Bankers are not done fighting a congressional raid on their coffers.
In a new letter submitted to the Federal Reserve ahead of a Friday comment deadline, the American Bankers Association staked out its strong opposition to a $7 billion cut in the dividends paid by the Federal Reserve Bank to its member banks that was included in a highway spending bill, suggesting that a legal challenge could be in order if the cut is carried out.
The dividend cut is “unjust and violates several legal principles,” American Bankers Association President Rob Nichols told the Fed in the letter.
National banks are required to hold stock in their regional Federal Reserve Bank, on which they previously received a 6 percent dividend. The FAST Act, passed in December, paid for new highway spending partly by allowing the dividend paid for big banks to dip below 6 percent when overall interest rates are low, as they are now.
The change will raise nearly $7 billion for highway spending over the next 10 years, according to the Congressional Budget Office, at the expense of banks.
In the letter, the bank group argued that there is no connection between banks and highway spending and warned that banks “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 comment is indicative of bank support for legislation to mitigate the dividend cut, such as a bill introduced by Rep. Randy Neugebauer, R-Texas, earlier this month.
It also outlined the basis for a suit against the Fed for carrying out the rule, claiming that there is precedent for the cut to be challenged as a breach of contract or illegal taking.
Although the Fed is tasked with writing the rule carrying out the dividend cut, Fed officials oppose it. Originally, the system was set up to give banks a vested interest in the public-private Federal Reserve System, an arrangement Fed Chairwoman Janet Yellen and others have defended.
