Custodia Bank Appeals Court Loss in Fed Membership Lawsuit

A federal judge ruled last month that the Kansas City Fed had the discretion to reject Custodia’s bid for membership. Custodia, according to the court, had not provided sufficient evidence to back up accusations that the Fed’s Board of Governors was illegally leaning on the Kansas City branch to reject the bank’s bid for a master account. A master account would let Custodia directly access the Fed and not need intermediary banks.

Years have passed since Custodia initially brought the lawsuit against the Federal Reserve, claiming they had unreasonably delayed in rendering a decision. Subsequently, under the leadership of Caitlin Long, who played a significant role in drafting Wyoming’s special purpose depository institution law, the company chose to file the suit anew after receiving a formal denial for their master account application from the Fed.

If Federal Reserve Banks don’t have the power to refuse master account applications, then state chartering laws would be the only protection for the U.S. financial system. In such a case, it’s easy to imagine a competition among states and their politicians to loosen regulations in order to attract businesses, leading to the creation of institutions with minimal oversight that could easily access the central bank’s balances and Federal Reserve services.

When the ruling came out, a representative from Custodia stated that we were in the process of assessing its implications. Additionally, we submitted a protest against the Federal Reserve’s request for legal fees. Our argument was twofold: first, since the appeal was still pending, the granting of fees could potentially halt future litigation by businesses against government or quasi-government entities. This, in turn, could negatively impact the checks and balances between these entities and the private sector.