Feds hit banks to pay for Highways

Another great idea has come out of Congress – reduce the dividends the Federal Reserve banks pay on stocks that private-sector banks hold.  This idea would lower the dividend from 6% for banks with more than $1 billion in assets to 1.5%.  Why would they want to reduce these dividends?  To pay for a Highway bill that the federal government can’t afford.

Here are some comments from The Wall Street Journal:

Fed Chairwoman Janet Yellen last week said she was concerned such a proposal could reduce banks’ willingness to be part of the Federal Reserve System and might pose a particular challenge to smaller banks that rely on the dividend. “This is a change to the law that could conceivably have unintended consequences,” Ms. Yellen said while testifying before the Senate Banking Committee on Thursday. “And I think it deserves some serious thought and analysis.”

When banks join the Fed system, becoming members, they are required to buy stock equal to 6% of a bank’s capital, and can’t transfer or sell it. The Fed’s regional reserve banks pay dividends on the stock to the member banks.

Although the dividend reduction wouldn’t be a major hit to any one bank, the total annual decrease is equal to roughly 4% of industry profits, said Jaret Seiberg, an analyst with Guggenheim Securities LLC.  “The banks are pushing back hard on the proposal, so it’s far from a slam dunk,” Mr. Seiberg said.

Proposals to ding banks as a way to offset spending aren’t new. The banking industry lobbied furiously last year against a budget bill from then Rep. Dave Camp (R., Mich.), who proposed a new tax on the biggest banks as a way to generate revenue. Although the Camp bill never gained traction, industry executives warned at the time it would set a dangerous precedent and be more likely to emerge in future budget debates.

“The problem is this is going to keep coming up now,” Mr. Seiberg said of the dividend proposal. “This has been elevated and it’s going to become one of those low-hanging fruit pay-fors that’s going to surface with every spending bill.”

And here is some of what The Hill said about it:

The banking industry are vehemently opposing one mechanism Senate Majority Leader Mitch McConnell (R-Ky.) and Sen. Barbara Boxer (D-Calif.) want to pay for their six-year highway transportation bill.  McConnell and Boxer’s multi-year transportation deal seeks to offset $16.3 billion of the $50 billion needed by lowering the interest rate off dividends banks purchase from the Federal Reserve.

The top banking industry groups — including the American Bankers Association, the Financial Services Roundtable, the Financial Services Forum and the Independent Community Bankers of America — sent a letter last week to Senate leadership urging them to abandon the pay-for.

“Dramatically reducing the rate to pay for a completely unrelated congressional priority will weaken the financial stability of banking institutions and reduce liquidity available in the financial system,” the groups wrote in a letter, obtained first by The Hill.

“This proposed policy change undermines a key agreement that has underpinned the United States banking system for 100 years,” the groups wrote.

Sarah Curry

Sarah Curry is Director of Fiscal Policy Studies at the John Locke Foundation.

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