Congressional Research Service: 'Federal Reserve – Policy Issues in 118th Congress' (Part 3 of 3)
(Continued from Part 2 of 3)
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Payments
Because banks and select other institutions maintain master accounts at the Fed to hold their reserves, those accounts can be used to facilitate interbank payments. To that end, the Fed operates the following wholesale payment systems for those institutions:
* the Automated Clearinghouse (ACH) for wholesale credit and debit transfers,
* check clearing,
* Fedwire Funds Service for gross settlement of large value payments,
* Fedwire Securities Service for settlement of government and government agency securities, and
* National Settlement Service for multilateral payment settlement among the largest payment market participants.
Current payment systems issues of interest to
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79
80
81
82 Title VIII assigns payment, clearing and settlement systems a primary regulator, which can be the Fed, the
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Payment Stablecoins
Stablecoins are cryptocurrencies that are tied in value to some reference currency./83 For example, some stablecoins are set equal in value to the
Stablecoins face run risk--stablecoin holders who wish to convert into dollars rely on the issuer's ability to meet redemption demands. If holders believe that the issuer is unable to meet all redemption demands, then they benefit from being among the first to redeem. This can result in runs that cause the stablecoin's value to collapse because the underlying assets are of insufficient value or because they are too illiquid to meet redemption demands promptly. Whether this run risk should be regulated depends on whether there is some policy justification for addressing it, such as consumer protection or promoting innovation in payments or because run risk potentially poses systemic risk, as FSOC has argued./84
Members of
A 2021 report issued by the
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83 For background, see CRS In Focus IF11968, Stablecoins: Background and Policy Issues, by
84 FSOC, Report on Digital Asset Financial Stability Risks and Regulation,
85 President's
86 See CRS Report R41529, Supervision of
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Policy issues going forward include the following:
* Should payment stablecoins or all stablecoins be regulated for safety and soundness? If so, would the Fed be the most appropriate regulator? For regulatory purposes, can a workable legal distinction be made between payment stablecoins and other stablecoins?
* Should banks, nonbanks, or both be permitted to issue stablecoins, given financial stability concerns? If so, should bank issuance be limited to payment stablecoins?
* Should stablecoins be backed by the federal safety net, including access to federal deposit insurance, Fed master accounts, and the Fed's discount window?
* Is legislation required to implement bank stablecoin regulation by bank regulators?
* Would stablecoins meet the statutory definition of a significantly important FMU, irrespective of their size or importance? Does the Fed's authority to regulate FMUs address the risks posed by stablecoins?
For more information, see CRS Legal Sidebar LSB10754, Stablecoins: Legal Issues and Regulatory Options (Part 2), by
CBDC/87
The recent proliferation of private digital currencies or cryptocurrencies, such as Bitcoin, has led to questions of whether the Fed should create a central bank digital currency (CBDC) - a digital dollar that would share some of the features of these private digital currencies.
In addition, several countries are moving forward with plans to create CBDCs, and this has increased calls for the Fed to act. According to a survey from the Bank for International Settlements, "Nine out of 10 central banks are exploring central bank digital currencies (CBDCs), and more than half are now developing them or running concrete experiments."/88 For example,
Digital payments and account access are already widespread in
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87 This section draws from other CRS products co-authored with
88
89 For more information, see CRS In Focus IF11707, The
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From an end-user perspective, CBDC proposals range from a payment system similar to the status quo to one that is fundamentally different. At one end of the spectrum of proposals, a CBDC accessible only to banks may differ only slightly from the current system given that wholesale payment systems are already digital. At the other end, proposals for consumers to be able to hold CBDCs in accounts at the Fed would fundamentally change the role of the Fed and its relationship with consumers and banks. Thus, depending on its attributes, a domestic CBDC could potentially compete with private digital currencies, foreign CBDCs, private payment platforms, or banks. CBDC proponents differ as to which of these they would like a domestic CBDC to compete with. CBDCs are more likely to compete with private digital currencies as a payment means for legal commerce than to function in their other current uses (e.g., as speculative investments or as payment means for illicit activities).
