The American Bankers Association (ABA) and Washington Federal filed a lawsuit against the U.S. government last week alleging it violated contracts with Federal Reserve member banks by reducing dividends paid to these institutions.
This cut in dividend payments was the result of the 2015 law, Fixing America’s Surface Transportation (FAST) Act.
“The change to the statutory dividend rate upended Federal Reserve System policy that has been in place for more than 100 years,” Rob Nichols, ABA president and CEO, said. “The FAST Act set a troubling precedent to target specific segments of the business community to meet broad public obligations like highway infrastructure. Every industry in this country is vulnerable if this is allowed to stand.”
The suit, filed in the U.S. Court of Federal Claims in Washington, D.C., claims the taking of private property without just compensation violates the Fifth Amendment to the U.S. Constitution. The plaintiffs are seeking reimbursement for what they claim are improper reductions of the dividend payment.
The Federal Reserve has always paid a six percent annual dividend to banks that purchase stock in the regional Federal Reserve Banks — a rate codified in the Federal Reserve Act of 1913. The FAST Act said banks with more than $10 billion in assets will be paid dividends at a rate of approximately two percent instead of six percent. The difference would help pay for highways and other transportation programs throughout the nation.
“While legal action against the government is always a last resort, it’s one that we must turn to when alternatives are unavailable and matters of principle are at stake,” Nichols said. “This action undercuts the work banks do every day to help drive economic growth and meet the needs of America’s businesses and communities. It is particularly damaging for affected community banks, which have had a much more difficult time replacing the lost income.”