Bipartisan effort grows to stall Fed change on dividends

A bipartisan group of lawmakers has joined the banking industry in urging House leadership to not slash the interest rate that banks earn off dividends from the Federal Reserve.

House Speaker John Boehner (R-Ohio) and House Minority Leader Nancy Pelosi (D-Calif.) each declined comment through spokespeople on Tuesday after a group of 150 bipartisan members sent them a letter urging them not to cut the rate, fearing the consequences of such a move on the banking system.

{mosads}Reps. Bill Huizenga (R-Mich.) and Bill Foster (D-Ill.) circulated the letter, which asked leaders to stop any Congressional talk of lowering the rate “until there is greater examination of the issue and an understanding of the implications that such a statutory change might have on the banking system.”

The lawmakers and the banking industry are concerned that House leaders will seek to lower the rate in an effort to pay for a federal transportation fund, which expires Oct. 31. Senate leaders attempted the same strategy in July, though it ultimately failed. 

“We have to quit robbing Peter to pay Paul,” Huizenga said in an interview.

Federal Reserve officials grant banks a 6 percent interest rate on dividend investments in an effort to incentivize banks to join into the system, thereby promoting national banking stability.

Leadership is considering slashing it to 1.5 percent, which could mean small- and medium-sized banks will stay out of the Federal Reserve membership system.

What happens after that is anyone’s guess. 

Federal Reserve Chairwoman Janet Yellen, who President Obama appointed, warned in a July Senate testimony that slashing the rate would create significant uncertainty.

“I would be concerned that reducing the dividend could have unintended consequences for banks’ willingness to be part of the Federal Reserve system — and this might particularly apply to smaller institutions,” Yellen said then.

Politically, the issue has united Republicans who back the banking industry as a whole with Democrats, who are skeptical of larger financial institutions but sympathetic to medium-sized and small banks.

Big banks and small banks often butt heads on certain financial regulatory issues, but they’re united on this effort.

One-hundred-and-three House Republicans and 47 House Democrats signed the letter, including 19 of the 26 Democrats on the House Financial Services Committee. 

“We got a good showing from members of both parties indicating that this is a significant worry,” Foster said in an interview.

Foster said he wants the nonpartisan Government Accountability Office (GAO) to study the likely impact of a change before the interest rate is lowered.

“I’m a big believer in getting the facts before we just charge off in some direction,” he said.

House Financial Services Committee Chairman Jeb Hensarling (R-Texas) has also asked for a GAO official study.

Meanwhile, the banking industry is again urging leadership not to slash the rate. 

“This letter appears to be a simple statement of concern about a policy item that has never been the subject of a single hearing,” said Francis Creighton, head of government affairs with the Financial Services Roundtable. 

Creighton said that “certainly members of Congress and Senators should understand how their actions will impact the economy before they do it.”

Paul Merski, an executive vice president at the Independent Community Bankers of America, said that they worked to get signatures on the letter.

He called talk of slashing the rate adding “insult to injury since most medium and small banks are still waiting for regulatory relief.”

“And now they’re considering this backdoor tax without having a single hearing on it?” Merski said. “No one knows what the fallout will be if banks start switching out from being Fed members to be state-chartered banks.”

One-third of banks in the U.S. are members of the Federal Reserve membership system, Merski said. 

“The whole point [of the 6 percent rate] is to have banks buy into part of the Federal Reserve,” he said. “They won’t have the incentive to do that. And everybody is warning lawmakers not to do this: banks, lawmakers and even the Fed chairwoman.”