The dividends that regional Federal Reserve Banks pay to member banks on the stock they are required to hold is a historically important part of attracting banks to join the Federal Reserve System and limiting the shadow banking sector, according to a research brief released today by the Federal Reserve Bank of Richmond. The dividend was controversially cut by Congress in December to help pay for the federal highway bill.
“[A] closer look at the history of the Fed-bank relationship shows that the value of these dividends is greater—and more complicated—than just the dollar amount,” the researchers wrote. “These payments are part of a long-running story: the Fed’s challenge, over time, to encourage banks to join and stay in the Federal Reserve System to reduce the risk of what is now known as ‘shadow banking.’”
The dividend was historically set at 6 percent to reflect the 3 percent of capital that member banks were required to pay for Fed bank stock, plus the 3 percent of capital held “on call” for use by the Fed. In 2015, Congress reduced it to the current 10-year Treasury rate for banks with more than $10 billion in assets.
“There is no modern example to shed light on what might happen if banks decide Fed membership is no longer worth it,” the researchers concluded. “Nor is it clear what the consequences—intended as well as unintended—may be if member banks start leaving the System in substantial numbers.”