[Federal Register Volume 88, Number 25 (Tuesday, February 7, 2023)]
[Rules and Regulations]
[Pages 7848-7851]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2023-02192]
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FEDERAL RESERVE SYSTEM
12 CFR Part 208
[Docket No. R-1800]
RIN 7100-AG-53
Policy Statement on Section 9(13) of the Federal Reserve Act
AGENCY: Board of Governors of the Federal Reserve System (Board).
ACTION: Final rule.
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SUMMARY: The Board is issuing a policy statement interpreting section
9(13) of the Federal Reserve Act and setting out a rebuttable
presumption that it will exercise its discretion under that provision
to limit state member banks to engaging as principal in only those
activities that are permissible for national banks--in each case,
subject to the terms, conditions, and limitations placed on national
banks with respect to the activity--unless those activities are
permissible for state banks by federal statute or under part 362 of the
Federal Deposit Insurance Corporation's regulations. The policy
statement also reiterates to state member banks that legal
permissibility is a necessary, but not sufficient, condition to
establish that a state member bank may engage in a particular activity.
A state member bank must at all times conduct its business and exercise
its powers with due regard to safety and soundness. For instance, it
should have in place internal controls and information systems that are
appropriate and adequate in light of the nature, scope, and risks of
its activities. The Supplementary Information section provides examples
of how the policy statement would be applied to certain crypto-asset-
related activities.
DATES: This policy statement is effective on February 7, 2023.
FOR FURTHER INFORMATION CONTACT: Asad Kudiya, Assistant General
Counsel, (202) 475-6358; Andrew Hartlage, Special Counsel, (202) 452-
6483; Kelley O'Mara, Senior Counsel, (202) 973-7497; or Katherine Di
Lucido, Attorney, (202) 452-2352, Legal Division; Kavita Jain, Deputy
Associate Director, (202) 452-2062, Division of Supervision and
Regulation, Board of Governors of the Federal Reserve System, 20th
Street and C Streets NW, Washington, DC 20551. For users of TTY-TRS,
please call 711 from any telephone, anywhere in the United States.
SUPPLEMENTARY INFORMATION:
I. Background
In recent years, the Board has received a number of inquiries,
notifications, and proposals from state member banks and applicants for
membership regarding potential engagement in novel and unprecedented
activities.\1\ For example, the Board has received inquiries from banks
regarding potentially engaging in certain activities involving crypto-
assets.\2\ In January 2023, the Federal Deposit Insurance Corporation
(FDIC), the Office of the Comptroller of the Currency (OCC), and the
Board issued a statement highlighting significant risks associated with
crypto-assets and the crypto-asset sector that banking organizations
should be aware of, including significant volatility in crypto-asset
markets, risks of fraud among crypto-asset sector participants, legal
uncertainties, and heightened risks associated with open, public, and/
or decentralized networks.\3\ As part of its careful review of
proposals from banking organizations to engage in activities involving
crypto-assets, and in light of these risks, the Board is clarifying its
interpretation of section 9(13) of the Federal Reserve Act (Act) and
setting out a rebuttable presumption for how it will exercise its
authority under that statutory provision. This Supplementary
Information also provides examples of how the Board intends to apply
this presumption in the context of certain crypto-asset-related
activities.
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\1\ See SR Letter 22-6, CA Letter 22-6: Engagement in Crypto-
Asset-Related Activities by Federal Reserve-Supervised Banking
Organizations (August 16, 2022) (providing guidance to banking
organizations engaging or seeking to engage in crypto-asset-related
activities).
\2\ Throughout this Supplementary Information, the term
``crypto-assets'' refers to digital assets issued using distributed
ledger technology and cryptographic techniques (for example, bitcoin
and ether), but does not include such assets to the extent they are
more appropriately categorized within a recognized, traditional
asset class (for example, securities with an effective registration
statement filed under the Securities Act of 1933 that are issued,
stored, or transferred through the system of a regulated clearing
agency and in compliance with all applicable federal and state
securities laws). To the extent transmission using distributed
ledger technology and cryptographic techniques changes the risks of
a traditional asset (for example, through issuance, storage, or
transmission on an open, public, and/or decentralized network, or
similar system), the Board reserves the right to treat it as a
``crypto-asset.''
