The big banks are not taking a rare legislative defeat lying down.
Days after President Obama signed into law a highway package that finally ended an egregious, 100-year-old subsidy for big banks, two of Wall Street’s favorite legislators want to attach a last-minute rider to the end-of-the-year omnibus spending bill that lessens some of the impact of that change.
From 1913 until last week, banks received a 6 percent annual dividend on paid-in stock they had to purchase to become members of the Federal Reserve system. This was initially provided as an incentive for membership with the Fed, but membership is now mandatory for national banks, and all banks must abide by the standards of membership.
It took 100 years and a desperate need to find some way to pay for this year’s highway bill for anyone to think to take away the incentive payments.
The highway bill deal reduced the annual dividend to the rate of interest on 10-year Treasury notes, capped at 6 percent. (The current rate is around 2.2 percent.) This change only affects banks with more than $10 billion in assets, but it saves the federal government around $1 billion a year.
Now, enter Republican Reps. Randy Neugebauer of Texas and Bill Huizenga of Michigan. The crux of their proposed rider on the omnibus bill is this: If banks can’t have their free 6 percent dividend, then they shouldn’t have to pay for any stock at all.
Right now, banks must purchase Fed stock equal to 6 percent of their total capital. But under the proposal, first reported by the Wall Street Journal, banks with over $10 billion in assets would be able to cut that to 3.5 percent of capital, and the Fed would have to return excess money to the member banks, estimated at $25 billion. The Fed would also be restricted from forcing banks to purchase additional stock in the future.
As it happens, that plan actually ends up saving the government money, since it won’t have to pay any dividend on the money it returns to the banks. That would save as much as $1 billion a year, according to the Financial Services Roundtable, a lobbying group that nevertheless supports the rider.
Other groups like the American Bankers Association are also pushing for the measure to be included in the omnibus. It’s not yet clear whether it will make it into the final legislative package, which will reportedly be released on Monday for a vote next week. Current government funding expires December 16.
Since banks established before 1942 don’t even pay taxes on the Fed dividend, it’s unclear why they want to give up a tax-free return equal to Treasury yields. But a revealing comment to the Journal from a bank lobbyist positions this mostly as a temper tantrum reaction to the dividend cut.
“This is not something that we were interested in pursuing or even thought about until the highway bill passed,” said Francis Creighton, executive vice president of government affairs for the Financial Services Roundtable. “If we’re not getting the dividend we signed up for … that led us to say, ‘Do we need this entire system anyway? Does it even make sense?’”
Neugebauer and Huizenga already tried to bail the banks out once, attempting to replace the dividend cut in the highway bill with a substitute funding source that raided the Fed’s capital surplus account instead. Their new rider again irks the Fed, which through a spokesperson warned “against making any changes to the fundamental structure and governance of the Federal Reserve System without a serious, thoughtful, and public discussion.”