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The Connecticut Department of Banking has granted TNB USA Inc. an 18 month extension on its temporary certificate of authority, which will allow the bank to keep operating.

The decision is a reprieve for the de novo bank, which has been tied up in a legal battle with the Federal Reserve Bank of New York over the institution’s refusal to grant TNB a master account, the key to TNB’s business model.

The group behind the bank in organization, which is being led by former New York Fed executive vice president James McAndrews, is planning to operate under a narrow banking model. That means TNB will not offer FDIC insurance or originate loans, but instead have one operation: Collecting deposits, mainly from large institutional money market investors, and placing those deposits in a master account in the New York Fed.

The purpose of this model is to allow depositors to earn higher rates of interest than are currently available to non-financial companies and consumers in a safe, liquid form of deposit.

The Federal Reserve began paying interest on bank reserves to provide incentive for banks to hold onto reserves in 2008. This interest is referred to as the interest on excess reserves. The IOER is closely linked to the federal funds rate and sat at 2.4 percent as of Jan. 19.

Banks tend to profit off the IOER because they pay a much smaller rate to customers. TNB says it will help institutional investors get higher – but safer – returns by giving them more of the IOER rate.

After the New York Fed did not open a master account for TNB, which the de novo needs to access the Fed’s payment system, TNB sued the New York Fed, alleging that by refusing to open a master account for the group, the institution is essentially protecting larger banks from competition.

The New York Fed has responded to TNB’s lawsuit, saying in a letter to district court that TNB’s model raises major “policy concerns.” The New York Fed has requested the judge overseeing the case to reject the argument that it is required by law to grant access to TNB.

The temporary certificate, which lasts for 18 months, is part of Connecticut’s de novo bank application process. They can be extended, but significant progress toward the organization of the institution must be shown, according to the Connecticut Department of Banking.