\3\ Board, FDIC, and OCC, Joint Statement on Crypto-Asset Risks
to Banking Organizations, at 1 (January 3, 2023) (Joint Statement).
In the Joint Statement, ``crypto-assets'' refers ``generally to any
digital asset implemented using cryptographic techniques.'' The
Board believes that these risks similarly apply to crypto-assets as
defined in this Supplementary Information. See supra note 2.
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As expressed in the policy statement, the Board generally believes
that the same bank activity, presenting the same risks, should be
subject to the same regulatory framework, regardless of which agency
supervises the bank. This principle of equal treatment helps to level
the competitive playing field among banks with different charters and
different federal supervisors, and to mitigate the risks of regulatory
arbitrage.
In alignment with this principle, the Board generally presumes that
it will exercise its discretion under section 9(13) of the Act to limit
state member
[[Page 7849]]
banks to engaging as principal in only those activities that are
permissible for national banks--in each case, subject to the terms,
conditions, and limitations placed on national banks with respect to
the activity--unless those activities are permissible for state banks
by federal statute or under part 362 of the FDIC's regulations. The
Board also reiterates to state member banks that legal permissibility
is a necessary, but not sufficient, condition to establish that a state
member bank may engage in a particular activity. A state member bank
must at all times conduct its business and exercise its powers with due
regard to safety and soundness.\4\ For instance, it should have in
place internal controls and information systems that are appropriate in
light of the nature, scope, and risks of its activities.\5\
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\4\ 12 CFR 208.3(d)(1).
\5\ 12 CFR 208, app. D-1.
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A. Legal Authority
Under section 9(13) of the Act, the Board ``may limit the
activities'' of a state member bank and its subsidiaries to those
activities that are permissible for a national bank in a manner
consistent with section 24 of the Federal Deposit Insurance Act
(FDIA).\6\ Section 24 of the FDIA generally prohibits insured state
banks from engaging as principal in any activity that is not
permissible for national banks, unless authorized by federal statute or
the FDIC.\7\
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\6\ 12 U.S.C. 330 (as amended by Federal Deposit Insurance
Corporation Improvement Act of 1991 Sec. 303(b), Public Law 102-
242, 105 Stat. 2236, 2353).
\7\ 12 U.S.C. 1831a(a); 12 CFR part 362.
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The National Bank Act enumerates certain powers that national banks
may exercise and authorizes national banks to exercise ``all such
incidental powers as shall be necessary to carry on the business of
banking.'' \8\ The OCC has the authority to interpret provisions of the
National Bank Act and is charged with the ``discretion to authorize
activities beyond those specifically enumerated,'' within reasonable
bounds.\9\ Section 7.1000 of the OCC's regulations identifies the
criteria that the OCC uses to determine whether an activity is
authorized as part of, or incidental to, the business of banking under
12 U.S.C. 24(Seventh).\10\ If a national bank has not been authorized
by federal law, including the National Bank Act, to engage in an
activity, then national banks are not permitted to engage in such
activity.
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\8\ 12 U.S.C. 24(Seventh).
\9\ NationsBank of North Carolina, N.A. v. Variable Annuity Life
Ins. Co., 513 U.S. 251, 258 n.2 (1995).
\10\ 12 CFR 7.1000.
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B. Application
This policy statement applies to insured and uninsured state member
banks. The statement does not impact the legal obligation of insured
state member banks to seek approval from the FDIC when required under
section 24 of the FDIA and part 362 of the FDIC's regulations. As
established under those provisions, insured state banks may not engage
as principal in any type of activity that is not permissible for a
national bank unless--(i) the FDIC has determined that the activity
would pose no significant risk to the Deposit Insurance Fund; and (ii)
the state bank is, and continues to be, in compliance with applicable
capital standards.\11\
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\11\ 12 U.S.C. 1831a(a)(1).
