FDIC seeks comment on bank pay plan

(AP) — Federal regulators moved Tuesday to seek public input on a plan to link the insurance premiums levied on U.S. banks to the degree of risk-taking encouraged by their executive pay policies.

A divided board of the Federal Deposit Insurance Corp. voted to make public a preliminary proposal for using executive compensation as a factor in assessing the fees that banks must pay for the deposit insurance fund. The plan could involve both rewards and penalties for banks. The idea is for institutions deemed to be higher-risk to pay bigger insurance fees.

"The recent crisis has shown that compensation practices that encourage excessive risk can create significant losses in the financial system and the deposit insurance fund," FDIC Chairman Sheila Bair said before the 3-2 vote. But two heads of Treasury Department agencies, who also sit on the five-member board, voted against floating the proposal.

John Dugan, director of the Office of the Comptroller of the Currency, and John Bowman, acting director of the Office of Thrift Supervision, said it would be premature because Congress and the Federal Reserve were addressing the bank compensation issue.

Smaller banks, especially, could be hurt by a new regulatory burden even though they had little to do with the high-flying compensation of Wall Street institutions leading up to the financial crisis, the two regulators said.

The FDIC is seeking public comment on the plan for 30 days. If there is a final rule, it isn't expected to be adopted until late in the year.

Company policies that encouraged excessive risk-taking and rewarded executives for delivering short-term profits were blamed for fueling the financial crisis, and big banks especially were considered to have engaged in the practice.

The FDIC move comes amid public anger over compensation and Wall Street excess at a time of economic stress and a wide range of actions across the government targeting banks and executive pay. President Barack Obama is considering a new levy aimed at recovering tax dollars from bailed-out financial institutions, and calls for a hefty tax on bank bonuses have risen in Congress.

At the same time, the Federal Reserve and the Securities and Exchange Commission have taken actions on executive compensation.

Bair voiced quiet exasperation at the FDIC's public meeting with Dugan and Bowman's opposition. Their position "is not one that I can understand," she said. "We are simply asking the question."

Bair stressed that the idea wasn't to seek to dictate compensation levels for banks but to explore whether certain pay practices encourage banks to take excessive risk. Outsize compensation was "clearly a contributor to the crisis," she said.

Last year, 140 U.S. banks failed amid the soured economy and a cascade of loan defaults — the most in a year since 1992 at the height of the savings-and-loan crisis. They cost the federal deposit insurance fund, which fell into the red, more than $30 billion last year.

The FDIC proposal seeks input on a possible model for banks' compensation policies that would include payment in restricted company stock for a large portion of pay for employees whose work is deemed potentially risky. In addition, significant awards of company stock only would become vested over a multi-year period.

Also under the proposed model, a bank's compensation program would be administered by a committee made up of independent members of the board, in consultation with outside specialists.

The plan could involve both "carrots and sticks" for banks. A possible reward: Banks that are able to "claw back" compensation from executives under pay contracts could get reductions in their insurance premiums. Penalties, on the other hand, would call for increased fees for banks with pay deals that involve more risk.

Karen Shaw Petrou, managing partner of Federal Financial Analytics in Washington, said the plan was a bad idea. "Compensation is the least of the risks that result in bank failure and ... there are far more potent, proven forms of risk the FDIC has wholly ignored," she said in a memo to clients.

Those other forms of risk include heavy reliance by nonbank affiliates on insured deposits and growing holdings kept off banks' balance sheets, Petrou said.

If the FDIC plan were adopted, banks' compensation structures would be added to the other risk factors now taken into account by the FDIC in assessing fees, including diminished reserves against risk and reliance on higher-risk so-called brokered deposits.

Bair has said the number of bank failures could rise more this year. The agency expects the cost of resolving failed banks to grow to about $100 billion over the next four years. The FDIC last year mandated banks to prepay, for the first time, about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.

With the FDIC backed by the government, depositors' money — insured up to $250,000 per account — is not at risk. Besides the fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks.