
In a landmark judgment, the Federal Reserve’s authority to selectively grant master account applications was affirmed by the District of Wyoming’s federal court, dealing a blow to Custodia Bank’s ambitions. The Wyoming-based institution’s bid to secure a direct line to the Federal Reserve’s suite of services was denied, with Judge Scott Skavdahl presiding over the case.
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- Federal court supports the Federal Reserve’s right to selectively approve or deny master account applications, impacting Custodia Bank’s direct access aspirations.
- Custodia Bank’s legal challenge to the Federal Reserve’s decision was dismissed, with the court emphasizing the Federal Reserve’s discretionary authority.
- The court’s decision highlights the potential for deregulatory competition among states if the Federal Reserve’s discretion were removed, posing risks to financial stability.
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Federal Court Upholds Federal Reserve’s Decision Against Custodia Bank’s Master Account Request
The controversy began when the Federal Reserve declined Custodia Bank’s application for a master account. Such accounts are pivotal for banks, enabling direct transactions with the Federal Reserve without the intermediation of other financial institutions. The bank escalated the matter to the courts in June 2022, following what the Federal Reserve Bank of Kansas City described as an unreasonable delay in processing its application. The situation took a decisive turn when the Federal Reserve formally rejected the application and published a detailed report outlining the rationale behind its decision.
Custodia Bank’s subsequent legal challenge accused the Federal Reserve Board of improperly influencing the Kansas City Fed’s decision to deny the application, contending that the Federal Reserve did not possess the right to refuse applications from nonmember depository institutions.
However, Judge Skavdahl’s ruling clarified that there is no legal mandate for the Federal Reserve to grant master account access to all applicants. Furthermore, the evidence indicated that the Kansas City Fed independently decided without undue influence from the Federal Reserve Board of Governors.
The judge also highlighted the importance of the Federal Reserve’s discretionary power in this context, suggesting that without it, the only safeguard against unsuitable access to the U.S. financial system would be the states’ chartering laws. This could potentially lead to deregulatory competition among states, compromising financial stability.
Responding to the court’s verdict, Nathan Miller, a spokesperson for Custodia Bank, acknowledged the challenges faced in contesting the Federal Reserve’s decision but reaffirmed the bank’s commitment to establishing a secure, technology-driven bank. The bank is currently contemplating its next steps, including the possibility of an appeal.
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