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By issuing this statement, the Board is setting out a clear
expectation that state member banks look to federal statutes, OCC
regulations, and OCC interpretations to determine whether an activity
is permissible for national banks. If no such source authorizes
national banks to engage in the activity, then state member banks
should look to whether there is authority for state banks to engage in
the activity under federal statute or part 362 of the FDIC's
regulations. If there also is no authority for a state bank to engage
in the activity under federal statute or part 362 of the FDIC's
regulations, a state member bank may not engage in the activity unless
it has received the permission of the Board under Sec. 208.3(d)(2) of
the Board's Regulation H. Under that provision, a state member bank may
not, without the permission of the Board, change the general character
of its business or the scope of the corporate powers it exercised at
the time of its admission to membership. In such instances, insured
state banks would be required to submit an application to the FDIC
under part 362 of the FDIC's regulations.
In determining whether to grant a state member bank permission to
engage in an activity under Sec. 208.3(d)(2) of Regulation H, the
Board, consistent with the policy statement, will rebuttably presume
that a state member bank is prohibited from engaging as principal in
any activity that is impermissible for national banks, unless the
activity is permissible for state banks under federal statute or part
362 of the FDIC's regulations. This presumption may be rebutted if
there is a clear and compelling rationale for the Board to allow the
proposed deviation in regulatory treatment among federally supervised
banks, and the state member bank has robust plans for managing the
risks of the proposed activity in accordance with principles of safe
and sound banking.
In assessing permissibility, the Board is intending to align its
process with that of the FDIC under section 24 of the FDIA.\12\ If the
FDIC, by rule, permits insured state banks to engage in the activity,
no Board approval would be required to establish permissibility.\13\
However, if the FDIC permits the activity only for a particular bank,
separate Board approval would be required for all other state member
banks.
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\12\ See, e.g., FDIC FIL-54-2014: Filing and Documentation
Procedures for State Banks Engaging, Directly or Indirectly, in
Activities or Investments that are Permissible for National Banks
(November 19, 2014).
\13\ As noted below, legal permissibility is a necessary, but
not sufficient, condition to establish that a state member bank may
engage in a particular activity. Regardless of the legal
permissibility of a proposed activity, if commencing the proposed
activity would constitute a change in the general character of the
state member bank's business or in the scope of corporate powers it
exercised at the time of its admission to membership, prior
permission of the Federal Reserve pursuant to Sec. 208.3(d)(2) of
Regulation H would be required.
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In a case where a state member bank determines that an activity is
permissible for national banks under federal statute, OCC regulations,
or OCC interpretation, the bank may only engage in the activity if the
bank adheres to the terms, conditions, and limitations placed on
national banks by the OCC with respect to the activity. For example, if
the OCC conditions permissibility on a national bank demonstrating, to
the satisfaction of its supervisory office, that the bank has controls
in place to conduct the activity in a safe and sound manner, and
receiving a written nonobjection from OCC supervisory staff before
engaging in a particular activity, then the activity would not be
permissible for a state member bank unless the bank makes the same
demonstration and receives a written nonobjection from Federal Reserve
supervisory staff before commencing such activity.
C. Safety and Soundness
In the statement, the Board also reiterates to state member banks
that legal permissibility is a necessary, but not sufficient, condition
to establish that a state member bank may engage in a particular
activity. A state member bank must at all times conduct its business
and exercise its powers with due regard to safety and soundness.\14\
For instance, it should have in place internal controls and information
systems that are appropriate to the nature, scope, and
[[Page 7850]]
risks of its activities.\15\ Further, a state member bank must comply
at all times with Regulation H, conditions of membership prescribed by
the Board,\16\ and other applicable laws and regulations, including
those related to consumer compliance and anti-money laundering. With
respect to any novel and unprecedented activities, such as those
associated with crypto-assets or use of distributed ledger technology,
it is particularly important for a state member bank to have in place
appropriate systems to monitor and control risks, including liquidity,
credit, market, operational (including cybersecurity and use of third
parties), and compliance risks (including compliance with Bank Secrecy
Act and Office of Foreign Asset Control requirements to reduce the risk
of illicit financial activity). Federal Reserve supervisors will expect
state member banks to be able to explain and demonstrate an effective
control environment related to such activities.
