Bankers group sues government over Fed payment cut

One of the nation’s largest banking associations is launching a court battle against the federal government after a 2015 law cut into payments banks receive from the Federal Reserve.

The American Bankers Association announced Thursday that it had filed suit against the United States, arguing policymakers breached longstanding contracts and violated the Constitution.

The lawsuit, filed by the trade group along with the Seattle-based bank Washington Federal, sets up a massive legal fight between the U.S. government and one of the nation’s deep-pocketed industries, with billions of dollars at stake.

{mosads}The suit, filed in the U.S. Court of Federal Claims, argues that the U.S. government violated a century-old contract with the Federal Reserve with the policy change and also violated the Constitution by “taking … private property without just compensation.”

“While legal action against the government is always a last resort, it’s one that we must turn to when alternatives are unavailable and matters of principle are at stake,” said Rob Nichols, the ABA’s president and CEO. “This action undercuts the work banks do every day to help drive economic growth and meet the needs of America’s businesses and communities.”

At the center of the fight is a longstanding dividend payment the Federal Reserve has made to U.S. banks. Since the Federal Reserve was created in 1913, the central bank has paid banks a 6 percent dividend in exchange for banks buying stock in the Federal Reserve system. The thinking was that getting the nation’s banks to buy into the central bank would support and legitimize the institution.

Banks are required to buy Fed stock equal to 6 percent of their assets. But that stock does not gain value and cannot be traded or sold, so banks have long argued the dividend is the only fair way for them to recoup their cost.

But in recent years, lawmakers have begun to question if that dividend rate is overly generous and realized that they could stand to see billions of dollars in cost savings that could be used to cover other policy priorities.

Under pressure to offset the costs of new legislation, lawmakers agreed to include the provision in a 2015 highway-funding bill, despite intense pressure from the banking industry.

That law slashed the dividend payment for banks with over $10 billion in assets from 6 percent to roughly 2 percent. The provision was estimated to raise $6.9 billion over a decade to help cover costs for the highway bill.

The ABA said it was seeking compensation for those reduced payments and “other appropriate relief.”