The banking industry is scrambling to kill a provision in the Senate highway-funding bill that would reap billions of dollars in revenue by cutting a century-old system that has reaped annual awards for banks.
Industry lobbyists say they were blindsided by the inclusion of the provision, which would help policymakers cover the bill’s cost by cutting the regular dividend the Federal Reserve pays to its member banks.
{mosads}One lobbyist went so far as to reread the Federal Reserve Act of 1913 after getting wind of the proposal to determine what was at stake.
“I think it took everyone by surprise,” said Paul Merski with the Independent Community Bankers of America. “There was no study of the issue, no hearings, no consultation with the Federal Reserve itself.”
“It came on very quickly,” said James Ballentine of the American Bankers Association, who said he first caught wind of the idea a little over a week ago. “It’s certainly a scramble.”
In a Congress where lawmakers are always hunting for politically palatable ways to raise revenue or cut costs to cover the expenses of additional legislation, the Fed provision was a novel, and rich, one. The proposal is estimated to raise $17 billion over the next decade, and is by far the richest “pay for” included in the bill.
Lobbyists said they were not aware of any previous time when lawmakers had attached the language to a piece of legislation, which would scrap a perk banks have come to expect for over a century.
When banks join the Federal Reserve system, they are required to buy stock in the central bank equal to 6 percent of their assets. However, that stock does not gain value and cannot be traded or sold, so to entice banks to participate, the Fed pays out a 6 percent dividend payment.
The Senate proposal says it would slash that “overly generous” payout to 1.5 percent for all banks with more than $1 billion in assets. While the summary language outlining the proposal said that change would only impact “large banks,” industry advocates argued that banks most would identify as small community shops could easily have assets in excess of that amount.
Banks are working to mobilize against the provision, even as lawmakers are pushing to pass a highway bill before program funding expires at the end of the month.
Merski said ICBA had launched a “nationwide grassroots effort,” enlisting its numerous member banks and bankers and told them to call Senate offices to oppose the provision.
And Ballentine said his group was engaged in a concerted education effort for members, outlining why the industry believes the policy change would be disruptive and has no place in highway legislation.
Five major industry groups also sent a letter to lawmakers blasting the provision, saying it “undermines a key agreement that has underpinned the United States banking system for 100 years.”
Senate Banking Committee Chairman Richard Shelby (R-Ala.) opposes the provision, and invited Fed Chairwoman Janet Yellen to opine on it when she appeared before his panel earlier this month.
She told lawmakers that if the dividend payment is reduced, some banks may not want to buy into the Fed.
“This is a change that likely would be a significant concern to the many small banks that receive the dividend,” she said.
Donald Kohn, the former vice chair of the Fed, told House lawmakers Wednesday that the proposal would be one directly felt by banks.
“Let’s recognize that by lowering it to, say, 1.5 percent on the proposal, in effect you are placing a tax on banks,” he told the House Financial Services Committee.
A review of previous policy proposals suggests that the idea may have first been thought up by House liberals. The 2014 budget proposal from the Congressional Progressive Caucus put forward the idea to raise revenue, and a CPC aide said he believed it was the first time someone in Congress proposed the idea. But the Senate highway bill apparently marks the first time members have actually placed it in actual legislation.
While banking advocates make the policy argument, they also acknowledge they are facing a hard political reality — $17 billion is hard for members to pass up to help cover costs in a must-pass bill.
“It’s difficult to have a policy discussion when people are looking for a pay for,” said Ballentine. “That’s the issue we’ve been running into.”
The Senate bill is facing an uphill climb towards enactment, as House leaders from both parties have pushed the Senate to instead take up its short-term extension of highway funding and continue working on a longer-term proposal. But now that the Fed dividend has been identified as a way to raise billions of dollars, the industry now will be on high alert for it pop up elsewhere, when lawmakers are looking for a way to cover the costs of their preferred policies.
“That’s a genuine concern,” said Merski. “We’re going to remain actively opposed to this in any form.”
“Pay fors, they never die,” agreed Ballentine. “Perhaps we can take some of the spotlight off of this provision, which we think has served a good purpose.”