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\14\ 12 CFR 208.3(d)(1).
\15\ 12 CFR 208, app. D-1.
\16\ 12 CFR 208.3(d)(3).
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D. Specific Activities of Interest
The Board has received inquiries as to the permissibility of
certain crypto-asset-related activities for state member banks. Below,
the Board discusses how it would presumptively apply section 9(13) of
the Act to these activities. In practice, this presumption could be
rebutted if there is a clear and compelling rationale for the Board to
allow deviations in regulatory treatment among federally supervised
banks, and the state member bank has robust plans for managing the
risks of such activities in accordance with principles of safe and
sound banking. However, the Board has not yet been presented with facts
and circumstances that would warrant rebutting its presumption. Nothing
in the policy statement would prohibit a state member bank, or an
applicant to become a state member bank, once approved, from providing
safekeeping services for crypto-assets in a custodial capacity if such
activities are conducted in a safe and sound manner and in compliance
with consumer, anti-money-laundering, and anti-terrorist-financing
laws.
Holding Crypto-Assets as Principal. The Board has not identified
any authority permitting national banks to hold most crypto-assets,
including bitcoin and ether, as principal in any amount,\17\ and there
is no federal statute or rule expressly permitting state banks to hold
crypto-assets as principal. Therefore, the Board would presumptively
prohibit state member banks from engaging in such activity under
section 9(13) of the Act.\18\
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\17\ To date, the OCC has not made a determination addressing
the permissibility of a national bank holding crypto-assets as
principal, other than ``stablecoins'' to facilitate payments subject
to the conditions of OCC Interpretive Letter 1179. See OCC
Interpretive Letter No. 1174 (January 4, 2021) (Interpretive Letter
1174); OCC Interpretive Letter No. 1179 (November 18, 2021)
(Interpretive Letter 1179). The OCC has required a national bank to
divest crypto-assets held as principal that it acquired through a
merger with a state bank. Specifically, the OCC conditioned its
recent approval of the merger between Flagstar Bank, FSB and New
York Community Bank into Flagstar Bank, NA on the divestiture of
holdings of ``Hash,'' a crypto-asset, after a conformance period, as
well as a commitment not to increase holdings of any crypto-related
asset or token ``unless and until the OCC determines that . . . Hash
or other crypto-related holdings are permissible for a national
bank.'' OCC Conditional Approval Letter No. 1299, at 9 (October 27,
2022).
\18\ In addition, insured state member banks would need to seek
approval to hold crypto-assets, other than those permitted by OCC
Interpretive Letters 1174 and 1179, from the FDIC under section 24
of the FDIA and part 362 of the FDIC's regulations.
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The Board believes this presumption is bolstered by safety and
soundness concerns.\19\ The Financial Stability Oversight Council has
observed that, in the absence of a fundamental economic use case, the
value of most crypto-assets is driven largely by sentiment and future
expectations, and not by cash flows from providing goods or services
outside the crypto-asset ecosystem.\20\ This prevents firms that hold
crypto-assets from engaging in prudent risk management based on the
underlying value of most crypto-assets, their anticipated discounted
cash flows, or the historic behavior of the relevant markets. Moreover,
the crypto-asset sector--which is globally dispersed--is largely
unregulated or noncompliant with regulation from a market-conduct
perspective, and issuers are often not subject to or not compliant with
disclosure and accounting requirements. This opacity may make it
difficult or impossible to assess market and counterparty exposure
risks. Further, engagement in crypto-asset transactions can present
significant illicit finance risks, in part due to the pseudonymity of
transactors and validators. Finally, crypto-assets that are issued or
transacted on open, public, and/or decentralized ledgers may involve
significant cybersecurity risks--especially in comparison to
traditional asset classes.
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\19\ See Joint Statement (noting that holding as principal
crypto-assets that are issued, stored, or transferred on an open,
public and/or decentralized network, or similar system, is highly
likely to be inconsistent with safe and sound banking practices).
