FDIC pushes to rein in executive pay at banks

By Binyamin Appelbaum
Washington Post Staff Writer
Wednesday, January 13, 2010

The Federal Deposit Insurance Corp. advanced a proposal Tuesday to penalize banks for risky compensation practices despite public opposition from other federal banking agencies, exposing tensions among senior officials over the government's proper role in shaping pay practices.

Popular outrage over Wall Street paydays has failed to generate significant momentum in Washington to limit the amounts bankers are paid. Instead, regulators and politicians are battling over the more modest idea of pushing companies to tie pay to long-term performance.

The FDIC, which collects fees from all banks to repay depositors in failed banks, is considering a plan to reduce the fees paid by companies that take specified steps such as paying bonuses in the form of stock that cannot be sold immediately. Banks that don't comply would face higher fees, on the theory that bankers paid solely for short-term results will take greater risks, increasing the chances of a bank failure.

The agency's board agreed by a 3 to 2 margin Tuesday to seek public comment on a preliminary version of the proposal, which could be adopted later this year.

FDIC Chairman Sheila C. Bair said that "a growing body of evidence and common sense and academic literature" showed that bonuses for short-term performance had played a role in fomenting the financial crisis. She said the FDIC's approach would reinforce guidance from the Federal Reserve instructing companies to tie compensation to long-term performance.

But John C. Dugan, who heads the Office of the Comptroller of the Currency and sits on the FDIC's board, registered sharp objections to the proposal, which he described as premature and possibly outside the FDIC's authority. Dugan said the FDIC should wait to judge the impact of the Fed's guidance on compensation to avoid burdening banks with an unnecessary fee. He also questioned whether sufficient evidence showed a link between overpaid executives and failed banks.

"I have substantial concerns about trying to address the real problem of risky compensation arrangements through finely calibrated increases in deposit insurance," Dugan said.

John Bowman, the acting director of the Office of Thrift Supervision, who also sits on the FDIC's board, registered similar objections.

Under Bair's leadership, the FDIC increasingly has adjusted its premiums in carrot-and-stick combinations designed to shape bank behavior. Banks can be rewarded for increasing the amount of capital they hold in reserve against unexpected losses and punished for offering high interest rates to attract deposits, among other incentives and penalties. This would be the first time, however, that the FDIC has tied incentives to compensation policies.

In addition to encouraging awards of deferred stock, the FDIC also wants companies to include "clawback" provisions requiring employees to repay bonuses if short-term gains curdle into long-term losses. Finally, the FDIC wants pay decisions made by independent members of a company's board of directors.

In general, the FDIC has authority over banks that hold insured deposits but not over their parent companies, whose executives often are among the most highly-paid employees. But the agency's legal department has concluded that the new rule could apply to both groups, officials said.

Bair said the timing of the proposal was important because some banks wanted to reform pay practices but feared that competitors would gain an advantage. By offering financial incentives, the FDIC could help banks justify the decision to implement reforms, Bair said.

She offered her own sharp comments in response to the remarks by Dugan and Bowman, emphasizing that at this stage the FDIC "was simply asking questions."

"I must say, to take a position that we should not even be asking these questions is not one that I can understand," she said. "I also cannot understand why we need to keep waiting. We need to keep waiting for this or that, and in the interim, nothing changes."

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