Appeals Court Backs Fed’s Power To Cut Off Bank Master Accounts / Fresh Today / CUToday.info

WASHINGTON—A federal appeals court has ruled the Federal Reserve has broad authority to deny or terminate master accounts for financial institutions, rejecting a Puerto Rico-based lender’s argument that it had a statutory right to access the Fed’s payment system, Reuters reported.

In a unanimous decision Wednesday, the Second U.S. Circuit Court of Appeals upheld the Federal Reserve Bank of New York’s decision to terminate the master account of Banco San Juan Internacional (BSJI), a Puerto Rican lender that had argued the Federal Reserve Act entitled it to what are commonly called “bank accounts for banks.” The ruling affirmed that regional Federal Reserve banks have discretion to grant or deny such access as part of their mandate to protect financial stability, Reuters said.

BSJI sued in 2023 after learning its 11-year-old account would be closed amid concerns related to anti-money laundering compliance and U.S. sanctions enforcement tied to Venezuela. The bank argued the termination was part of a broader campaign against institutions connected to higher-risk sectors, including cryptocurrency and cannabis businesses. Circuit Judge Denny Chin wrote that Reserve Banks possess “a toolkit of scalpels and a hatchet” to manage systemic risk, noting that while the Fed has targeted supervisory tools for member banks, its principal authority over nonmember institutions is the ability to allow or deny access to the payment system, Reuters said.

The appeals court also rejected BSJI’s claim that it had been targeted because the bank was owned by a Venezuelan national, finding no evidence of discriminatory intent. The decision reinforces earlier lower-court rulings that found the Federal Reserve Act authorizes — but does not require — Reserve Banks to provide master accounts, an issue that has drawn heightened attention in recent years amid disputes involving crypto-focused banks and other nontraditional financial institutions.