On December 4, the U.S. Court of Appeals for the Ninth Circuit heard oral arguments in an appeal of a district court’s decision upholding the Federal Reserve Bank of San Francisco’s (FRBSF) denial of an application by an Idaho-chartered bank that facilitates trade commodities from and to the U.S., to obtain a master account to use the FRBSF’s transaction-related services to provide payment processing to non-U.S. customers. A Federal Reserve Bank master account is necessary for an institution to have direct access to the payment systems of the Federal Reserve System and settle transactions in central bank funds, and such an account is one of the requirements for other benefits, such as accessing the Fed’s discount window.

In challenging the Federal Reserve Bank’s decision denying the application, the bank argued that, as a depository institution, it was entitled to master accounts as a matter of law. The district court magistrate disagreed, finding that the Fed Reserve Bank had discretion in acting on the application and that it was not a government agency subject to an Administrative Procedures Act or similar challenge.

That decision, and one in a similar case’s order, allow the Federal Reserve Banks to assess such applications pursuant to Federal Reserve Board publication of Guidelines for Evaluating Account and Services Requests issued in 2022 (covered by Orrick Insights here). Those guidelines called on Federal Reserve Banks to undertake “greater due diligence and scrutiny” of master account applications from state-chartered institutions without a Federal Reserve supervised holding company that operate under novel charters or engage in novel activities.

The 9th Circuit’s panel probed the unique nature of Federal Reserve Banks, which are substantially privately owned yet are instruments of Federal Reserve System policies, including those set forth in the guidelines. The panel also took note of a 2022 amendment to the Federal Reserve Act that requires the Federal Reserve Board to publish the dispositions of master account applications, including whether such applications were “rejected,” arguably recognizing that Federal Reserve Banks do have discretion to deny applications. Also, at issue in the argument was whether Federal Reserve Bank discretion to deny master accounts for state chartered institutions impinges impermissibly on the dual banking system, potentially negating the type of state banking policy experimentation that system is said to foster.