Each year, the government pays billions of dollars to banks to thank them for being part of the Federal Reserve system. These payments aren’t structured to influence or encourage any particular business activity — banks just get straight cash, no matter what they do. The subsidy is economically useless. It doesn’t push interest rates lower or boost pay for bank tellers or help more farmers qualify for loans. The money just goes straight to the bottom line, boosting bank profits.
Late last year, Congress passed a law limiting these payouts, using the savings to help pay for a highway bill. While lawmakers originally proposed trimming the subsidy by $17 billion over five years, the legislation ultimately only cost banks $2.7 billion, thanks to a late compromise that allowed smaller banks to keep receiving full payment. Since the subsidies are scaled to the size of each bank, the lion’s share of the $2.7 billion will come from a small number of big firms.
The top lobbyist for the American Bankers Association wrote a letter to the Fed last week calling the subsidy cuts “an unconstitutional taking of member banks’ property without compensation.”
“The government’s actions ... amount to a regulatory taking of member banks’ property,” ABA President and CEO Rob Nichols wrote.
You read that correctly. A bank lobbyist argued that banks have a constitutional right to free money from the government.
The bank subsidy is a century-old relic from the earliest days of the Federal Reserve. When the United States established a central bank in 1914, it didn’t require all banks to participate in the new regulatory regime. Instead, Congress encouraged banks to take part by offering to pay a healthy dividend on stock that banks purchased in the new central banking system. This practice eventually became obsolete when Congress granted the Fed blanket power to regulate commercial banks whether they opted into the central banking system or not.
But Congress never got around to ending the subsidy after it changed the regulatory standards. Now the bank lobby is insisting that this dividend payment is property that the government is forbidden from seizing without compensation. The government agreed to pay banks in 1913, and changing course to lower those payments today would be theft, the ABA maintains.
The Fed can’t reverse a law passed by Congress. But the central bank’s leaders have been sympathetic to the bank lobby since both groups were caught flat-footed by the highway bill last year. When asked about the dividend in July, Fed Chair Janet Yellen lamely said that she didn’t want to discourage banks from participating in the Federal Reserve system — even though the Fed has the same oversight powers over banks whether they take part or not. In February, two experts at the Richmond Federal Reserve wrote that cutting the dividend could encourage growth in “shadow banking” — something that would only happen if the Fed chose not to use its regulatory authority.
Nichols referenced the Richmond Fed paper in his letter before asking for help from the central bank.
“ABA understands that the proposed interim final rule is in pursuance of a decision made by legislation,” Nichols wrote, adding that his lobbying group “stands ready to assist the Board of Governors of the Federal Reserve with any appropriate measures that mitigate these concerns.”
The only “appropriate measures” available to the Fed are pressuring Congress or aiding the lobby group in a lawsuit to overturn the subsidy cuts. The Fed pressures Congress on behalf of big banks all the time, even though the law doesn’t technically consider this advocacy to be lobbying. The central bank’s general counsel, Scott Alvarez, has been especially adept at securing favors for banks through the regulatory process and publicly advocated for bank deregulation before a conference of bankers in 2014.
Author: Zach Carter