Fed Issues Dividend Final Rule

The Federal Reserve today published in the Federal Register a final rule implementing a controversial provision of last December’s highway bill that substantially cuts the dividends paid on the Federal Reserve Bank stock that national banks and other Fed member banks are required to hold. The rule reduces the dividend rate for banks with more than $10 billion in assets from 6 percent to the latest high yield on 10-year Treasurys, not to exceed 6 percent. The rule takes effect Jan. 1.

ABA strongly opposes the dividend cut, and has said Congress’ action violates federal law and sets a dangerous precedent for unfair treatment of specific segments of the business community to meet broad public obligations. Citing Supreme Court precedents, the association also said that the dividend cut represents a breach of contract and is an unconstitutional taking of Fed member banks’ assets.

“This change to the statutory dividend rate upended Federal Reserve System policy on offsets and incentives for system membership, dating from the inception of the Federal Reserve, in place for over 100 years,” ABA said in a previous comment letter. “This action was taken explicitly to target a narrow set of financial institutions to fund a significant portion of the national transportation system. Member banks having more than $10 billion in assets will be materially damaged by the resulting dilemma: either accept a severely reduced return on a highly illiquid asset, or leave the Federal Reserve System altogether.”

ABA President and CEO Rob Nichols said in a Politico interview yesterday that “we have not ruled out any options or tools” to undo the rule.

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