Banking is likely to remain Congress's "piggy bank," warned Rep. Randy Neugebauer in an interview.
Banking is likely to remain Congress's "piggy bank," warned Rep. Randy Neugebauer in an interview. Bloomberg News

WASHINGTON — The sweeping, five-year highway bill may include some key concessions for small financial institutions, but the deal has left many in the industry frustrated.

Lawmakers unveiled the $253 billion plan Tuesday afternoon after weeks of negotiations between the House and Senate to resolve differences in their competing proposals. The conference committee report comes just days before the country's transportation program is set to expire on Dec. 4, with Congress now expected to act fast to move the legislation.

While the banking industry won a host of regulatory relief measures in the push, many in the banking industry are disappointed with the final result. Most notably, Congress will cut the dividend payment on Federal Reserve stock for banks with assets of more than $10 billion to help pay for the highway bill.

"While it may benefit some, this was an attack on the industry and it still remains that way," said James Ballentine, executive vice president of congressional relations and political affairs at the American Bankers Association. "I don't think anyone in the banking industry feels secure going forward that Congress will not be using the industry as a pay-for for unrelated issues."

To be sure, the plan is marginally better for banks than an earlier Senate proposal that would have cut the 6% rate on bank stock to 1.5% for all banks over $1 billion of assets. Smaller institutions below the $10 billion cap will now be able to keep the higher rate.

Lawmakers also offset some of the costs of the bill by tapping into the Fed's $29 billion capital surplus account, which will now be capped at $10 billion, based on a competing proposal promoted by House Republicans to replace the dividend cut. The House plan would have removed the Fed surplus account entirely and transferred the money to Treasury.

Big banks noted that, once again, the smallest institutions are saved from further regulation, while the rest of the industry has to deal with new burdens.

"They already have lower capital requirements, lower insurance premiums, lower liquidity requirements, and now they are paid higher rates on government securities," Greg Baer, president of the Clearing House Association, said in a statement.

House lawmakers also expressed frustration with the deal, arguing that the Fed spending regime was supposed to be an alternative — not to be used in conjunction with a reduction in dividends on stock that banks are required to hold.

"If you're in the financial services industry, you should be concerned that Congress looks potentially at the industry as a piggy bank for funding other aspects of government," Rep. Randy Neugebauer, a lead author on the House proposal, said in an interview Tuesday.

Even the central bank is left grumbling, on similar grounds.

"Using the resources of the Federal Reserve to finance fiscal spending sets a bad precedent. It infringes on the independence of the central bank and weakens fiscal discipline," a spokesperson for the Fed board said.

Still, others noted that the deal, while not perfect, may help shield the banks from further dividend cuts on their Fed stock down the line.

"That's probably, realistically, about the best deal the banks could have hoped for," said Edward Mills, an analyst at FBR Capital Markets. "It's better to get something more workable now, because once you've identified a pot of money that has no true political cost, that pot of money was going to be used."

But the deal could end up providing new challenges for small banks near the $10 billion cutoff. That's also the line used for several key Dodd-Frank Act regulatory thresholds, making it a costly one to cross, with the dividend change just piling on top of that.

"It further disrupts the economics of community banks, and it's going to probably be yet another reason for banks right at the $10 billion mark to either sell or acquire other institutions to get materially above $10 billion," Mills said.

At the same time, the financial services industry isn't leaving empty-handed, as banks won 20 regulatory relief provisions in the legislation. Those include a change to annual privacy notice rules; requiring banks to send out new disclosures only when their privacy standards have changed; and an extension to bank exam cycles from a year to 18 months for banks with assets of $500 million to $1 billion. The package also contains a bill that would set up an appeals process for the designation of rural areas under the Consumer Financial Protection Bureau's "qualified mortgage" rule, and provides a tweak to Dodd-Frank Act capital standards language that will aid Emigrant Bank of New York, based on a controversial 2012 bill that failed to win passage. The bill would push back the effective date of a Dodd-Frank provision so that Emigrant is allowed to count trust-preferred securities as part of its Tier 1 capital.

In another victory for the industry, the final package removed the use of Fannie Mae and Freddie Mac guarantee fees to help pay for the highway bill, a provision that was included in the earlier Senate proposal. Many in the mortgage business have criticized the use of G-fees to help pay for unrelated spending programs after the fees were used to fund a 2011 payroll tax holiday. The legislation also approves the reauthorization of the Export-Import Bank, ending a long and embittered partisan fight over the program.

But while resolving differences in the highway bill seems to have been a relatively amicable process that led to several big compromises, that's no guarantee that the looming budget fight to play out in coming weeks will prove the same.

With so many popular regulatory relief measures, like the change to privacy notices, included in the highway bill, there's now less low-hanging fruit to bargain with in the spending package as industry officials push for further changes to Dodd-Frank. Lawmakers must finalize a deal to fund the government by Dec. 11 to avert a shutdown.

"Traditionally, there's nothing more bipartisan than highway funding — so all the cats and dogs get added here and all the fights are left for later," Mills said. "This is not an indication that you're going to have a repeat of this cooperation 10 days from now. It's an indication that people are getting what they can get now, and are getting entrenched for a pretty big battle for the next 10 days."

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