ABA, Washington Federal Sue Over Federal Reserve Dividend Cut

The American Bankers Association and Seattle-based Washington Federal this afternoon filed suit in the Court of Federal Claims seeking relief for government actions that violate contracts with Federal Reserve member banks by reducing dividends paid to those institutions. The cut to the long-established dividend contract was part of the 2015 highway spending bill, which reduced the annual dividend for Fed member banks with more than $10 billion in assets from 6 percent to approximately 2 percent.

ABA President and CEO Rob Nichols in a press release announcing the lawsuit emphasized the effect of the policy, which as originally proposed would have applied to Fed member banks with more than $1 billion in assets. “The change to the statutory dividend rate upended Federal Reserve System policy that has been in place for more than 100 years,” said Nichols, adding that the highway bill “set a troubling precedent to target specific segments of the business community to meet broad public obligations like highway infrastructure. Every industry in this country is vulnerable if this is allowed to stand.”

The litigation seeks to reimburse banks for these improper reductions of the dividend payment. The complaint asserts breach of contract and taking of private property without just compensation in violation of the Fifth Amendment to the U.S. Constitution. In 2016, banks lost $1.1 billion to this taking, an amount estimated to balloon to $17 billion over 10 years.

In a Wall Street Journal op-ed announcing the lawsuit, Nichols and Washington Federal Chairman and CEO Roy Whitehead explained their reasoning, defending the 6 percent dividend as a key factor in the nation’s financial stability. “The monetary loss is certainly significant for the industry, especially for smaller banks that will have greater difficulty replacing the lost income,” they wrote. “But the bigger concern is the stability of the banking industry’s regulatory architecture and the principle of an honest contract.”

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