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FDIC nibbles nicely at bank risk
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Sheila Bair looks to be leading the regulatory race to the top. The agency she oversees, the Federal Deposit Insurance Corporation, has recently unveiled a handful of clever ideas to contain risky bank behavior and protect the nation’s deposit insurance fund. Rival watchdogs fighting for turf will find it difficult to ignore FDIC’s latest tactics.
Generating the most buzz is a sensible plan to tie the amount that banks pay for deposit insurance to the riskiness of their compensation plans. Banks with schemes that favor short-term gains would pay more than those that, for example, include multi-year claw-backs on bonuses. The agency will vote on the plan next week.
Of course, this comes as the Fed is also implementing its own proposal to include executive pay in its overall assessment of bank stability. It’s not clear which agency will be more stringent. But a little competition among the two wouldn’t be the worst outcome after years in which banking regulators rivaled each other in their laxity.
Linking pay to insurance premiums follows a handful of other changes FDIC is making. It recently revised the formula it uses to assess how much interest undercapitalized banks can pay to attract deposits. The net effect of the changes will be to reduce the rates banks can pay by an average of 12 basis points, analytics firm Market Rates Insight estimates.
This is a clever way to limit moral hazard. Failing banks, more concerned with survival than profitability, often make last-ditch attempts to attract new deposits by offering ultra-high rates on savings products wrapped by FDIC insurance.
Similarly, FDIC is pushing for a form of schmuck insurance from the buyers of failed bank assets. To mitigate some losses the fund incurs on assets in receivership, FDIC is pushing for the buyers of the assets to make payments linked to the increase in their share prices following the announcement of a deal.
In isolation, these may look like incremental, if sensible, changes to the way FDIC does business. But in the context of a regulatory turf battle over power and resources in Washington, it’s an encouraging sign indeed.
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Instead of outright denying banks (who have what was now up until 4th qtr 2008 an implicit government guarantee now turned into a explicit guarantee) the right to leverage the taxpayers money as many times over as it wishes, instead, a proposal that places a fee on a banks riskiest compensation plan is now considered an innovative way to protect the taxpayer. Let’s see, history has shown that it takes but ONE trader to criple or blow up a bank. Our government officials still think we’re sailing under blue skies and calm waters and financial columnists still praise them for their intellectual firepower.
This post does the good of high lighting what few of the Washington folks are doing. Indeed Shaila Bair has come off well here and what she is trying to do here is good for American Tax payers. One just wishes there are more administrators like her.
Hopefully her plan passes and that will start putting some control on banker compensation, in the language they understand best – money and bonuses. This is good because to wait until Congress puts any limit on these bonuses or White House implements any regulation; is equivalent of waiting for Godot. That is unlikely to happen soon.
Our Congress, Treasury Secretary Geithner and Obama White House; all these are still in pockets of Bankers. That is why, how soever small, but this smart move by FDIC is good. At least Bair is trying to do something concrete within her capacity. She deserves the credit (and more media coverage) here.
We are truly missing the only thing that drives success or failure of banks: Profit.
The first thing banks would want to is have “compensation” tied to riskiness or vice-versa and pretend that in some way that leads to a formula of overall riskiness of the financial institution.
But it’s non-operational profits and things described as such that are disguising underlying asset risk. Formula: Greater risk = greater profit. Indexing FDIC payments/reserves to non-operational profit and lending profit would expose the raw nerve that drives risky behavior.
Ms. Bair is perhaps off to good beginnings. But risk taking demanded by congress to securitize debt to financial institutions created huge amounts of risk in the “derivativization” (is that even a word?) that followed in order to pass the hot potatoe of toxicity back to the government and consequently the citizen who the governments’s main responsibility it is to protect.