BANKING OPERATIONS—U.S.: Custodia reply brief asks Supreme Court to review Fed master account authority

Custodia Bank, Inc., a Wyoming-chartered nonmember bank catering to digital asset companies, has formally requested the U.S. Supreme Court to evaluate the authority of regional Federal Reserve Banks in relation to master accounts for state-chartered institutions. In its reply brief supporting a petition for a writ of certiorari, Custodia contended that the Monetary Control Act stipulates mandatory service availability, thereby limiting the discretion claimed by Reserve Banks. The case, identified as Custodia Bank, Inc. v. Federal Reserve Board of Governors, No. 26-62, is set for consideration in October 2026.

The background of the case reveals that Custodia applied for a master account at the Federal Reserve Bank of Kansas City. However, the application was denied by the Reserve Bank president, who cited concerns that Custodia’s business model posed risks that were not in line with safe banking practices. Following the denial, Custodia initiated legal action while the application was under review. Initially, the bank sought a judicial decision regarding the application, but later revised its complaint to demand an order for approval. A federal district court in Wyoming ruled in favor of the Federal Reserve and the Kansas City Fed, granting summary judgment and dismissing Custodia's claims under the Administrative Procedure Act due to a lack of final agency action. The court also rejected Custodia's argument that it was entitled to the master account by right. This ruling was subsequently upheld by a divided panel of the Tenth Circuit, which determined that Section 342 of the Federal Reserve Act provides discretion that is not overridden by 12 U.S.C. §248a. The Tenth Circuit later denied a request for an en banc rehearing, prompting Custodia to file its petition for certiorari in July 2026.

In its arguments, Custodia focuses on the interplay between two sections of the U.S. Code: 12 U.S.C. §248a and 12 U.S.C. §342. The bank asserts that Section 248a(c)(2) of the Monetary Control Act mandates that Federal Reserve services must be accessible to nonmember depository institutions, emphasizing the use of the term "shall be available." Custodia argues that this requirement applies system-wide across the Federal Reserve, including individual Reserve Banks, as it pertains to “all Federal Reserve bank services.”

Custodia contends that the respondents primarily argue that Section 342 grants Reserve Banks the discretion to accept deposits, as it states they “may receive * * * deposits.” In response, Custodia maintains that while Section 342 offers general authority for deposit acceptance, Section 248a constrains discretion regarding service availability. The bank also disputes the respondents' interpretation that Section 248a serves merely as a pricing provision, asserting that the text first addresses service availability before discussing pricing.

Furthermore, Custodia mentions that Section 248a defines “any bank which is eligible” to apply for FDIC insurance, suggesting that Reserve Banks are obligated to provide services to nonmember banks that meet legal eligibility criteria. It also interprets Section 248c’s requirement for reporting rejected master-account applications as a procedural measure rather than a substantive power to deny access.

Beyond statutory interpretations, Custodia warns that the lower court’s ruling could lead to constitutional issues by allowing regional Reserve Bank presidents to exercise unchecked regulatory authority over master-account decisions, despite not being appointed as principal or inferior officers under Article II of the Constitution. The bank emphasizes that this constitutional avoidance principle supports its statutory interpretation rather than standing alone as a separate constitutional claim.

Custodia further argues that the implications of the decision could reverberate throughout the banking sector, influencing the role of state banks within the dual banking system by making their charters contingent upon approval from regional Reserve Banks. The bank cites the Kansas City Fed’s statement that the Board does not exert direct control over account-access decisions, maintaining that Board guidelines do not effectively limit the authority of Reserve Bank presidents.

On the matter of financial-system risk, Custodia’s reply indicates that the Federal Reserve has cautioned that restricting discretion may hinder its capacity to protect the financial system from high-risk institutions. However, Custodia contends that policy concerns should not take precedence over statutory language and asserts that alternative risk management strategies can be implemented without denying master-account access.

Lastly, regarding the preservation of arguments, Custodia acknowledges that the respondents concede the statutory issue was raised and decided in lower courts, but they assert that the bank did not sufficiently preserve a constitutional argument. Custodia counters that the principle of constitutional avoidance reinforces the statutory question already presented to the Supreme Court, urging the Court to grant its petition.