By John M. Pachkowski, J.D.
In light of recently-enacted legislation to fund transportation projects, the Federal Reserve Bank of Richmond has released an Economic Brief questioning whether the legislation could affect banks’ membership in the Federal Reserve System.
The legislation, the Fixing America’s Surface Transportation Act or FAST Act, contains a five-year, fully paid plan to broadly deal with U.S. roads and bridges, public transportation, car and truck safety, and railroads. In order to adequately fund transportation projects, the FAST Act looked at a number of revenue sources to close any funding gaps. Two of these new revenue sources encroach upon decades-old practices at the Federal Reserve Board. These revenue sources will total $35.7 billion over five years and account for more than 10 percent of the FAST Act’s total cost.
One source of revenue reduces the dividend paid on Federal Reserve Bank stock to member banks. Under section 32203 of the FAST Act, member banks with consolidated assets of $10 billion or less will continue to receive a 6-percent dividend on their Federal Reserve Bank stock, but the dividend is indexed to inflation. For member banks with consolidated assets greater than $10 billion, there is a floating dividend based on the smaller of: the rate equal to the high yield of the 10-year Treasury note auctioned at the last auction held prior to the payment of a dividend, and 6 percent.
The second revenue stream caps the Fed’s surplus account at $10 billion with any amounts exceeding the cap being remitted to the U.S. Treasury.
In the Economic Brief, “The Cost of Fed Membership,” the brief’s authors, Helen Fessenden and Gary Richardson, noted, “Given the relatively small sum of the dividend provision, it may be tempting to dismiss its significance. But a closer look at the history of the Fed-bank relationship shows that the value of these dividends is greater—and more complicated—than just the dollar amount.”
The authors also discussed the history of the Federal Reserve Bank stock requirement, how it contributed to the dual banking system, and responses to increase membership in the Federal Reserve System.
Fessenden and Richardson concluded, “There is no modern example to shed light on what might happen if banks decide Fed membership is no longer worth it. Nor is it clear what the consequences—intended as well as unintended—may be if member banks start leaving the System in substantial numbers. But what is clear is that a large decline in membership would directly challenge [Paul] Warburg’s [1916] prediction that ‘the future will belong to those banks—national or state—that are members of the Federal Reserve System.’”
For more information about the Federal Reserve System, subscribe to the Banking and Finance Law Daily.
