Puerto Rican bank to appeal Fed master account closure case

After a judge dismissed its lawsuit against the Federal Reserve, a Puerto Rican bank has pledged to appeal the decision, noting that recent comments from the head of the central bank could undermine the lower court’s findings.

Banco San Juan International, or BSJI, a Guaynabo, Puerto Rico-based financial institution, has been in a legal battle with the Federal Reserve Board and the Federal Reserve Bank of New York since its Fed deposit account was terminated in November 2023. 

Having ruled earlier this year that the Federal Reserve Bank of New York had full discretion over access to so-called master accounts, a judge in the U.S. District Court for the Southern District of New York dismissed BSJI’s remaining motions and closed the case on Monday. 

In a statement released Tuesday, the bank said it plans to appeal the decision, noting that conventional thinking about master account access is being revisited in Washington — including within the Fed itself.

“Even the Chair of the Federal Reserve, Jerome Powell, testified to the Senate Banking Committee that he was ‘troubled’ by the recent spate of depository institutions that have been ‘de-banked’ by the Reserve Banks,” the bank’s statement reads. “He said ‘reputational risk’ … is improper and would no longer be considered by Reserve Banks.”

During testimony in the Senate Banking Committee last month, Powell expressed concern about the inclusion of reputation risk in the Federal Reserve System’s guidebook for evaluating master account applications. Specifically, the manual directed staff to “consider the conduct of the institution and its leadership” to determine if it threatened the institution’s reputation. Powell said that concept has been removed from the internal guidance, adding that the Fed will review its usage in other parts of its oversight.

“It may be that this whole thing with reputation risk needs to be thought about,” Powell said. “We’re taking that concept out of the one manual that we’ve been using for account access for master accounts; we’re just going to take that out. But I think this needs a fresh look and I think it’s time for that.”

In response to Powell’s comment, Sen. Tim Scott, R-S.C., chair of the Senate Banking Committee, introduced legislation that would prohibit the use of reputation risk for all federal bank regulators.

The inclusion of reputation risk as a matter of prudential oversight has long been debated in banking and bank regulatory circles. Critics say it gives examiners a free hand to downgrade institutions for activities that do not pose an imminent threat to solvency. Crypto proponents believe such considerations have played a key role in what they see as an orchestrated effort to limit the banking sector’s exposure to digital assets. 

In a court filing submitted shortly after Powell’s comment, BSJI noted that the New York Fed “expressly” relied upon reputational considerations when it moved to close the bank’s account. 

BSJI is chartered as an international banking entity, or IBE, under Puerto Rico’s Oficina del Comisionado de Instituciones Financieras, or OCIF. Firms that operate as IBEs can only take deposits from non-residents. In its lawsuit, the bank argued that the New York Fed has discriminated against it and other IBEs in recent years, particularly those with Venezuelan-born owners and depositors. 

In its defense of the account closure, the New York Fed argued that BSJI had insufficient money laundering controls, especially in light of the fact that most of its depositors were from high-risk jurisdictions, including Venezuela. 

In its statement on Tuesday, BSJI accused the Fed and other bank regulators of imposing standards on nontraditional banks that are all but impossible to meet in pursuit of the “predetermined outcome” of curtailing their viability.

“They do so even in the face of Administration and congressional support of these financial institutions,” the statement reads. “BSJI will continue to pursue all appellate avenues, including the United States Supreme Court, if necessary. BSJI is committed to uncovering the truth.”