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Financial Institutions Advisory & Financial Regulatory, Time and Money

March 11, 2022

Federal Reserve Proposes Tiered Framework for Evaluating ‘Master Account’ Applications


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On March 1, 2022, the Federal Reserve (the “Fed”) proposed a new framework for evaluating “master account” applications for direct access to the Fed’s payment system. The proposal builds upon the Fed’s original proposal from May 2021, which had outlined six principles for the individual Federal Reserve Banks to consider when reviewing such applications. The latest proposal includes these principles and adds a “tiered review framework” that ties the intensity of review to the level of oversight to which the requesting institution is subject.[1]

This memorandum reviews the six principles that Reserve Banks would use and summarizes the newly proposed tiered review framework.


To settle financial transactions with the Fed, institutions must have either a master account with a Reserve Bank or an agreement with an existing member (and approval from the relevant Reserve Bank) to use such member’s master account for financial services. Under Section 13 of the Federal Reserve Act, a Reserve Bank, at its discretion, can give an eligible institution a master account and access to financial services.

According to Fed Governor Lael Brainard, “With technology driving rapid change in the payments landscape, the proposed guidelines would ensure novel requests for access to Federal Reserve accounts and payment services are evaluated consistently and transparently to ensure a safe and innovative payment system.”

Six Principles for Review

The six principles for review were proposed to promote consistency and efficiency among the Reserve Banks in reviewing applications for Fed master accounts. These principles emphasize that if an institution is eligible for Fed services, the individual Reserve Banks have discretion to grant or deny access to those services, upon the determination that access to a master account and financial services will not create undue risk.

The first principle directs each Reserve Bank to ensure the requesting institution is eligible[2] for a Fed account and has a “well-founded, clear, transparent, and enforceable legal basis for its operations.”[3] Under this principle, a Reserve Bank should also assess whether the design of the institution’s services would prevent its full compliance with certain laws and regulations, such as anti-money laundering (“AML”) regulations, U.S. sanctions, and consumer protection laws.

The other five principles would require the Reserve Banks to ensure that providing an account to the requesting institution would not create undue risk. To the extent possible, this review should incorporate assessments by the institution’s regulatory supervisors. Additionally, the reviewing Reserve Board would ensure that the institution has effective risk management frameworks for each of the risks addressed by these principles.

To meet the second principle, an institution would have to show it does not pose potential undue risks to the Reserve Bank, including credit, operational, settlement, and cyber risks. In its evaluation, a Reserve Bank should confirm the institution complies with its supervisory agency’s requirements and demonstrates an ability to comply with the Fed’s ongoing requirements while managing operational risk.

Under the third principle, the requesting institution’s access to a Fed account and financial services should not carry potential undue risks to the overall payment system, including credit, liquidity, operational, settlement, and cyber risks. Accordingly, a Reserve Bank should identify the interactions between the institution and the payment system and adjudge that the institution is in sound financial condition with the potential to continuously meet its obligations and risk management requirements.

The fourth principle assesses the institution’s potential for undue risk to the U.S. financial system’s stability. In applying this principle, the reviewing Reserve Bank should coordinate with the other Reserve Banks and the Fed and consider how strains on this institution could pass to other segments of the financial system, including deposit balances in the United States.

The fifth principle addresses undue risk to the overall economy from illicit activities, such as fraud, money laundering, and cybercrime. Here, the Reserve Bank should verify the institution’s Bank Secrecy Act and AML compliance programs meet certain requirements and confirm the institution has a compliance program that satisfies regulations of the Treasury Department’s Office of Foreign Assets Control regulations.[4]

Lastly, the sixth principle requires a Reserve Bank to evaluate any adverse effects on the Fed’s ability to implement monetary policy. To do so, the particular Reserve Bank should assess the effect on supply and demand of reserves, key policy interest rates, and the structure of key short-term funding markets, among other factors.

Tiered Review Framework

The three-tiered review framework provides a guide for Reserve Banks to determine the level of due diligence and scrutiny in each review. First, the Reserve Bank would determine an institution’s eligibility for a Fed account and financial services. Then, the Reserve Bank would apply a level of due diligence and scrutiny that scales with the level of regulatory oversight to which each institution is already subject.

  • Tier 1 - Tier 1 would apply to federally insured institutions. Tier 1 institutions would face “a less intensive and more streamlined review”[5] unless this initial review identifies a potential risk requiring additional attention.
  • Tier 2 - Tier 2 would be institutions that are subject to federal prudential supervision, including, if applicable, at the holding company level, but are not federally insured. Tier 2 institutions would face an “intermediate level of review.”
  • Tier 3 - Tier 3 would apply to institutions without federal insurance and without federal prudential supervision at the holding company and institution levels. Tier 3 institutions would face the “strictest level of review.”

The updated proposal preserves the principles from the 2021 proposal to guide Reserve Banks in their evaluation of a request for master account access. According to the Fed, the tiered review framework was added to provide more clarity on the level of scrutiny different institutions would face. These principles and tiered review framework were proposed to foster a more consistent review system without removing the Reserve Bank’s discretion, as technological and financial innovation leads to more unique institutions requesting access to Fed services.

Special thanks to associate Jordan Briggs (New York-Financial Institutions Advisory & Financial Regulatory), who contributed to this publication.


[1]  The tiered review framework proposed in the Supplement was introduced in part to respond to recommendations from comment letters solicited on the Original Proposal. See Memo to the Board of Governors, “Proposed Guidelines to Evaluate Requests for Accounts and Services at Federal Reserve Banks,” FRB Staff (Feb. 16, 2022).
[2]  Eligibility is determined under the Federal Reserve Act or other federal statute.
[3]  Supplemental Notice at 11.
[4]  31 C.F.R. Chapter V.
[5]  Supplemental Notice at 23.

Authors and Contributors

Mark Chorazak


Financial Institutions Advisory & Financial Regulatory

+1 212 848 7100

+1 212 848 7100

New York