ABA: Fed Dividend Cut ‘Unfair and Contrary to Law’

ABA today voiced strong opposition to December 2015 legislation that substantially cut the dividends paid on the Federal Reserve Bank stock that national banks and other Fed member banks are required to hold.

In a letter commenting on the Federal Reserve’s regulation implementing the legislation, ABA stated that Congress’ decision to slash the dividend for banks over $10 billion in assets in order to fund national highway projects violates federal law and sets a dangerous precedent for unfair treatment of specific segments of the business community to meet broad public obligations.

“ABA understands that the proposed interim final rule is in pursuance of a decision made by legislation, not in furtherance of a policy initiated by the Federal Reserve Board,” the association said. “Nevertheless, we believe that the policy implemented by the interim final rule is unfair and contrary to law.” Citing Supreme Court precedents, ABA said 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 added. “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.”

The dividend cut was passed as part of last year’s highway spending bill — a provision ABA strongly opposed — and lowered the dividend paid to 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 Congressional Budget Office estimates that the cut will cost member banks $6.904 billion between 2016 and 2025. For more information, contact ABA’s Hu Benton.