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The Federal Reserve announced a new system on Monday that could offer fintechs and crypto banks direct access to its payment rails. The big question is, will it?
That’s an expensive question for groups that have spent months pushing both Congress and the Fed to create a system that would entitle them to master accounts — an arcane-but-critical component of the banking system’s that allows account holders to send money to each other without having to incur fees by going through another bank.
Over the last year, Senate Banking Committee Republicans, led by Sen. Pat Toomey of Pennsylvania, transformed the opaque standards and inconsistent timelines for master account applications into a political flashpoint.
Sarah Bloom Raskin’s nomination to the Fed failed after Toomey launched a series of broadsides over her alleged role in securing the state-chartered fintech Reserve Trust a master account through the Kansas City Fed — no easy feat for a fintech. Even more strange, Toomey says Reserve Trust later lost its charter.
The Fed hasn’t confirmed or acknowledged its status.
“A master account is a public good, and after the Reserve Trust debacle, the public deserves greater transparency than the guidance released today,” Toomey spokesperson Amanda Thompson said Monday afternoon. “If the Fed doesn’t understand its role as a public trustee, then perhaps Congress should pass legislation to require it to be more transparent and accountable.”
Sen. Pat Toomey (R-Pa.) has called for greater Fed transparency around the master account process. | Tom Williams/Pool via AP
Wyoming Republican Sen. Cynthia Lummis has blistered the Fed for stalling on applications submitted by two crypto banks that received a special charter under the state’s laws. Earlier this year, a bipartisan cryptocurrency bill she sponsored with New York Democrat Sen. Kirsten Gillibrand included provisions that would require Fed banks to make an account available to any depository institution chartered under state or federal law.
One of those banks, Custodia (formerly known as Avanti), sued both the Federal Reserve Board of Governors and the Federal Reserve Bank of Kansas City earlier this year over claims that the Fed had illegally dragged its feet on its application. Notably, the Fed’s court deadline to respond to that complaint happens to be today.
“These guidelines are long overdue and a step in the right direction towards consistency and clarity in this process. It is important that the Federal Reserve also includes clear deadlines for the master account review process,” Lummis said in a statement on Monday night. “I am now looking forward to some clear answers for the Special Purpose Depository Institutions in Wyoming that have been waiting for master accounts for over two years.”
Our Victoria Guida on the new standards: “The final version closely mirrors previous proposals, under which the central bank said it would have a three-tiered system for evaluating who should get a so-called Fed master account, a privilege that allows institutions to transfer money directly to another account holder.
“Under that system, traditional banks that have federal deposit insurance would go through a ‘less intensive and more streamlined review,’ according to a Fed staff memo. Institutions that are supervised by a banking agency would be in the second tier with an ‘intermediate level’ of review, while entities with neither deposit insurance nor prudential supervision would receive the strictest level of oversight.”
Fed Governor Miki Bowman, a former community banker who was nominated to the board by former President Donald Trump, says there’s more work to be done.
“More work remains to be completed before a process is established to fully implement the guidelines,” Bowman said on Monday afternoon, calling the new tiered system an “important step” for giving applicants more transparency into the process. “There is a risk that this publication could set the expectation that reviews will now be completed on an accelerated timeline.”
— Electronic Transactions Association Senior Vice President of Government Affairs Scott Talbott, whose group’s membership includes both big banks and fintech companies: “This three-tiered system recognizes that there are other players who can provide value to the economy. It creates a regulatory path for fintechs to work directly with the Fed.”
— American Bankers Association President and CEO Rob Nichols: “We embrace financial innovation, but we should not do anything to undermine the strength and resiliency of our banking system. Allowing new financial players to access the Federal Reserve system without requiring them to meet the same high standards as banks poses real risks.”
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Housing starts and building permits data released at 8:30 a.m. … Industrial production index released at 9:15 a.m. … President Joe Biden will sign the Inflation Reduction Act of 2022.
THE IRS’s $80 BILLION QUESTION — Our Brian Faler: “The IRS is about to get a big chunk of change, and you’re going to be hearing a lot about it between now and the November elections.
“Though the IRS has long been criticized as unable to do basic things like answer taxpayers’ questions and process their returns in a timely way, Republicans are now portraying the agency as rife with thugs poised to terrorize average Americans.”
KHAN GRINDS WALL STREET’S GEARS — WSJ’s Dave Michaels and Ryan Tracy: “The Biden administration’s antitrust enforcers are throwing sand in the gears of Wall Street’s deal machine. Under Chairwoman Lina Khan, the Federal Trade Commission is questioning mergers that likely would have gone unchallenged in years past—a change Ms. Khan says is needed to prevent companies from building up too much power and stifling competition.
