FDIC considers plan to penalize banks whose pay practices encourage risky moves

By Binyamin Appelbaum
Washington Post Staff Writer
Friday, January 8, 2010

The Federal Deposit Insurance Corp. is considering financial penalties for banks whose pay practices encourage reckless behavior, potentially opening a new front in the federal government's effort to reshape the way bankers are paid, according to people familiar with the matter.

Officials at the FDIC and other federal agencies are concerned that some banks reward executives for increasing revenues and profits in the short term even if those executives also are increasing the company's risk of losses in the long term.

The FDIC, which collects fees from all banks to repay depositors in failed banks, is reviewing whether it could adjust those fees to reward companies that adopt reforms, such as "clawback" provisions that can require executives to repay bonuses.

The discussions remain at an early stage and were described by sources who spoke on condition of anonymity because the work is not finalized. The FDIC's board is scheduled to discuss the issue at a Tuesday meeting, and it could vote to seek public comment on the idea.

The Obama administration has loudly criticized compensation practices at large banks, and it placed limits on pay for top executives at companies that took extraordinary federal aid, such as Citigroup and American International Group. But the government has struggled to define a broader policy toward pay practices that preserves the autonomy of private companies while discouraging lavish paydays for short-term victories.

The Federal Reserve said earlier this year that it would review and compare pay practices at the largest banks and that it would generally instruct regulators to examine whether companies were tying compensation to long-term success. The FDIC is exploring whether it can use fees as a carrot-and-stick complement to the Fed's approach, the sources said.

The FDIC, which estimates that it will spend $100 billion cleaning up the wreckage of banks that fail during this financial crisis, has tried increasingly under Chairman Sheila C. Bair to reward prudence and discourage recklessness.

Banks pay fees to the FDIC based on size, adjusted for the likelihood that the bank itself will fail. Less healthy banks pay larger fees. The agency also imposes penalties for a variety of practices that make failure more likely, such as paying relatively high interest rates to attract deposits, and rewards for practices that make failure less likely.

The agency now is considering whether some compensation practices should be included in those categories for the first time.

Bair said in October that the size of the bonuses some large banks planned to pay for 2009 "distresses me."

"I think it is in the enlightened self-interest of these large financial organizations to, you know, suspend these outsized bonuses at least, if not permanently realign compensation to more rational levels," Bair said.

But she added that it was primarily the responsibility of shareholders, not the government, to curb excessive compensation.

"Some of it is just you're going to have to rely on the industry's own self-restraint," she said, "and unfortunately a lot of them don't seem to be too self-restrained right now."

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