Community Banks Vow Opposition to Fed Dividend Cut

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By Jeff Bater

Oct. 8 — Community bankers vowed to oppose any highway funding legislation that includes a reduction of the dividend that the Federal Reserve pays lenders, saying such a cut “sets a terrible precedent.”

The Independent Community Bankers of America released a letter Oct. 8 addressed by state trade associations representing small banks to House and Senate leaders as lawmakers scramble to put together a long-term highway bill.

In the letter, the state banking groups said the proposed dividend reduction amounts to “a backdoor tax increase” that would disproportionately affect community banks and that they will be “forced to oppose any transportation bill that includes it as a spending offset.”

Unintended Consequences

“Reducing the dividend has not been studied or debated before the Congress and could result in significant unintended consequences to the Federal Reserve system, member financial institutions and the individuals and businesses they try to serve,” the letter said. “A reduction in the stock dividend rate to pay for unrelated spending items sets a terrible precedent.”

The Senate in July advanced its version of a long-term highway funding bill—a measure that drew opposition from the banking industry because it would fund highways partly by reducing dividends to banks from the Fed.

At stake is an annual dividend of 6 percent the banks receive from the Fed. The Senate wants to cut the dividend and use the money to help pay for a highway funding bill. Senate Majority Leader Mitch McConnell (R-Ky.) told bank executives at a recent private meeting in Washington that there was no way he would remove the provision, which reduces the dividend to 1.5 percent for banks with more than $1 billion of assets. House members have to decide by month's end whether to back the Senate's approach before highway funding expires.

Fed member banks and nationally chartered banks are required to purchase Fed stock. The stock is considered “dead capital” because it may not be sold, transferred, or used as collateral. The dividend paid to banks offsets the cost of setting aside capital that could otherwise be used for lending and other services.

To contact the reporter on this story: Jeff Bater in Washington at jbater@bna.com

To contact the editor responsible for this story: Seth Stern at sstern@bna.com