Depending on its features and how much it differed from the status quo, a
To date, the Fed and
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90 An expansive definition of seigniorage is the income the government obtains from having government (including central bank) liabilities act as money.
91
92 The
In response to the executive order, the
93
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Policy issues include the following:
* Would a CBDC crowd out private financial services in the areas of cryptocurrency, payments, or banking?
* Would CBDCs be less costly and more efficient than the current payment system? What advantages would CBDC provide once FedNow is operational?
* Could international coordination on CBDCs improve the efficiency of cross-border transactions?
* Would CBDCs promote financial inclusion by offering an attractive alternative to the unbanked, or would they widen the "digital divide"?
* Would a CBDC enable faster and more efficient government payments?
* How would a CBDC balance privacy and preventing illicit activity?
* What effect would a CBDC have on financial stability?
* Would a CBDC increase or decrease cybersecurity risk?
* Would CBDCs make monetary policy more or less effective?
* Would CBDCs generate more government seigniorage than the current system can?
* How could the
* Would new legislation or regulation be needed to operate a CBDC?
For more information, see CRS Report R46850, Central Bank Digital Currencies: Policy Issues, by
Access to Master Accounts
Financial technology (fintech) has led to innovation in retail payments by both traditional banks and fintech firms./94 Although these fintech firms do not necessarily provide traditional banking services besides payment processing, some have sought - and some have been granted - state or federal bank charters. For payment firms, a major motivation for seeking a bank charter is to obtain a Fed "master account" to access wholesale payment systems and related Fed payment services without needing a bank to act as its intermediary./95 More recently, cryptocurrency firms with state bank charters have applied for master accounts in order to more seamlessly transact between crypto and official currency./96
All types of payments between end users (such as customers and merchants) with different banks using different payment systems can be seamlessly completed because master accounts are connected to each other at the Fed. Customer payments are aggregated and netted by banks, which can then debit and credit each other's master accounts through wholesale payment systems, where they are cleared and settled. Without a master account, a payment provider is reliant on a bank with a master account to complete transactions with outside parties.
Institutions must apply to the Fed to receive master accounts. These applications have typically been approved quickly for traditional banks, but some nontraditional applicants have reportedly faced delays, causing consternation./97 The growing number of nontraditional applicants has raised policy questions about who is and who should be eligible for master accounts (under existing law or through legislation), how transparent the application process should be, and what safeguards the Fed should impose on firms with master accounts.
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94 For more information, see CRS Report R46332, Fintech: Overview of Innovative Financial Technology and Selected Policy Issues, coordinated by
95 Access to a master account does not automatically confer access to the Fed's discount window. Examples of Fed-provided payment services are listed in Title 12, Section 248a(b), of the
96 For more information, see CRS In Focus IF11997, Bank Custody, Trust Banks, and Cryptocurrency, by
97
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Emblematic of this debate, two recent examples have attracted policymakers' interest. First, the master account application of
According to the final guidance, by law, the Fed may grant master accounts only to firms that meet the statutory definition of member bank or depository institution, designated FMUs, certain government-sponsored enterprises, the
Assuming an applicant is legally eligible, the final guidance separates applicants into three tiers, with each tier receiving progressively more scrutiny before approval. Applicants that are federally insured depository institutions will receive the least scrutiny, institutions that are not federally insured but are subject to prudential supervision by a federal banking agency or have holding companies that are supervised by the Fed will receive more scrutiny, and eligible institutions that are not federally insured and do not have holding companies supervised by the Fed but have state or federal charters will receive the most scrutiny.
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98
99
100 Hill, "Opening a Federal Reserve Account."
101
102
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In the context of fintech and crypto applicants, there is a policy tradeoff between the desire to foster innovation and mitigate risks--which may be poorly understood--to the Fed and financial stability posed by innovation. Compared to non-crypto fintech payment firms, crypto firms pose additional risk given the extreme volatility in cryptocurrency prices, numerous examples of scams and fraud, regulatory uncertainty, and several high-profile and abrupt failures of crypto firms.