“‘In all too many areas of our economy, including agriculture, airlines, healthcare, we’ve seen significant consolidation and reduction of competition,’ Ms. Khan said in an interview. ‘Mergers have played a role in that.’”
UNION FIGHT BREWING — Our Nick Niedzwiadek: “Starbucks on Monday alleged that staff at the National Labor Relations Board improperly interfered in at least one organizing election and called for a halt to mail-in balloting.”
OVERDRAFT PRESSURE — The Center for Responsible Lending is stepping up pressure on regulators to limit overdraft fees, arguing that it’s not enough to wait for banks and credit unions to end the practice on their own. “This is a systemic problem that requires strong action,” CRL President Mike Calhoun wrote in an op-ed in American Banker on Monday. “Financial regulators must rein in the size and frequency of these fees.”
HOMEBUILDER CONFIDENCE SLUMP — Bloomberg’s Molly Smith: “A gauge of US homebuilder sentiment declined for an eighth-straight month, marking the worst stretch since the housing market collapsed in 2007 amid higher borrowing costs and elevated prices.”
WHY ARE PEOPLE UNIONIZING? — NYT’s Jodi Kantor and Arya Sundaram: “Digital productivity monitoring is also spreading among white-collar jobs and roles that require graduate degrees. Many employees, whether working remotely or in person, are subject to trackers, scores, ‘idle’ buttons, or just quiet, constantly accumulating records. Pauses can lead to penalties, from lost pay to lost jobs.”
WE…WORKED? — NYT’s Andrew Ross Sorkin, Vivian Giang, Stephen Gandel, Lauren Hirsch and Ephrat Livni: “Adam Neumann, the founder of WeWork, whose spectacular rise and fall has been chronicled in books, documentaries and a scripted television series,has a new venture — and a surprising backer … Andreessen Horowitz is investing about $350 million in Flow, according to three people briefed on the deal.”
COUNTERPOINT — Some feedback from Monday’s Morning Money on how the Supreme Court’s EPA decision is influencing lobbying and advocacy efforts:
“The crypto industry continues to peddle the line that it needs its own unique rulebook when really what it wants is exemptions from existing law, and now it’s trying to use a recent Supreme Court decision to scare us all,” said Mark Hays, a senior policy analyst at Americans for Financial Reform. “On the major question of what a security is, Congress has in fact spoken by passing laws. It legislated a broad definition of securities, one that has been tested in court. This idea that big-money lobbying and contributions, plus a united message gives you a sound legal argument is really, really bad math.”
THREE ARROWS — NYMag’s Jen Wieczner: “Among crypto’s smartest observers, there is a widely held view that Three Arrows is meaningfully responsible for the larger crypto crash of 2022, as market chaos and forced selling sent bitcoin and other digital assets plunging 70 percent or more, erasing more than a trillion dollars in value. ‘I suspect they might be 80 percent of the total original contagion,’ says Sam Bankman-Fried, who as CEO of FTX, a major crypto exchange that has bailed out some of the bankrupt lenders, has perhaps more visibility on the problems than anyone.”
IN FOR A PENNY — WSJ’s David Benoit and Rachel Louise Ensign: “When big banks steered clear of cryptocurrency companies, a handful of small lenders eagerly courted the booming businesses. Now, they are dealing with the bust.”
QT CONUNDRUM — The Fed’s plan to double the pace at which it shrinks its balance sheet starting next month is happening at the same time officials are pushing ahead with interest rate hikes, Reuters’ Gertrude Chavez-Dreyfuss writes. “With some investors believing the economy is already in a recession, speculation has grown that if something has to give, it could be the pace at which QT unfolds.”
WOOF — Bloomberg’s Vince Golle: “The Federal Reserve Bank of New York’s August general business conditions index slumped more than 42 points to minus 31.3, with the drop just behind that seen in April 2020, a report showed Monday. A reading below zero indicates contraction, and the figure was far weaker than the most downbeat forecast in a Bloomberg survey of economists.”
China’s economy stumbled in July as a two-month boost from easing lockdowns faded, prompting the country’s central bank to unexpectedly cut two key interest rates in an effort to shore up faltering growth. — WSJ’s Jason Douglas
A growing number of Wall Street banks are willing to trade Russian bonds that were once viewed as untouchable. — Bloomberg’s Laura Benitez and Katherine Doherty
The move to delist five Chinese state-owned enterprises from the New York Stock Exchange signals Beijing may be willing to compromise in order to strike an audit deal with the United States and end a more than decade-old dispute, analysts and advisers said on Monday. — Reuters’ Scott Murdoch, Kane Wu and Xie Yu
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