Over the past few months, support has been growing in Congress to end a subsidy paid to U.S. banks and reallocate that money to fund other government programs. This proposal has (not surprisingly) been met with staunch resistance from the banking industry. Beyond the politics, should bank investors be concerned?
What is being considered, and why?
In 1913, the government wanted the nation's banks to join the newly formed Federal Reserve System. As a carrot to encourage participation, the Federal Reserve authorized a 6% dividend to be paid to participating banks. That dividend has continued, unchanged to this day.
Now, however, Congress is considering lowering that payout, which has come under fire as an unnecessary subsidy to the nation's banks at a time when that money could be put to a more productive use elsewhere, specifically to help fund infrastructure improvement projects like highway improvement.
In a closed-door meeting in October, Senate Majority Leader Mitch McConnell was reported to have told bank executives to expect the dividend to be cut to 1.5% for banks with more than $1 billion in total assets.
What kind of numbers are we talking about?
By ending the dividend payment to banks and repurposing it to other uses, Congress could unlock about $17 billion in new funding over the next 10 years.
That's a huge sum of cash by any standard. However, the change will hardly even cause a blip on the radar screen at the nation's largest banks. The annual payments to Bank of America, Citigroup, and JPMorgan Chase are less than $350 million each. That $350 million figure works out to 0.42%, 0.46%, and 0.37% of each bank's respective total revenue for 2014.
Why are the banks fighting so hard if the numbers are so insignificant to their business?
In the context of a megabank's multitrillion-dollar balance sheet, the financial implications of this change are minimal. In fact, industry lobbyists and bank executives aren't really all that worried about the financial implications of this proposal specifically.
The real concern, and the reason the industry is fighting the proposal, is that it could potentially set a precedent of taxing banks as a way to fund any number of government priorities.
The industry fears that once Congress takes a step to tap into the banking industry's massive pot of gold, it wouldn't be able to stop. The question the industry asks is, "where does it stop?"
It most likely stops with the Federal Reserve's dividend
For bank investors, the immediate impact of this proposal, if enacted, will be minimal. The dollars involved are just too small to move the needle in any material way at large, publicly traded banks. However, it will be worth following this trend to understand where Congress will draw the line on taxing banks.
In my view, ending this dividend payout is a low-hanging fruit and probably the end of this strategy for raising new funding. Banks are in a politically fragile position in the aftermath of the financial crisis, and ending the dividend payout is an easy and painless way to fund necessary projects without raising taxes or taking a political risk. Any further attempts to solicit funds from banks to fund government programs will be more difficult.
In other words, I don't think bank investors should worry.