Second Circuit Affirms Fed Can Revoke Master Accounts at Discretion: What This Means for CFOs Managing Cross-Border Settlement
On May 13, the U.S. Court of Appeals for the Second Circuit ruled 3-0 that Banco San Juan Internacional has no statutory right to a Federal Reserve master account. The court rejected the bank's claim that the Federal Reserve Act entitled it to a "master account," which lets banks access the Fed's electronic payment system. Circuit Judge Denny Chin wrote that regional Federal Reserve banks have discretion to award master accounts, as part of their job to promote stability in the financial system.
The ruling turns on a single word in the statute. Section 342 of the Federal Reserve Act states that "Any Federal reserve bank may receive" deposits from member banks and other depository institutions. The court reasoned that Section 342 gives Reserve Banks discretion to receive deposits, which includes discretion to approve or deny master accounts. "May" means permission, not obligation. This interpretation has now been affirmed by both the Second and Tenth Circuits, establishing a clear judicial consensus.
A master account is a deposit account held by a depository institution at a Federal Reserve Bank. It grants the account holder direct access to the Federal Reserve's payment systems, allowing for the settlement of transactions, access to Fedwire services, and other critical banking functions. Master account and Federal Reserve services allow institutions to transfer money to other master accountholders directly and hold funds in the Federal Reserve System, while others must go through third parties, which can add cost, delay, and further complication to transactions.
This matters for freight and logistics operators because their settlement infrastructure sits several layers removed from this discretionary access point. The actual funds movements in cross-border payments are completed through correspondent bank relationships, Fedwire, or CHIPS. When a logistics company pays a supplier in Asia or settles a charter party in Europe, that payment moves through a chain of correspondent banks, each of which depends on upstream access to clearing systems, access that ultimately traces back to a master account somewhere in the chain.
Even small delays in settlement can tie up cash across supply chains, weaken negotiating leverage with overseas suppliers, and complicate cash-flow forecasting in an increasingly interconnected global economy. But delays are the optimistic scenario. The more acute risk is mid-transaction freeze, when a compliance flag halts a payment that's already in flight.
When an international payment is intercepted by an intermediary bank, the originating institution receives a Request for Information. The speed at which an enterprise responds dictates the duration of the liquidity freeze. For a freight operator, this isn't a theoretical inconvenience. Vessels incur demurrage charges. Containers sit at port. Customs releases hang in limbo. The payment that was supposed to clear in 48 hours is now frozen indefinitely because a correspondent bank's compliance system flagged something, a vessel name, a port of call, a beneficiary match against a sanctions list.
Each regulated financial institution is independently responsible for compliance, which means that every intermediary in a payment chain is required to perform its own AML, CFT, and sanctions screening checks. In practice, this means the same payment can be reviewed multiple times using different rule sets and data standards, multiplying cost and delay across the network.
What the Second Circuit ruling makes clear is that when these freezes happen, there's no statutory escalation path, not just at your bank's level, but all the way up. Federal Reserve banks maintain discretionary authority to grant or deny access to their master accounts. BSJI or any other bank that isn't chartered under federal, state, or territorial law doesn't have a statutory entitlement to Federal Reserve Bank services through a master account.
The practical implication: your bank's compliance team isn't being unreasonable when they tell you there's no timeline. They genuinely don't control the outcome. And if your bank's correspondent loses its master account, or is told to exit a particular corridor, your payment flow disappears with it. De-risking practices among large international banks have reduced the number of active correspondent banking relationships, especially in high-risk or low-volume jurisdictions. As global banks retreat from these markets to manage compliance exposure, smaller local institutions may be left without access to international payment networks altogether. This trend has led to the exclusion of entire regions from efficient cross-border flows.
The Board of Governors of the Federal Reserve System approved Account Access Guidelines for Reserve Banks to utilize in evaluating requests for access to Reserve Bank master accounts and services. Tier 3 institutions face the strictest level of review. This group includes eligible institutions that are not federally insured and are not subject to federal prudential supervision. They are bound by a regulatory framework that differs substantially from that of federally insured institutions. In addition, detailed regulatory and financial information may not exist or be available for these firms.
The Fed's guidelines explicitly contemplate that access decisions are discretionary and risk-based. In the event that a Reserve Bank approves an access request, it may subsequently place risk management controls, otherwise restrict, or close an account as necessary to mitigate risks. This isn't bureaucratic hedging, it's the architecture of the system.
For CFOs managing multi-corridor freight operations, the question isn't whether this ruling creates new risk. The risk was always there. The ruling simply makes it visible and judicially confirmed. Your settlement stack runs on a chain of discretionary relationships: your bank's relationship with its correspondent, that correspondent's relationship with its clearing bank, and that clearing bank's relationship with the Fed. At each layer, access can be restricted, suspended, or terminated without statutory recourse.
Funds can go missing for days in the correspondent banking chain, with no way to track their movement in real time. This uncertainty complicates cash flow forecasting and supplier relationships. When a compliance flag freezes your payment mid-transaction, the only question is how long and whether you have documented evidence ready to respond to an RFI.
The operational response isn't to abandon correspondent banking, there's no realistic alternative for most USD-denominated trade settlement. But it does mean treating banking relationships as operational risk, not just service provision. Understanding which correspondent banks your primary bank uses for which corridors. Knowing the tier classification of those correspondents under the Fed's guidelines. Building response protocols for compliance holds that assume no timeline. Maintaining relationships with backup banks that use different correspondent chains for critical corridors.
The Second Circuit's ruling doesn't change the rules. It clarifies that the rules were always permission-based, not rights-based, and that understanding now needs to inform how you build operational resilience into your settlement infrastructure.
References
[1] U.S. Court of Appeals for the Second Circuit, Banco San Juan Internacional v. Federal Reserve Bank of New York, Case No. 25-0246 (May 13, 2026)
