C Citigroup Inc

WASHINGTON—Lawmakers are looking to extract more than a billion dollars a year in fresh funds from banks in the U.S.

The proposal, already approved by the Senate, would cut the annual dividend payments banks receive for holding shares in the Federal Reserve System and use the savings for highway construction.

The payments under that obscure, century-old program totaled $1.69 billion last year, including roughly $310 million for Bank of America Corp. and $250 million for Citigroup Inc., according to the Fed and a Wall Street Journal analysis of regulatory filings.

The proposal surfaced this past summer in a highway-funding bill backed by Senate Majority Leader Mitch McConnell (R., Ky.) and was passed by the Senate in July. House GOP leaders haven't moved on the Senate bill and haven't taken a position on the bank-payments issue. Some Democrats in the House, however, have said they would support it. The House is expected to decide its approach on the highway bill before month's end.

The collapse of talks to produce an ambitious business-tax overhaul to pay for highway programs means the House is under some pressure to take up the Senate-passed bill, which includes the bank provision.

Representatives of Citigroup, Bank of America and other lenders have descended on Capitol Hill in protest. They warn that cutting the dividends could prompt smaller banks to flee the Federal Reserve System in search of other regulators and said it is unfair to put the burden of unrelated highway spending on their operations.

It doesn't make sense, said Rusty Cloutier, president of MidSouth Bancorp Inc. of Lafayette, La., who figures the dividend cut would shave one or two cents a share off his bank's annual earnings. "Am I going to get free toll passes or something?" he said.

Bank of America and Citigroup declined to comment.

Lawmakers are looking at the Fed program to pay for roads in part because they have been unwilling to raise the gasoline tax, a primary source of cash for highways that Congress hasn't increased since 1993.

The bank-dividend policy dates to 1913, when Congress created the Federal Reserve System. To win support, lawmakers divided Fed control between a board based in Washington, D.C., and 12 regional Fed banks. Funding those banks with taxpayer dollars was unpopular, so lawmakers asked private banks to become "members" of the Fed and buy stock in the regional Fed banks, according to Gary Richardson, historian for the Federal Reserve System.

Banks, however, needed enticement as well as compensation to bear the risk of needing to cover possible losses at the central bank. The solution: Any bank buying Fed system stock would receive a 6% annual dividend.

"To convince the bankers to join the system, you needed to convince them to invest money and to bear risk," Mr. Richardson said. About one-third of the country's 6,348 banks, including the 10 biggest, are members of the Fed system and receive the payout.

The idea of cutting the dividend first appeared in a budget proposed by the Congressional Progressive Caucus in March 2014.

"This may have started as a means to an incentive, but 100 years later, it's a matter of priorities," said caucus co-Chairman Rep. Raú l Grijalva (D., Ariz.), explaining the proposal's logic. He said the payments now amount to "a perk for the elite."

The idea hardly registered last year on the radar of bank lobbyists. But when the Senate negotiated the highway bill in July, the proposal made it onto a list of revenue sources from Finance Committee Chairman Orrin Hatch (R., Utah), whose office later described the dividends as overly generous and no longer necessary.

Mr. McConnell and other lawmakers agreed to cut the dividend to 1.5% from 6% for banks with $1 billion or more in assets, allowing Congress to claim about $17 billion in savings over 10 years to fund highways. The change would affect 292 banks that are Fed members. The highway bill passed the Senate, 65-34. Funding for highways could cease by next summer if the House doesn't act, according to the Transportation Department.

Fed Chairwoman Janet Yellen has expressed concern about "unintended consequences" of the policy change, including banks swapping charters to leave the Fed system. The Fed oversees all bank holding companies, and Fed membership is also mandatory for nationally chartered banks regulated by the Office of the Comptroller of the Currency. But state-chartered banks can choose not to join the Fed and instead be overseen at the federal level by the Federal Deposit Insurance Corp. If state-chartered banks opted out of the Fed system, they would lose the annual dividend but would also be able to take the cash they had spent on Fed stock and invest it elsewhere, perhaps earning a rate of return greater than the dividend.

A spokesman for the OCC said the agency worries that the dividend cut could "deprive a number of community-based institutions of resources they could use to support families and businesses in the cities and towns they serve."

Banking lobbyists worry that even if they succeed in beating back the proposal, it will likely remain in play for years. That is because it has the rare attribute of providing revenue without an accompanying tax increase. It is also appealing for many lawmakers, because six years after the financial crisis, banks remain a popular punching bag.

"It's on the shelf never to leave," said James Ballentine, chief lobbyist at the American Bankers Association. "It's like the can of beans you find in the back of your pantry that has been sitting there for years, and you open it up and it's still good."

Write to Ryan Tracy at ryan.tracy@wsj.com

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(END) Dow Jones Newswires

October 05, 2015 08:35 ET (12:35 GMT)

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