WASHINGTON — Rep. Randy Neugebauer, R-Texas, is seeking to ease the blow that banks suffered late last year when Congress usurped a Federal Reserve dividend paid to banks in order to help fund reconstruction for the nation's highways and bridges.
He introduced a bill Thursday that is designed to reverse some of the negative effects by allowing banks to redeploy capital held at the Fed.
"I opposed this dividend reduction, which forced one sector of the economy to pay for spending in a completely unrelated sector of the economy," Neugebauer said.
As part of a longstanding arrangement, Fed member banks are required to subscribe to stock at the regional banks equal to 6% of their capital and surplus — half of which is held at an account at the central bank with the other half being callable if the Fed needed it.
Neugebauer's bill would release the majority of the "paid-in" capital held at the Fed, which amounts to roughly $30 billion.
"At a time when our economy continues to see tepid growth, it only makes sense to free up capital and allow it to be put to its most efficient use," Neugebauer said.
Until recently, all banks received a 6% dividend on their stock ownership, but the dividend for banks with more than $10 billion was reduced to a floating rate tied to 10-year U.S. Treasury bills as part of legislation passed late last year that diverted savings on the dividend payments to the Treasury to help pay for transportation infrastructure.
"Rewriting a significant portion of the Federal Reserve's charter and siphoning off a bank dividend payment to pay for highway infrastructure sets a bad precedent that should give other industries serious cause for concern," American Bankers Association President Rob Nichols said at the time.
Neugebauer said the dividend reduction was akin to a bank tax, but that institutions "can use this newly free capital to lend to consumers and small businesses, make infrastructure investments, or hold it in reserve, which strengthens the financial system — the ultimate purpose of the Federal Reserve."
Tim Pawlenty, chief executive officer of the Financial Services Roundtable, which represents the banks most affected by the dividend cut, praised the plan.
"This common sense proposal will help make needed lending available to a still fragile economy without impeding the ability of regulators to ensure a safe and sound financial system," he said.
Other bank trade associations, including the American Bankers Association, also backed the bill. Specifically, Neugebauer's legislation would allow banks with more than $10 billion of assets to keep 5.5% of the capital pledged to Fed stock as on call instead of paid-in. Smaller banks would have an option to either maintain the status quo and receive a 6% dividend on 3% of their paid-in capital or take the same deal as their larger counterparts.
Norbert Michel, a research fellow in financial regulations at The Heritage Foundation, said the bill makes sense because the Fed stock arrangement is outdated and the funds would be better left in the hands of the private sector.
"This is not 1913, we are not on the gold standard, we are not trying to entice people to join the Fed…it is a completely different animal and there really is no economic reason for the banks to hold that capital at the Fed," Michel said. "You cannot make an argument that if you take it out, the Fed is going to crash or, if you leave it in, the private banks are going to crash. But $30 billion is $30 billion and it makes more sense to leave it in the private sector."
Neugebauer's proposal would leave the Fed with roughly $5 billion in paid-in capital and another $10 billion in a capital surplus account that was also raided by the transportation bill. The capital surplus account had close to $30 billion before it was used as a pay-for for the transportation bill.
During a December hearing on Capitol Hill, Fed Chair Janet Yellen said the transportation bill concerned her because it "sets bad precedent and impinges on the independence of the central bank" and that holding additional capital "enhances the credibility and confidence in the central bank."
Aaron Klein, a policy director at the Brookings Institution also said he wouldn't be surprised if more proposals come forward that would change the Fed's structure, saying Congress "took the genie out of the bottle" when it passed the transportation bill.
"Congress made a big mistake in monkeying with the Fed's structure to create fake pay for's for the transportation bill…it should be no surprise to anyone that in this new structure that banks and Congress are asking for new rules," Klein said.