Financial Regulatory Forum

US FDIC floats plan to tie bank pay to fee levels

By Reuters Staff
January 12, 2010

By Karey Wutkowski

WASHINGTON, Jan 12 (Reuters) – U.S. banks whose compensation plans encourage risk-taking would have to pay more for deposit insurance under a proposal floated by the Federal Deposit Insurance Corp on Tuesday.

The proposal is very preliminary and was contentious even among the members of the FDIC board, which is made up of regulators for different-sized financial firms. The board voted 3-2 to seek public comment on the proposal.

The plan would reward pay structures that tie banker pay to long-term performance and include “clawback” provisions to recoup payments.

Likewise, banks with risky payment schemes, including huge cash components and incentives for short-term results, would have to pay more in insurance premiums.

The proposal, which is not guaranteed to lead to rulemaking, said the FDIC would not seek to impose a specific level of compensation. Also, it would not require banks to provide more than a minimal amount of data, in an attempt to lighten the burden of the proposal.

“We’re not talking about (compensation) levels, notwithstanding my dismay,” FDIC Chairman Sheila Bair said to reporters. “This isn’t about levels, this is about structures.”

During the FDIC board meeting, Comptroller of the Currency John Dugan said the proposal would be premature because of other efforts to police pay. Dugan, who voted against the proposal, also said raising fees on deposit insurance might not effectively get at the problem of risky pay structures.

“It would be very unfortunate to have an end result where insured institutions — and perhaps their holding companies — were subject to inconsistent schemes evaluating the risk of their executive compensation programs,” said Dugan, whose agency regulates some of the largest U.S. banks.

John Bowman, director of the Office of Thrift Supervision, also voted against the proposal, saying there is not enough evidence linking pay structures to bank failures.

Dugan and Bowman said it would be prudent to first see final pay rules from the Federal Reserve. The Fed in October issued preliminary guidelines that would dictate prudent compensation practices for all levels of bank employees.

The FDIC proposal comes as bonuses for bankers have returned to the spotlight, with the nation’s biggest banks preparing to hand out awards that critics say were made possible only by taxpayer bailouts.

This week, the White House and New York Attorney General Andrew Cuomo went on the offensive against big Wall Street bonuses. Cuomo asked top bailout recipients to turn over data on expected payouts. White House spokesman Robert Gibbs said some Wall Street executives “continue not to get it” when it comes to the fairness of big bonuses.

The FDIC’s deposit insurance fee system is already risk-based. Banks with low supervisory ratings and high amounts of broker deposits pay higher rates to federally insure their customers’ accounts.

The proposal would add another risk metric to the fee system. It will be put out for 30 days of public comment.

The FDIC insures accounts up to $250,000 at more than 8,000 U.S. banks.

(Reporting by Karey Wutkowski and Steve Eder; editing by John Wallace) ((E-mail:karey.wutkowski@thomsonreuters.com +1 202 898 8374))

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