Banking Provisions in the National Defense Authorization Act for Fiscal Year 2023

INSIGHTi

Banking Provisions in the National Defense
Authorization Act for Fiscal Year 2023
Updated December 29, 2022
The James M. Inhofe National Defense Authorization Act for Fiscal Year 2023 (NDAA; P.L. 117-263 )
contains a few provisions relevant to the financial system. This Insight provides an overview of those
provisions most pertinent to domestic banking regulation.
Title LVII—Financial Services Matters
Title LVII pertains to financial services and there are two provisions that impact the banking system.
Bank Hiring Practices
Section 19 of the Federal Deposit Insurance Act (12 U.S.C. §1829) prohibits, without the prior consent of
the Federal Deposit Insurance Corporation (FDIC), any person from working in banking who has been
convicted of a crime of dishonesty or breach of trust or money laundering, or who has entered a pretrial
diversion or similar program in connection with the prosecution of such an offense. An individual or bank
can seek an exception by filing an application with the FDIC. In 2020, the FDIC issued a rule to revise
and codify its policy on Section 19. Under the rule, an individual whose covered offense has been
expunged is exempt from needing to file an application. The rule also raised the minimum standards for
certain offenses to require an application and reduces the time individuals with certain offenses have to
wait to apply.
Section 5705 of Title LVII of the FY2023 NDAA amends Section 19 to create further exceptions. (This
section is based on H.R. 5911, the Fair Hiring in Banking Act, passed by the House in May 2022.)
Specifically, an individual does not need to apply for an exception if the offense occurred seven or more
years ago or if the individual was incarcerated and released from incarceration five or more years ago.
Similarly, for offenses committed by individuals 21 years or younger, exceptions are not be needed 30
months after sentencing. Further, individuals with expunged or sealed records do not need to apply for an
exception under Section 19. The provision also establishes new minimum standards under which
exceptions are not necessary. Finally, the provision requires the FDIC to coordinate with the National
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Credit Union Administration to promote consistent implementation of the exceptions among the credit
union system.
Master Accounts
Payments between end users (such as customers and merchants) with different banks using different
payment systems can be completed because master accounts are connected to each other at the Federal
Reserve (Fed). Customer payments are aggregated and netted by banks, which can then debit and credit
each other’s master accounts through wholesale payment systems, where they are cleared and settled.
Institutions must apply to the Fed to receive master accounts. These applications have typically been
approved quickly for traditional banks, but some nontraditional applicants have reportedly faced delays.
Payment firms can also obtain master accounts to access wholesale payment systems and related Fed
payment services by being approved for bank charters. Once approved for a bank charter, a payment firm
can complete such payments without needing an intermediary.
Financial technology (fintech) has led to innovation in retail payments by both traditional banks and
fintech firms. Although these fintech firms do not necessarily provide traditional banking services besides
payment, some have sought—and some of those have been granted—state or federal bank charters. More
recently, cryptocurrency firms with state bank charters have applied for master accounts to more
seamlessly transact between crypto and official currency. The growing number of nontraditional
applicants has raised policy questions about who is and who should be eligible for master accounts, how
transparent the application process should be, and what safeguards the Fed should impose on firms with
master accounts. Both guidance from the Fed and portions of the FY2023 NDAA seek to clarify these
questions.
The Fed issued final guidance in August 2022 explaining how it would evaluate master account
applications. According to the Fed, the guidance would make the application process more transparent
and ensure that applications from nontraditional institutions were treated consistently among the 12
regional Federal Reserve banks. Further, in November 2022, the Fed proposed to begin publicly
disclosing institutions with master accounts on a quarterly basis.
Section 5708 of Title LVII of the FY2023 NDAA requires the Fed to create and maintain a public
database of institutions that have access to master accounts as well as entities that have requested access
to one. The database is required to be updated quarterly and include the status of any pending requests for
access.
Title LVIII—Financial Data Transparency
Bank regulators collect and publish industry data each quarter. For example, regulators publish Call
Reports and Uniform Bank Performance Reports, which detail the financial condition of each banking
institution. Regulators collect similar data for bank holding companies in the form of Y9-C reports. In
addition, regulators maintain public databases of various information on each bank, and the Consumer
Financial Protection Bureau keeps records of information such as complaints filed against financial
institutions, as well as data on consumer lending and other consumer financial activity.
Title LVIII, based on H.R. 2989, the Financial Transparency Act of 2021, requires all federal financial
regulators—both bank regulators and regulators of nonbank financial institutions and activities—to adopt
open-source data standards by jointly issuing proposed rules within 18 months of enactment and final
rules no later than two years from enactment. While this requirement applies to all financial system
regulators, it may have a significant impact on the way that bank data are collected. For instance, various
bank regulators have their own identification schemes for the institutions they collect data on. Title LVIII

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requires the use of common identifiers for collections of information and would require data to be “made
available as an open Government data asset;… freely available for download; rendered in a human-
readable format; and accessible via application programming interface where appropriate.”

Author Information

Andrew P. Scott
Marc Labonte
Analyst in Financial Economics
Specialist in Macroeconomic Policy





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IN12067 · VERSION 3 · UPDATED

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