Currently, Fed member banks must pay in 3% of capital to the Fed and hold another 3% at their institution, subject to call. In return, the Fed pays banks with less than $10 billion in assets a 6% dividend on their paid-in capital, while paying larger banks a lesser floating rate, currently pegged at 2.21%.
Until last December, the dividend rate for all banks was the same. But Congress, despite strenuous objections from the banking industry, reduced the dividend for larger banks in order to pay for costs in the highway spending bill.
H.R. 5027 seeks to address the negative effects of this change by letting banks put more of their required capital to work. It would allow large banks to pay in just 0.5% percent and retain 5.5% of their required capital, subjecting the retained capital to call only after the Fed exhausts its $10 billion capital surplus account. Banks under $10 billion in assets could elect this same treatment, still earning 6% on their paid-in capital, or maintain the status quo.
Rep Neugebauer said
As a result of this dividend reduction, banks experienced an artificial reduction in their return on investment – in essence, a bank tax. 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.ABA EVP James Ballentine said
The precipitous change in the Fed dividend policy last year was made with no hearings or consideration for its impact on banks and their communities. H.R. 5027 offers a commonsense solution that can turn billions in dead capital into loans and other productive uses.Read more.