Custodia Bank Ruling: Why Did Judge Skavdahl Make a 360 Degree Turnaround?

Justice Scott Skavdahl, who has been hearing the case between Custodia Bank and the Federal Reserve, changed his view on the issue of the Fed’s power over the master account applications. At first, Judge Skavdahl appeared to be doubtful that Congress had given the Federal Reserve complete freedom in determining such applications. 

This viewpoint entailed a certain degree of limitation on the Fed’s discretionary authority. Yet in a later decision, Judge Skavdahl sided with the Federal Reserve, inferring that the legislative provisions actually grant the Fed the final power of determination.

Custodia Bank vs the Federal Reserve

Custodia Bank, a bank based in Wyoming, sued the Federal Reserve after a protracted decision-making process in respect to its master account application. Master accounts are important because they make it possible to have direct access to the services offered by the Federal Reserve without the intermediation of an operational bank. The lawsuit of Custodia followed the delay of the Federal Reserve Bank of Kansas City and its ultimate rejection of the application. 

The legal angle of the bank was that the decision of the board from the Fed to disqualify the bank was inappropriate and influenced the decision of the Kansas City Fed, and so, the disqualification was outside the Fed’s discretion for nonmember depository institutions.

Judicial Analysis and Implications

In his final ruling, Judge Skavdahl ruled that no federal laws require the Federal Reserve to give master account access to every applicant. This interpretation hinged predominantly on the assertion that the Kansas City Federal Reserve arrived at an autonomous decision, thus without any influence of the Board of Governors. 

The judge accentuated the dangers of providing unlimited access to the services of the Federal Reserve and the risk of a regulatory ‘race to the bottom’ among states. In such a situation, minimally regulated institutions could gain direct entry to the Fed and threaten the integrity of the financial system.

Custodia Bank’s Response

Custodia Bank, upon the ruling of the court, voiced its resolve to pursue its vision of a secure technological bank. Representing Custodia, Nathan Miller focused on the difficulties that were met in the struggle against the practice of the Federal Reserve, but the bank’s commitment to its aspirations was strongly highlighted.

At the moment, Custodia is looking at all the alternatives, including an appeal, as it struggles to deal with the consequences of this legal defeat.

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