Kansas City Fed Approves Limited Purpose Account For Kraken Financial

Welcome to Goodwin’s Financial Services News Roundup. Our newsletter highlights important legal, regulatory, and business developments related to financial services and banking.

1 Kansas City Fed Approves Limited Purpose Account for Kraken Financial

On March 4, the Federal Reserve Bank of Kansas City (Kansas City Fed) announced its approval of a limited purpose Federal Reserve account for Payward Financial, d/b/a Kraken Financial, a Wyoming-chartered special purpose depository institution. The account has an initial one-year term and is subject to tailored restrictions designed to address the institution’s business model and risk profile. The Kansas City Fed stated that an account access determination is made by an individual Reserve Bank based on the applicant’s particular facts and circumstances and that all applicants must meet uniform eligibility standards. The Kansas City Fed’s announcement did not disclose specific information about the institution’s access to the range of Federal Reserve financial services.

2 Federal Banking Agencies Issue FAQs on the Capital Treatment of Tokenized Securities

On March 5, the Federal Deposit Insurance Corporation (FDIC), Office of the Comptroller of the Currency, and Board of Governors of the Federal Reserve System, (collectively, the Agencies) issued responses to frequently asked questions (FAQs) concerning the capital treatment of tokenized securities (i.e., securities in which ownership rights are represented using distributed ledger technology) that, under applicable law, confer legal rights identical to those of the non-tokenized form of the security (Eligible Tokenized Security). The FAQs clarify the capital treatment for Eligible Tokenized Securities, the circumstances under which such a security would qualify as financial collateral for purposes of the capital rule for banking organizations implemented by the Agencies, and that the capital rule does not provide for different treatment based on the use of permissioned or permissionless blockchains. Rather, the Agencies advised that the capital rule is technology neutral, and technologies used to issue and transact in a security do not generally impact the security’s regulatory capital treatment.

3 FDIC Chairman Outlines Ongoing Reforms to Supervisory and Regulatory Frameworks

On March 11, FDIC Chairman Travis Hill provided an update on the agency’s efforts to reform its supervisory and regulatory “toolkit,” emphasizing a shift toward a more risk-focused and outcome-oriented approach intended to “bolster economic growth, foster innovation, and promote stability in the banking sector.” Chairman Hill highlighted a series of supervisory reforms, including interagency efforts to clarify key supervisory concepts such as “unsafe or unsound practices” and “matters requiring attention,” as well as initiatives to refocus examinations on material financial risks and legal violations, review existing supervisory findings, and update the CAMELS rating framework. He also discussed changes to consumer compliance supervision designed to reduce process-driven requirements and concentrate on actual consumer harm and statutory violations. In addition, his remarks previewed forthcoming changes to capital and liquidity requirements, including revisions to leverage and risk-based capital standards and potential adjustments to liquidity rules, as well as continued work on issues relating to digital assets, Bank Secrecy Act/anti-money laundering compliance, and bank resolution policy.

4 Federal Banking Agencies Seek Comment on Proposals to Modernize Capital Framework for Large Banks

On March 19, the Federal Reserve, FDIC, and OCC proposed a number of revisions to the regulatory capital framework applicable to large banking organizations, including global systemically important banks (G-SIBs), to modernize the regulatory capital framework and maintain the strength of the banking system by updating risk-based capital requirements and recalibrating key elements of the existing regime. The first proposal would revise the G-SIB surcharge methodology to better align capital requirements with firms’ systemic risk profiles, including changes to the measurement of systemic indicators and the calibration of surcharges. The second proposal would implement a revised, expanded risk-based capital framework broadly aligned with the Basel III “endgame” standards, including changes to the measurement of credit, market, and operational risk. The third proposal would update the standardized approach to reduce redundancy, improve risk sensitivity, and better align requirements across banking organizations. Of particular note, the second and third proposals would revise the regulatory capital rules so that certain covered banking organizations would no longer be required to deduct any amount of mortgage servicing assets (MSAs) from common equity tier 1 capital. Instead, MSAs would be subject to a 250% risk weight, consistent with the treatment in the current capital rule for MSAs that do not exceed the deduction threshold. Comments on all three proposals must be received by June 18.

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