Banks Assert Constitutional Right to Billions in Subsidies

A trade group for the nation’s largest banks has asserted a constitutional right to risk-free profit from the Federal Reserve.

Rob Nichols, the chief lobbyist for the American Bankers Association, argued in a comment letter Thursday that a recent federal law reducing the dividend on the stock that banks purchase as part of membership in the Federal Reserve system violates the Fifth Amendment clause banning the uncompensated seizure of property.

Congress reduced the dividend as part of a deal to pay for transportation projects. Dividends for the stock, which cannot be bought or sold, had been set at 6 percent since the Federal Reserve’s inception in 1913. Banks cannot ever lose money on the stock; they’re even paid out if their regional Fed bank disbands. So the dividend represented a risk-free profit, earning back its investment in full every 17 years.

The dividend cut, from 6 percent to the current interest rate on the 10-year Treasury note, is estimated to reduce the banks’ payments by roughly $7 billion over 10 years. The change only applies to banks with more than $10 billion in assets.

“The Takings Clause of the Fifth Amendment provides that ‘private property’ shall not ‘be taken for public use, without just compensation,’” Nichols wrote in his comment letter to the Fed, which is preparing to implement the dividend cut. Nichols added, “The dividend rate remained unchanged for over 100 years, and it has long been considered fundamental to the Federal Reserve’s ability to attract member banks.”

Contrary to Nichols’s statement, nationally chartered banks are required by law to become members of the Federal Reserve system. And while state banks can opt in or out, they must nevertheless abide by the standards of membership. Moreover, Fed membership offers many perks, from the ability to process payments to access to cheap borrowing, through the Fed’s discount window. So the dividend is just a vestigial sweetener that never went away, pumping billions of dollars in public money to the banks for no discernible reason.

Given those facts, Nichols’s argument amounts to saying that the 6 percent dividend rate itself is constitutionally protected, because it’s been around for a long time. Nichols effectively asserts that the risk-free dividend is bank property.

The letter appears to be a prelude to a legal battle over the dividend cut. The claims about constitutionality are precisely what the banks would argue before the Supreme Court. And by filing a formal comment letter protesting the law, the ABA can argue that it exhausted its administrative options before filing suit.

Friday is the last day for public comments on the Fed’s dividend change. Outside of the ABA’s letter, only one other comment has been filed.

Related:

• Big Banks in a Tizzy Want to Take Their Billions and Go Home

Top photo: Rob Nichols, right, chief lobbyist for the American Bankers Association, arrives with the CEO of Wells Fargo to a 2013 meeting of the Financial Services Forum with President Barack Obama.