'Skinny Master' does not change legal eligibility

Before you get too excited about the "skinny" master account (aka payment account) proposed by Fed Governor Waller, it's important to read his words carefully.

Waller repeatedly stressed that the account would be available to "legally eligible" entities. Under current law, this means depository institutions. Waller's proposal is not a recipe for payment service provider (PSP) access as adopted by the UK, EU, Canada, and others. It is a Fed compromise offer for the many "Tier 3" depository institutions that are currently eligible for master accounts that the Fed does not want to give them.

To be fair, this is as far as the Fed can go on its own. As my co-authors and I wrote in our recent white paper, true PSP access to Fed services requires a targeted amendment to the Federal Reserve Act, which only Congress can enact.

Aside from the issue of legal eligibility, though, the account that Waller described is very similar to the account we proposed in our white paper: a settlement account with no interest on balances, no overdraft privileges, and no discount window borrowing. Similar constraints have been adopted by other jurisdictions to keep PSP accounts focused on payments and minimize risks and impacts for the broader financial system.