Banking industry up in arms over plan

Greg Nash

The banking industry are vehemently opposing one mechanism Senate Majority Leader Mitch McConnellMitch McConnellMcConnell: Trump White House will have ‘constraints’ Nearly 400 House bills stuck in Senate limbo McConnell-allied group: We'll back Rubio if he runs for reelection MORE (R-Ky.) and Sen. Barbara BoxerBarbara BoxerDem senators back Interior coal leasing review Trump and Sanders whip up debate buzz Boxer: Sanders appeals to young voters with grandpa effect MORE (D-Calif.) want to pay for their six-year highway transportation bill.

McConnell and Boxer's multi-year transportation deal seeks to offset $16.3 billion of the $50 billion needed by lowering the interest rate off dividends banks purchase from the Federal Reserve.

Currently, banks must purchase stock at the Federal Reserve in order to become a member. But they receive a 6 percent interest rate on their investment.

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McConnell and Boxer want to slash that rate to 1.5 percent for banks that have more than $1 billion in consolidated assets, while keeping the 6 percent interest rate for banks under the $1 billion threshold, according to the draft.

The top banking industry groups — including the American Bankers Association, the Financial Services Roundtable, the Financial Services Forum and the Independent Community Bankers of America — sent a letter last week to Senate leadership urging them to abandon the pay-for.

"Dramatically reducing the rate to pay for a completely unrelated congressional priority will weaken the financial stability of banking institutions and reduce liquidity available in the financial system," the groups wrote in a letter, obtained first by The Hill.

"This proposed policy change undermines a key agreement that has underpinned the United States banking system for 100 years," the groups wrote.

Federal Reserve Chairwoman Janet Yellen raised concerns about the issue earlier this month when she testified before the Senate Banking Committee.

"I would be concerned that reducing the dividend could have unintended consequences for banks willingness to be part of the Federal Reserve system — and this might particularly apply to smaller institutions," Yellen said.

After the Fed was created in 1913, Fed officials needed a way to encourage banks to join the Federal Reserve system — so they offered the appealing 6 percent interest rate. Critics of the rate argue that it's outdated.

But Yellen, who was appointed by President Obama, argued that the lowered rate "would likely be a significant concern to the many small banks that receive this dividend."

"This is a change to the law the could conceivably have unintended consequences and I think it deserves some serious thought and analysis," Yellen said.

Senate Banking Committee chairman Richard Shelby (R-Ala.) vehemently opposes lowering the rate. Shelby, who is frequently a Yellen critic, said at the hearing that he agreed with Yellen on the issue.

"I agree with you and I don't see any nexus between the dividends coming from members of the Federal Reserve system — which are a lot of small and medium sized banks — and funding the highway transportation system," Shelby said at the hearing. "I think that's a pretty far reach but you know, people look for money everywhere they can get it."