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Fed Money Tapped in Highway Bill as Banks Get Dividend Break

Updated on
  • Central bank would lose $19 billion from its surplus account
  • Banks’ dividend payout would be tied to 10-Year Treasuries

The banks’ partial win on dividends is the Federal Reserve’s loss.

U.S. House and Senate leaders reached agreement Tuesday on legislation to help pay for the nation’s highways with surplus funds from the Federal Reserve and an annual dividend banks get for owning shares of Fed regional banks, according to a copy of the bill text obtained by Bloomberg News. The dividend reduction wouldn’t be as much as originally proposed.

While the financial industry would still have to share a portion of the 6 percent dividend with the government, it would be a floating payout tied to 10-year U.S. Treasuries, which currently yield about 2.2 percent, the agreement said. Senate Majority Leader Mitch McConnell had proposed in July cutting the annual dividend to 1.5 percent. Under the new deal, the dividend would be capped at 6 percent, so if Treasury yields rose higher than that, the Fed wouldn’t have to pay the banks more. Banks with $10 billion or less in assets would be exempt from the reduction.

The dividend compromise didn’t appease lenders, with the American Bankers Association calling it “bad public policy.”

‘Misguided Proposal’

“This proposal is misguided and undermines a key agreement that has underpinned the U.S. banking system for a century,” ABA President and Chief Executive Officer Rob Nichols said in a statement. “Banks shouldn’t be used like an E-Z Pass to pay for highways.”

Greg Baer, president of the Clearing House Association, said by exempting smaller banks rather than all banks the bill is basing the dividend amount “ultimately on the political popularity of the bank holding it.” Clearing House is a trade group representing banks including Bank of America Corp., JPMorgan Chase & Co. and Citigroup Inc.

The Fed’s surplus capital comes from the 12 reserve banks. The highway bill would allow for a one-time draw of $19 billion from the surplus funds, which totaled $29.3 billion as of Nov. 25. If the surplus account goes above $10 billion, that capital would be swept to the government, the text said.

The House passed a long-term highway funding bill, H.R. 22, last month that included a measure sponsored by Representative Randy Neugebauer, a Texas Republican, that swapped the dividend cut for tapping the Fed surplus account. The Senate earlier passed its own version of a six-year highway bill.

Resolving Differences

A conference committee of House and Senate members had been working out the differences. Now that the House and Senate leadership have approved using bank dividends and the Fed surplus in the highway bill, the agreement can’t be amended and must be passed by the full House and Senate by end of day Friday.

“We shouldn’t be taking money from private companies to fund public roads,” Neugebauer said an in interview Tuesday. “You open up Pandora’s box.”

David Skidmore, a Fed spokesman, declined to comment. Last month Skidmore said in a statement before the House passed its highway bill that using Fed resources to finance fiscal spending sets a “bad precedent.”

The banking industry has vigorously fought a cut in the dividend payout to avoid becoming a future source for government funding and potentially paving the way for a tax on banks. Decreasing the payout to 1.5 percent was estimated to generate about $17 billion over 10 years for the highway trust fund. The payout totaled less than $350 million apiece last year for JPMorgan, Bank of America, Citigroup and Wells Fargo & Co.

G-Fees Excluded

Guarantee fees charged by Fannie Mae and Freddie Mac to lenders were also being considered to fund highway spending. Under the agreement, they wouldn’t be used to pay for the roads.

The final highway agreement included more than a dozen financial services provisions, including ones easing securities regulations and some Dodd-Frank rules for community banks. One would deregulate trading of private shares, making it easier for workers to sell their stock to wealthy investors as long as their employers don’t block the transaction.

The legislation would provide $281 billion in contracting authority over five years for the Highway Trust Fund for roads, bridges, mass transit and other programs. It also includes more than $12.2 billion tied to capital investment grants, $10.36 billion for rail-related projects, $980 million for National Highway Traffic Safety Administration vehicle safety provisions and hundreds of millions of dollars for other projects or agencies, including emergency preparedness.

— With assistance by Billy House, and Ian Katz

(Updates with funding details in last paragraph.)
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