FED Issues Policy on Treatment of Novel Aspects by State Member Banks
The Board of Governors of the Federal Reserve System (FED) approved the application of Bank of Montreal (Canada) and BMO Financial Corp (of Delaware, US) to acquire BancWest Holding Inc and thereby indirectly acquire the Bank of the West, both of San Francisco, California. In addition, FED also denied the application of Custodia Bank Inc (Wyoming) to become a member of the Federal Reserve System, on the grounds that the application of Custodia Bank was inconsistent with the required factors under the law. FED also issued a policy statement on possible limiting of the activities of a state member bank, under the Federal Reserve Act, to align the permissibility frameworks for both uninsured and insured state member banks.
The policy statement highlights that uninsured and insured banks supervised by the FED will be subject to the same limitations on activities, including those for novel banking activities such as crypto-asset related activities. The policy statement reiterates to state member banks that legal permissibility is a necessary, but not sufficient, condition to establish that a state member bank may engage in a particular activity. A state member bank must at all times conduct its business and exercise its powers with due regard to safety and soundness. For instance, a bank should have in place risk management processes, internal controls, and information systems that are appropriate and adequate for the nature, scope, and risks of its activities. With respect to any novel and unprecedented activities, such as those associated with crypto-assets or use of distributed ledger technology, it is particularly important for a state member bank to have in place appropriate systems to monitor and control risks, including liquidity, credit, market, operational (including cybersecurity and use of third parties), and compliance risks (including compliance with Bank Secrecy Act and Office of Foreign Asset Control requirements to reduce the risk of illicit financial activity). FED supervisors will expect state member banks to be able to explain and demonstrate an effective control environment related to such activities.
The policy statement also specifies how the FED will evaluate inquiries or proposals on certain crypto-asset related activities, consistent with longstanding practice. Nothing in the policy statement would prohibit a state member bank, or an applicant to become a state member bank, once approved, from providing safekeeping services for crypto-assets in a custodial capacity if such activities are conducted in a safe and sound manner and in compliance with consumer, anti-money-laundering, and anti-terrorist-financing laws. FED believes that the principle of equal treatment will promote a level playing field among banks with different charters and different federal supervisors and help mitigate the risks of regulatory arbitrage. The policy statement will come in effect from February 07, 2023.
Keywords: Americas, US, Banking, Policy Statement, Federal Reserve Act, DLT, Crypto-Assets, Internal Controls, FED
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