\20\ Financial Stability Oversight Council, Report on Digital
Asset Financial Stability Risks and Regulation, at 27 (October 3,
2022); see also id., at 23-28.
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Issuing Dollar Tokens. Certain state member banks have proposed to
issue dollar-denominated tokens (dollar tokens) using distributed
ledger technology or similar technologies. The permissibility of the
issuance of dollar tokens to facilitate payments for national banks is
subject to OCC Interpretive Letters 1174 and 1179, including the
conditions set out therein.\21\ A state member bank seeking to issue a
dollar token would be required to adhere to all the conditions the OCC
has placed on national banks with respect to such activity, including
demonstrating, to the satisfaction of Federal Reserve supervisors, that
the bank has controls in place to conduct the activity in a safe and
sound manner, and receiving a supervisory nonobjection before
commencing such activity.
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\21\ Interpretive Letter 1174; Interpretive Letter 1179.
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The Board generally believes that issuing tokens on open, public,
and/or decentralized networks, or similar systems is highly likely to
be inconsistent with safe and sound banking practices.\22\ The Board
believes such tokens raise concerns related to operational,
cybersecurity, and run risks, and may also present significant illicit
finance risks, because--depending on their design--such tokens could
circulate continuously, quickly, pseudonymously, and indefinitely among
parties unknown to the issuing bank. Importantly, the Board believes
such risks are pronounced where the issuing bank does not have the
capability to obtain and verify the identity of all transacting
parties, including for those using unhosted wallets.\23\
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\22\ See Joint Statement, at 2.
\23\ Interpretive Letter 1174, at 4 (quoting President's Working
Group on Financial Markets, Statement on Key Regulatory and
Supervisory Issues Relevant to Certain Stablecoins, at 3 (December
23, 2020)).
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List of Subjects in 12 CFR Part 208
Accounting; Agriculture; Banks, Banking; Confidential business
information; Consumer protection; Crime; Currency; Federal Reserve
System; Flood insurance; Insurance; Investments; Mortgages; Reporting
and recordkeeping requirements; Securities.
12 CFR Chapter II
Authority and Issuance
For the reasons set forth in the Supplementary Information, part
208 of chapter II of title 12 of the Code of
[[Page 7851]]
Federal Regulations is amended as follows:
PART 208--MEMBERSHIP OF STATE BANKING INSTITUTIONS IN THE FEDERAL
RESERVE SYSTEM (REGULATION H)
0
1. The authority citation for part 208 continues to read as follows:
Authority: 12 U.S.C. 24, 36, 92a, 93a, 248(a), 248(c), 321-338a,
371d, 461, 481-486, 601, 611, 1814, 1816, 1817(a)(3), 1817(a)(12),
1818, 1820(d)(9), 1833(j), 1828(o), 1831, 1831o, 1831p-1, 1831r-1,
1831w, 1831x, 1835a, 1882, 2901-2907, 3105, 3310, 3331-3351, 3905-
3909, 5371, and 5371 note; 15 U.S.C. 78b, 78I(b), 78l(i), 780-
4(c)(5), 78q, 78q-1, 78w, 1681s, 1681w, 6801, and 6805; 31 U.S.C.
5318; 42 U.S.C. 4012a, 4104a, 4104b, 4106, and 4128.
Subpart J--Interpretations
0
2. Add Sec. 208.112 to read as follows:
Sec. 208.112 Policy statement on section 9(13) of the Federal Reserve
Act.
(a) Under section 9(13) of the Federal Reserve Act (12 U.S.C. 330),
a state member bank may ``exercise all corporate powers granted it by
the State in which it was created . . . except that the [Board] may
limit the activities of State member banks and subsidiaries of State
member banks in a manner consistent with section 24 of the Federal
Deposit Insurance Act.'' The Board interprets this provision as vesting
the Board with the authority to prohibit or otherwise restrict state
member banks and their subsidiaries from engaging as principal in any
activity (including acquiring or retaining any investment) that is not
permissible for a national bank, unless the activity is permissible for
state banks by federal statute or under part 362 of the Federal Deposit
Insurance Corporation's (FDIC) regulations, 12 CFR part 362. The Board
reminds state member banks of the fundamental canon of federal banking
law that activities are permissible for a national bank only if
authority is provided under federal law, including the National Bank
Act.
