Proposal Would Use Some Fed Bank Dividends for Highway Funding

By Kate Davidson 

        Many in Congress wants to put more money into the highway trust fund, and some now want the Federal Reserve's help.
        Senate Majority Leader Mitch McConnell (R., Ky.) released draft legislation Tuesday that would offset new highway spending, in part, by reducing the dividend the Fed's regional reserve banks pay on stock that private-sector banks hold as members of the Federal Reserve system.
        The provision, which would lower the dividend to 1.5% from 6% for banks with more than $1 billion in assets, would cover about a third of the cost of three years of highway spending--roughly $16 billion.
        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."
        Banks have concerns too. In a letter last week to the leaders of the Senate Environment and Public Works Committee, several banking trade groups warned the proposal could hurt financial stability and reduce liquidity.
        "This proposed policy change undermines a key agreement that has underpinned the U.S. banking system for 100 years," wrote the groups, which included the American Bankers Association, Financial Services Forum, Financial Services Roundtable, Independent Community Bankers of America and the Clearing House.
        The Fed system comprises the seven-member Board of Governors, based in Washington, and 12 regional reserve banks based around the country. The reserve banks serve as the operating arms of the Fed, supervising banks and providing a variety of financial services, among other things.
        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.
        Congress frequently tries to make sure new spending is offset by spending cuts or other revenue increases elsewhere in the budget--measures known in legislative parlance as "pay-fors" because they help pay for the spending. It's not uncommon for pay-fors to be unrelated to the underlying bill, as is the case with the potential Fed dividend reduction.
        Senate Banking Committee Chairman Richard Shelby (R., Ala.) reiterated his opposition to the Fed dividend proposal Tuesday. "That will weaken the banking system," he said. "There's no connection between small banks, medium-sized banks, and building highways and transit."
        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."
        David Harrison
        contributed to this article.
        Write to Kate Davidson at kate.davidson@wsj.com
        (END) Dow Jones Newswires

        July 21, 2015 18:36 ET (22:36 GMT)

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