Banks Should Not Be Forced to Buy ‘Stock’ in the Federal Reserve

A week ago, President Barack Obama signed a new highway funding bill that will effectively tax banks and raid the Federal Reserve to pay for new highway spending. That whole ordeal exposed the convenient fiction that the Federal Reserve needs capital. The truth is, however, that the Fed doesn’t need capital, since it can just create money to pay anything it owes.

Now, several lawmakers on the House Financial Services Committee are trying to do the right thing. Reps. Bill Huizenga, R-Mich., and Steve Stivers, R-Ohio, with the support of Chairman Jeb Hensarling, R-Texas, want to give banks back most of the so-called stock they had to purchase when they joined the Fed.

When joining the Fed, banks are required to buy stock in the Federal Reserve System equal to 6 percent of their capital, with 3 percent held at the banks’ regional Fed (It’s been a requirement since 1913). Because this amount can no longer be used for any other purpose, the Fed pays the banks a 6-percent annual dividend.

Shareholders in a public company can trade or sell their stock, but that’s not the case here. So the amount is really more like a contribution.

The highway bill changed this dividend agreement for banks with more than $10 billion in assets. Now, rather than receive 6 percent, these banks will receive the lower of 6 percent or the 10-year Treasury note yield.

The new proposal would simply return most of the amount these banks had to contribute to the Fed. The amount would fall from 3 percent of their capital to 0.5 percent.

It would be easy for opponents of this new plan to argue against reducing the Fed’s capital were it not for one major problem: The highway bill lowered the Fed’s capital surplus account from around $30 billion to $10 billion.

Congress no longer has any valid reason to argue that the Fed needs these resources.

Besides, the truth is that the Fed doesn’t need any capital. The Fed can literally create any amount of money it needs to pay its liabilities, so it can never be insolvent in the same manner as a private business.

And Congress seems to have agreed. Hopefully, they’ll finish what they started and give the money back to the banks so it can be put to good use in the private sector.