Master accounts for innovative payment firms may deliver lower costs and new product options for consumers and merchants. Meanwhile, the lack of an explicit, comprehensive federal regulatory system for payments leaves the Fed reliant on rules within the payment systems it operates and federal regulation of banks to manage payment risks./103 At the same time, the dual state-federal banking system can result in limited federal oversight when a state-chartered institution does not have federal deposit insurance./104 As a result, the Fed could find itself with limited ability to monitor or mitigate risks after a master account has been granted to an institution with no primary federal regulator.
Policy issues for
* Should master accounts be made available to any institution that is legally eligible, or should legislation limit them to traditional banks (e.g., banks with deposit insurance and a primary federal regulator)? Should a nontraditional firm benefit from valuable Fed services without bearing the regulatory costs applied to other users to access those services (and other benefits)./105
* What risks would granting master accounts to firms offering crypto services pose to the payment system, the Fed, and financial stability?
* Should there be a time limit on Fed decisions on master account applications? It is unclear whether the Fed has processed nontraditional applications more quickly since the guidance was released.
* Will the new statutory requirement to publicly release information on master account holders and applicants sufficiently address concerns about transparency?
* Is legislation needed to provide greater clarity on who should be granted master accounts and force the Fed to act more quickly on applications?/106 Or should
For more information, see CRS Insight IN12031,
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103 There are a limited number of federal laws pertaining to payments, most dealing with consumer protection issues or preventing illicit activity.
104 State-chartered depository institutions with federal insurance are subject to federal regulation comparable to nationally chartered institutions. For more information on charters, see CRS Report R47014, An Analysis of
105
106 In the 117th
See
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Lender of
Despite their name,
Less frequently throughout its history, the Fed has also provided liquidity to firms that were not banks under emergency authority found in Section 13(3) of the Federal Reserve Act (12 U.S.C. Sec.343)./108 This authority has been used extensively in only three crises - the Great Depression, the 2007-2009 financial crisis, and the COVID-19 pandemic. In the latter two cases, the Fed used that authority to create a series of emergency facilities to support nonbank financial markets and firms.
Until the Dodd-Frank Act, this authority was broad, with few limitations. One pre-financial crisis limitation was that the authority could be used only in "unusual and exigent circumstances." Concerns in
COVID-19 Response
The COVID-19 pandemic caused widespread disruptions to the economy and, initially, the financial system. In response to the pandemic, the Fed acted as lender of last resort by encouraging use of the discount window and creating an alphabet soup of emergency programs under Section 13(3) to stabilize the financial system and assist entities cut off from credit markets.
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107
108 See CRS Report R44185,
109 See, for example, the Joint Explanatory Statement of the
110
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As financial conditions improved rapidly--faster than the economy improved--take up for the programs turned out to be much smaller than their announced size. The emergency programs backed by the CARES Act expired at the end of 2020, while most other emergency programs were extended until
Policy issues for
*
* Has the Fed created a moral hazard problem where financial markets expect every recession to bring 13(3) facilities, thereby leading financial participants to take on greater risks in the expectation of Fed support? If so, what changes to the Fed's lending or regulatory powers are appropriate to mitigate that risk?
* Did the Fed's facilities disproportionately benefit investors in sophisticated financial products, who are disproportionately at the top of the income distribution, or did the benefits of Fed facilities mainly get passed through to the broader economy via a faster and more robust recovery that broadly benefited all households?
* Has operating emergency facilities undermined the Fed's independence or political neutrality?
* In future crises, should facilities that provide longer-term credit - as opposed to short-term liquidity - to specific financial sectors be created and administered by the Fed or
For more information, see CRS Report R46411, The
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111 This analysis does not consider whether the programs made an economic profit (i.e., whether the government earned a market rate of return). The financial performance of the facilities is reported at https://www.federalreserve.gov/publications/reports-to-congress-in-response-to-covid-19.htm.
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Fed Independence and Congressional Oversight
As discussed in the Introduction, the Fed has been granted an unusually high degree of independence from
For oversight, the Fed is required to provide
One notable difference between the Fed and most other government agencies is that there is no congressional budgetary oversight of the Fed - the Fed is self-financing and its budget is not subject to the appropriations or authorization process. Thus, there is no regular avenue for
Critics have sought a Government Accountability Office (GAO) audit of the Fed.
