The Fed and the Reserve Trust revisited

Pennsylvania Senator Pat Toomey


News from Ting Shen/Bloomberg

Former Federal Reserve Governor Sarah Bloom Raskin withdrew her appointment as central bank supervisor in March. But the mystery deepens over how Colorado-based Reserve Trust — the fintech company on whose board she had served — received a lead account from the Fed.

Pennsylvania Senator Pat Toomey sent a letter to Kansas City Fed President Esther George on Wednesday asking about the regional bank’s recent decision to revoke the Reserve Trust’s main account. Reserve Trust was the first and seemingly the only non-banking fintech to receive a main account from the Fed, which allows an institution to seamlessly transfer money without banking partners.

This was odd because the Kansas City Fed initially rejected Reserve Trust’s application in 2017 after determining it did not meet the legal definition of a depository institution. Then, after Ms. George received a phone call from Ms. Raskin, the Kansas City Fed issued the account. Ms Raskin quit the Reserve Trust board in 2019 and cashed in $1.4 million in shares.

Mr. Toomey raised questions about the Fed’s revolving door and possible Reserve Trust patronage when the Senate Banking Committee considered Ms. Raskin’s nomination this year. The Kansas City Fed denied anything was wrong and blamed its reversal on the Colorado banking regulator reinterpreting state law.

But Colorado’s banking regulator disputed the Kansas City Fed’s narrative, and Ms. George and Ms. Raskin blocked Republican senators. Democrats attacked Republicans for suggesting there might be something fishy. Now the Kansas City Fed is giving more credence to its questions.

Mr. Toomey notes in his letter to Ms. George that he has been advised that “the Kansas City Fed recently revoked the Reserve Trust master account after determining, among other things, that the company was no longer eligible for an account. “. He wrote that this “reinforces significant concerns already surrounding the fairness, transparency and consistency” of the Fed’s approach to major accounts.

The Journal reports that the Kansas City Fed had no comment on its Reserve Trust decision, and Reserve Trust did not respond to questions posed by Bloomberg and us. But the case calls for transparency because it was so central to a fight for the Fed’s nomination and it raises the specter of political patronage in regulatory decisions. Ms. George owes the Senate and the public an explanation of what happened.

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Appeared in the June 10, 2022 print edition.


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