(b) The Board generally believes that the same bank activity,
presenting the same risks, should be subject to the same regulatory
framework, regardless of which agency supervises the bank. This
principle of equal treatment helps to level the competitive playing
field among banks with different charters and different federal
supervisors and to mitigate the risks of regulatory arbitrage.
(c) In alignment with this principle, the Board generally presumes
that it will exercise its discretion under section 9(13) of the Federal
Reserve Act (12 U.S.C. 330) to limit state member banks and their
subsidiaries to engaging as principal in only those activities that are
permissible for national banks--in each case, subject to the terms,
conditions, and limitations placed on national banks with respect to
the activity--unless those activities are permissible for state banks
by federal statute or under 12 CFR part 362. For example, if the OCC
conditions permissibility on a national bank demonstrating, to the
satisfaction of its supervisory office, that the bank has controls in
place to conduct the activity in a safe and sound manner, and receiving
a written nonobjection from OCC supervisory staff before engaging in a
particular activity, then the activity would not be permissible for a
state member bank unless the bank makes the same demonstration and
receives a written nonobjection from Federal Reserve supervisory staff
before commencing such activity.
(d) If a state member bank or its subsidiary proposes to engage in
an activity as principal that is not permissible for a national bank or
for an insured state member bank under federal statute or part 362 of
this title, the state member bank or subsidiary may not engage in the
activity unless the bank has received the prior permission of the Board
under Sec. 208.3(d)(2). Under that provision, a state member bank may
not, without the permission of the Board, change the general character
of its business or the scope of the corporate powers it exercises at
the time of its admission. In determining whether to grant permission
to engage in an activity under Sec. 208.3(d)(2), the Board will
rebuttably presume that a state member bank and its subsidiaries are
prohibited from engaging as principal in any activity that is
impermissible for national banks, unless the activity is permissible
for state banks under federal statute or part 362 of this title. This
presumption may be rebutted if there is a clear and compelling
rationale for the Board to allow the proposed deviation in regulatory
treatment among federally supervised banks, and the state member bank
has robust plans for managing the risks of the proposed activity in
accordance with principles of safe and sound banking. Depending on the
applicant and the activity, an application to the FDIC may also be
required under section 24 of the Federal Deposit Insurance Act (12
U.S.C. 1831a).
(e) This statement does not impact the legal obligation of insured
state member banks to seek approval from the FDIC when required under
section 24 of the Federal Deposit Insurance Act and part 362 of this
title. As established under those provisions, insured state banks may
not engage as principal in any type of activity that is not permissible
for a national bank unless--(1) the FDIC has determined that the
activity would pose no significant risk to the Deposit Insurance Fund;
and (2) the state bank is, and continues to be, in compliance with
applicable capital standards.
(f) The Board also reiterates to state member banks that legal
permissibility is a necessary, but not sufficient, condition to
establish that a state member bank may engage in a particular activity.
Under Sec. 208.3(d)(1), a state member bank must at all times conduct
its business and exercise its powers with due regard to safety and
soundness. Under appendix D-1 of this part, at a minimum, a state
member bank should have in place and implement internal controls and
information systems that are appropriate for the nature, scope, and
risks of its activities. Further, under Sec. 208.3(d)(3), a state
member bank must comply at all times with this part and conditions of
membership prescribed by the Board; in addition, a state member bank
must comply with other applicable laws and regulations, including those
related to consumer compliance and anti-money laundering. With respect
to any novel and unprecedented activities, appropriate systems to
monitor and control risks, including liquidity, credit, market,
operational, and compliance risks, are particularly important; Federal
Reserve supervisors will expect banks to be able to explain and
demonstrate an effective control environment related to such
activities.
By order of the Board of Governors of the Federal Reserve
System, January 27, 2023.
Ann E. Misback,
Secretary of the Board.
[FR Doc. 2023-02192 Filed 2-6-23; 8:45 am]
BILLING CODE 6210-01-P