Banks cry foul over rate cut tied to federal highway bill

A massive highway spending bill has tapped a longstanding revenue stream for big banks, causing some in the financial community to cry foul.

Last week, President Obama signed into law a $305 billion federal highway infrastructure bill. Some of the funds earmarked for the bill cut directly into a regular dividend payment that banks get from owning stock in the Federal Reserve.

Following passage of the Federal Reserve Act in 1913, all nationally chartered banks were required to purchase stock in the Federal Reserve, the nation’s new central banking system. One of the perks banks received for doing so came in the form of a dividend return of about 6 percent.

Beginning Jan. 1, however, nationally chartered banks with $10 billion or more in assets will have their Federal Reserve dividend set at 6 percent or at the yield of the 10-year U.S. Treasury note, whichever number is lower. The 10-year U.S. Treasury Note was hovering around 2.20 percent this week.

Effect in Kansas

Though no banks based in Kansas will be directly affected by the cut — there are some banks with $10 billion or more in assets that do business in the state — the banking community in the state objects to the change.

“This is basically theft,” said Chuck Stones, president of the Kansas Bankers Association. “It’s a terrible precedent to set. It’s something that just doesn’t make sense when you look at it.

“I think they just saw some money in that pot and decided to steal it — that’s what this is.”

Brad Elliott, CEO of Equity Bank in Wichita, said consumers could eventually be affected as a result of the cut.

“Banks have to make a return for their shareholders, so they’ll have to, at some point, increase income,” Elliott said. “That could be by raising fees, or it could be in some other area.

“So, this will affect consumers eventually in either increased fees or the cutting of some services. Bank of America could cut more services from its retail sector, for instance.”

Elliott said Equity does own stock in the Federal Reserve, but does not have assets in the amount that would trigger the cut. He added that Equity receives about $200,000 per year in dividend payments off of close to $3.4 million it has invested in Federal Reserve stock.

“Most people don’t realize that the 12 Federal Reserve banks in America are capitalized and owned by commercial banks,” Elliott said. “We’re required to buy stock in the Federal Reserve and have an investment in them. The capital actually comes from an investment of ours.

“We, along with many other Fed-member banks in the state and region, are receiving more taxation on a system that isn’t designed to create revenue for the federal government.”

Lyndon Wells, director of public affairs for Wichita-based Intrust Bank, said banks are being “effectively penalized” by the bill.

“I don’t understand why Congress feels this is a revenue source that is appropriate for funding infrastructure projects,” Wells said. “We think it’s much more appropriate for Congress to consider revenue sources that would support these projects, such as gas taxes or other alternative sources of revenue.

“This is an added tax on banks, and it also sweeps Federal Reserve funds that are set aside to provide a buffer in the event of future downturns or crises circumstances.”

Big money, bigger banks

Even for holding companies that control potentially trillions of dollars of wealth, returns from the dividend can be significant.

Jennifer Dunn, a spokeswoman for Wells Fargo & Co., the nation’s fourth-largest bank holding company with $1.7 trillion in assets, said in an e-mail that the institution would lose about $126 million annually because of the bill. Wells Fargo declined specific comment on the change.

JPMorgan Chase & Co., the largest holding company in the country with more than $2.4 trillion in assets, according to its most recent quarterly earnings report, stands to lose more than $100 million per year because of the cut, according to the Wall Street Journal.

Chase is one of four national banks — Wells Fargo, Bank of America and Citigroup are the others — that show assets in the trillions, though 110 banks total claim at least $10 billion in assets, according to the most recent numbers provided by the information center. About $1.69 billion in Federal Reserve dividend payments went out to banks last year, according to the Journal.

While losing an annual stream of revenue in the millions or tens of millions may not signal trouble for such large holding companies, it does show a disturbing change in lawmaker thinking, said Stones, with the Kansas Bankers Association.

“First of all, it’s only ‘minor surgery’ if you’re not the one having the surgery,” he said. “Second, it makes you wonder if they will change the rules again in the future to affect smaller banks.”

‘Back door tax increase’

Though the measure was passed by the House and Senate – both Republican-controlled – before being signed by the president, Elliott said at least some of the blame for what some perceive to be bad legislation should rest with the Obama administration.

“This administration has made the financial system the problem for America,” Elliott said. “I think they have been looking at how to penalize the financial system, not understanding that it’s an independent small business.

“Really, the banking system in America is what makes us different than every other country in the world, which has made us more entrepreneurial. As long as we continue to demonize this industry, it’s hard for it to continue to be America’s entrepreneurial backbone.”

Even with their vast resources, the big banks weren’t able to turn back the legislation, which had been a long-feared outcome. Along with the Kansas Bankers Association, national advocacy groups like the Financial Services Roundtable and the American Bankers Association have, not surprisingly, criticized the cut.

“Banks shouldn’t be used like an E-ZPass to pay for highways,” said bankers association CEO Rob Nichols in a statement. “Dramatically reducing the dividend rate — without hearings, consultation with committees of jurisdiction, study or analysis of any kind whatsoever — is extremely bad public policy.”

Also in a statement, Financial Services Roundtable CEO and former Minnesota Gov. Tim Pawlenty called the cut a “back door tax increase,” adding that it will make it harder for banks to provide loans for “small businesses or help for families buying a first home.”

A representative with Bank of America declined comment, as did representatives with JPMorgan Chase and a handful of local bankers who said the cut wouldn’t affect their institution.

Election year politics?

With a presidential election coming up next year, Andover State Bank President Brian Chamberlin said it would have been difficult to fathom lawmakers deciding to increase taxes, such as the gas tax.

“It’s pretty sad that national banks will have to take a hit in order to fund the highway bill,” Chamberlin said. “I don’t quite see a good correlation there, but Congress has to find the money somewhere since no one is interested in a tax increase of any kind in the approaching election year.”

Both Republican Kansas senators, Jerry Moran and Pat Roberts, voted in favor of the Highway Bill. Moran spokeswoman Katie Niederee said in an e-mail that the senator did not agree with the rate cut portion of the bill.

“While Sen. Moran believes a long-term highway authorization is extremely important, he thinks there are better ways to pay for improving our country’s infrastructure,” Niederee said. “Sen. Moran opposes the idea of altering the dividend, but worked to improve the original version of the highway bill by reversing its direct impact on Kansas banks.”

This story was originally published December 9, 2015 at 6:20 PM with the headline "Banks cry foul over rate cut tied to federal highway bill."