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112 Section 11B of the Federal Reserve Act (12 U.S.C. Sec.248b). Since 2012, the Fed has voluntarily released unaudited financial statements quarterly as well. Those statements can be found at http://www.federalreserve.gov/monetarypolicy/bst_fedfinancials.htm#quarterly.
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In its rulemaking, the Fed follows the standard notice-and-comment process, which provides some transparency to the Fed's decisionmaking process and gives the public a chance to weigh in on regulatory proposals. However, as an independent agency, the Fed's rulemaking is not subject to executive review by the
For disclosure, the Fed is statutorily required to release an annual report of its operations and actions and a weekly summary of its balance sheet./114
The CARES Act also included testimony and reporting requirements for Fed actions involving CARES Act funding./115
Until 1993, the Fed did not publicly announce its monetary policy decisions (e.g., interest rate changes).
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113 For more information, see CRS Report R41974, Cost-Benefit and Other Analysis Requirements in the Rulemaking Process, coordinated by
114 Sec.Sec.10(7), 10(10), and 11(a)(1) of the Federal Reserve Act (12 U.S.C. Sec.247, 12 U.S.C. Sec.247a, and 12 U.S.C. Sec.248(a), respectively).
115 For more information, see CRS Report R46329,
116 Other Fed reports to
117 From 1970 to 1993, the Fed released other information on
118 The nine
119
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Although oversight and disclosure are often lumped together, they are separate issues. Oversight entails independent evaluation of the Fed; disclosure is an issue of what internal information the Fed releases to the public. A potential consequence of greater oversight is that it could undermine the Fed's political independence. Most economists contend that the Fed's political independence leads to better policy outcomes and makes policy more effective by enhancing the Fed's credibility in the eyes of market participants. In the past, the Fed has opposed proposals to remove statutory restrictions on GAO audits and require a GAO audit on the grounds that they would reduce the Fed's independence from
Title LVIII, Subtitle F of the National Defense and Authorization Act for FY2023 (P.L. 117-263) requires the Fed to adopt data standards to publish its publicly available data in an open data format. It does not require the Fed to make any new data public.
Policy issues for
* What is the right balance between Fed independence and oversight and accountability?
* Have existing statutory restrictions interfered with GAO's ability to evaluate the Fed on issues of congressional interest?
* Has disclosure of lending records since the financial crisis created any stigma that has reduced the effectiveness of Fed lending programs? Has it buttressed public confidence that Fed lending programs do not result in favoritism or conflicts of interest?
* Should more federal statutes applying to the board and other government agencies (such as
* Does the Fed's leading role in crafting international standards for bank regulation and the financial system and its domestic implementation of those standards through the regulatory process bypass
* Does the 2021 trading scandal involving
For more information, see CRS Report R42079,
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120 For background, see
121 In the 117th
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Diversity
Some Members of
In the 117th
* Title I would have assigned the Fed a duty to eliminate racial and economic disparities in carrying out its monetary policy and other responsibilities and would have required the Fed to report to
* Title II would have required banks with over 100 employees regulated by the Fed (and other federal financial regulators) to submit data to the OMWI.
* Title III would have required the Fed and Treasury Secretary to issue guidance on the regulatory capital treatment of Emergency Capital Investment Program investments for Subchapter S and mutual banks. Title III would have also required the Fed to make the discount window available to minority depository institutions (MDIs) and community development financial institutions (CDFIs) at the seasonal credit rate.
* Title IV would have required the Fed, OCC,
* Title VI would have required Fed regional banks to interview at least one individual reflective of gender diversity and at least one individual reflective of racial or ethnic diversity when hiring a regional bank president.
Policy issues for
* Should monetary policy be used to promote the goal of racial equity, or are interest rates a tool that is not capable of effectively addressing racial equity?
* Is Fed leadership sufficiently diverse?
* Can the bank supervisory process be used to improve diversity at banks, or would such a policy detract from the current goals of supervision?
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The report is posted at: https://crsreports.congress.gov/product/pdf/R/R47377
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