing master accounts to uninsured and unsupervised institutions would permit largely unsupervised tie-ups between the payments system, Big Tech firms, and issuers of cryptocurrency,” which “would contradict important barriers between commerce and banking,” the groups wrote in the letter.
The potential unlocking of the Fed’s master accounts system to such unsupervised firms would also undermine the Community Reinvestment Act (CRA) and thus threaten to further entrench the wealth and lending disparities that law commits federal regulators to narrow, the letter warned:
An uninsured depository institution would not have any CRA obligations. To allow some institutions to receive the benefits of a banking charter along with other privileges such as Federal Reserve master accounts, without requiring them to meet community reinvestment obligations, would create a severe inconsistency in regulatory treatment. That inconsistency would erode the CRA’s effectiveness and provide an unfair competitive advantage to uninsured depository institutions that intend to evade any CRA obligations, thereby creating very strong incentives for institutions to choose the evasive approach.
The full text of the letter is available here.