Banking

Powell says regional banks decide who gets master accounts

WASHINGTON Senators pressed Federal Reserve Chair Jerome Powell on Wednesday morning to bring more transparency into the central bank’s process for granting access to its payments system. 

During a two-and-a-half hour Banking Committee hearing on inflation and monetary policy, Sens. Thom Tillis, R-N.C., and Cynthia Lummis, R-Wyo., raised issues with the Fed’s accountability in how it provides master account access. 

The critiques came less than a week after Esther George, president of the Federal Reserve Bank of Kansas City, denied a request from Sen. Pat Toomey, R-Pa., for additional information about the reserve bank’s decision to grant and then later revoke the master account of Reserve Trust, a Colorado-based fintech.

Federal Reserve chair Jerome Powell said the board of governors does not decide whether individual applicants are granted master accounts, a task that instead falls to the regional banks.

Bloomberg News

“Regarding congressional oversight of the Fed, I remain concerned that the Fed and its regional banks continue a pattern of stonewalling reasonable requests for information,” Tillis said. “The latest example concerns the fairness, transparency, and consistency of Fed decisions to granting highly-valuable Fed master accounts.”

Lummis asked Powell if he would commit to creating a public database of institutions that have received Fed master accounts and another list of organizations that have applied for them. The Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation already maintain similar resources on websites. 

“I’ll be glad to look into that,” Powell said, adding that the matter is largely beyond the control of the Fed Board of Governors. “You know our system well and it really is that the Board, we set rules, but the reserve banks really make the decisions about granting accounts subject to those rules.”

Powell noted that the Board is in the process of revising its policies for how master account applicants are evaluated. He said the Board’s most recent proposal for amending the process would clear up some of the issues raised by the senators. 

Yet, Lummis said the pending rule changes have created an environment in which reserve banks can deflect questions about the master account process to the Board.

“Applicants for master accounts are getting whipsawed between the Board of Governors and the banks,” Lummis said. “The Federal Reserve says the banks have all the authority they need to … make these decisions. And yet, you go to these reserve banks and they say ‘Oh, now we’re waiting for the Board of Governors.’”

The end result, Lummis said, is a “blackhole” of information about how the master account process is supposed to function. She encouraged Powell to address the matter once and for all.

“There’s just no excuse,” she said. “There’s no excuse anymore, Mr. Chairman.”

Transparency around how and to which institutions the Fed grants master accounts was first brought into question earlier this year during the confirmation hearing for the Biden administration’s first pick for Fed vice chair for supervision, Sarah Bloom Raskin. A former Fed governor and Treasury official, Raskin served on the board of Reserve Trust when it was granted a master account in 2018.

During the February hearing, Republicans on the Senate Banking Committee pressed Raskin about her role in helping Reserve Trust obtain a master account, something no other fintech had been able to do. Raskin said she could not recall. A standoff ensued, as Republicans refused to vote on any Fed nominees until Raskin provided more information on the exchange. They also pushed the Kansas City Reserve for documentation and a briefing on the matter. The reserve bank gave few details but stated that it stood by its rationale for granting the company access to its payment system. Raskin ultimately withdrew from consideration.

The matter emerged again earlier this month after Reserve Trust apparently had lost its master account. Toomey sent a follow-up request to the Kansas City Fed, which George shot down, claiming supervisory privilege. 

Tillis advocated for several legislative reforms from the dais in his opening remarks for the hearing. Tillis filled in for Toomey, the committee’s ranking member and a staunch proponent for reserve bank reform, who missed the hearing due to a death in his family.

Echoing proposals first floated by Toomey, Tillis suggested legislation that would subject regional bank presidents to congressional approval, prevent the Fed from denying congressional inquiries and solidify reserve banks as being subject to Freedom of Information requests. Given their status as quasi-governmental entities, regional reserve banks can often claim exemptions that preclude them from disclosing information.

“And it is important to point out that Republicans aren’t the only ones who’ve found it difficult to conduct Fed oversight,” Tillis said. “Several of my Democratic colleagues, including Senators Warren and Menendez, have been vocal when they also found their oversight efforts met with resistance.”

It’s the economy

Senators spent most of Wednesday’s hearing prodding Powell over the state of the economy. They asked for insights into the Fed’s plans to further combat 40-year-high inflation and his thoughts on topics ranging from housing affordability to the impact of consolidation in the oil industry on gas prices. He declined to delve into most subjects on the ground that they fell outside the Fed’s direct responsibilities to maintaining price stability and full employment. 

During his testimony, Powell said he was persuaded during last week’s Federal Open Market Committee meeting to support a 0.75 percentage point increase to the Fed’s benchmark interest rate immediately in the face of sharper than expected inflation rather than sticking to the half-point increase projected during the May meeting. 

“It was important that we make this move now and not wait and telegraph it and do it six weeks later, for example, or the meeting after that,” Powell said. “It was important to do it now, because where we are with inflation is having seen inflation come in above target over and over again. And we said we’d move more aggressively, if it was appropriate. We thought it was appropriate and we did.”

Powell said he would not rule out even more drastic changes to the Fed’s balance sheet, such as raising interest rates a full percentage point, if inflation continued to spiral out of control.

Along with changing the federal funds rate, the Fed’s other primary lever for curbing inflation is the reduction of its balance sheet. Earlier this month, the Fed began a process of reducing its balance sheet at a rate of $47.5 billion per month.

When the Fed shrinks its balance sheet, it affects how banks compose their own holdings. Not only does it impact the values of Treasuries and mortgage-backed securities, but it also reduces banks’ Fed account balances, a key source of Tier 1 capital used for meeting bank capital requirements.

Sen. Bill Hagerty, R-Tenn., asked how unrealized losses on the Fed’s balance sheet — namely its Treasuries portfolio, which was down $330 billion as of March — would impact the Fed’s reduction plans and if it planned to sell mortgage-backed securities as well to reach a reduction level of $95 billion per month. 

Powell said paper losses would play “no role in our decision making,” noting that the Fed does not seek to profit from its holdings, but rather hands over any proceeds from its balance sheet to the Treasury Department. He added that selling MBS was a strong possibility, because the Fed would ultimately prefer to primarily hold Treasuries.

“With these higher rates, MBS prepayment speeds have gone way down, and so to achieve the mostly-Treasury balance sheet, we may well need to sell MBS at some future date,” Powell said. “When we turn to that, we’re going to be very transparent.”

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