Bill Introduced to Address Effects of Fed Dividend Cut

Reps. Randy Neugebauer (R-Texas) and Pete Sessions (R-Texas) today introduced ABA-advocated legislation (H.R. 5027) that would alter the formula for capital that Federal Reserve member banks must hold with their regional Fed bank, potentially freeing up billions in “dead capital.”

Currently, Fed member banks must pay in 3 percent of capital to the Fed and hold another 3 percent at their institution, subject to call. In return, the Fed pays banks with less than $10 billion in assets a 6 percent dividend on their paid-in capital, while paying larger banks a lesser floating rate, currently pegged at 2.21 percent.

Until last December, the dividend rate for all banks was the same. But Congress, despite strenuous objections from the banking industry, reduced the dividend for larger banks in order to pay for costs in the highway spending bill.

H.R. 5027 seeks to address the negative effects of this change by letting banks put more of their required capital to work. It would allow large banks to pay in just .5 percent and retain 5.5 percent of their required capital, subjecting the retained capital to call only after the Fed exhausts its $10 billion capital surplus account. Banks under $10 billion in assets could elect this same treatment, still earning 6 percent on their paid-in capital, or maintain the status quo.

“As a result of this dividend reduction, banks experienced an artificial reduction in their return on investment – in essence, a bank tax,” said Rep. Neugebauer. “At a time when our economy continues to see tepid growth, it only makes sense to free up capital and allow it to be put to its most efficient use.”

“The precipitous change in the Fed dividend policy last year was made with no hearings or consideration for its impact on banks and their communities,” said ABA EVP James Ballentine. “H.R. 5027 offers a commonsense solution that can turn billions in dead capital into loans and other productive uses.”