Uphill Battle Looms as Banks Look to Forestall Fed’s Dividend Cut
By John Heltman

A measure that would substantially cut the Federal Reserve’s dividend payment to member banks is likely to prove difficult to remove from a Senate highway funding bill even though it has few public backers and many critics. The provision, which is expected to resurface when Congress reconvenes next week, would slash the dividend that the central bank pays to member banks to 1.5% from 6% for institutions with more than $1 billion of assets. To offset the cost of keeping that much capital tied up, the Fed pays out a 6% return on the banks’ stock — a level that is set in the authorizing statute, not by the Fed itself. Nationally-chartered banks are required to be Fed members, so reducing their interest rate would not affect their membership. But state-chartered banks who are Fed members by choice might find the arrangement less attractive, according to Karen Shaw Petrou, managing partner at Federal Financial AnalyticsPetrou said that, aside from the dangers associated with possibly reducing the pool of Fed member banks, there is also a risk in setting a precedent that the central bank is a potentially lucrative source of budget carve-outs that cumulatively could have far more drastic consequences. “It has a modest effect in the near-term,” Petrou said. “I think it has a much more significant effect … in that it is opening up the Fed’s balance sheet to the appropriations process. That’s the challenge.”