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Feds mull linking bank fees to exec pay policies

Federal banking regulators are seeking 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.
/ Source: The Associated Press

Federal banking 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.

"This is something we cannot ignore," FDIC Chairman Sheila Bair said. 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.

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.

"We're really just asking questions at this point," Bair said. She stressed that the regulators weren't seeking to dictate compensation levels for banks but were exploring whether certain pay practices encourage banks to take excessive risk.

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.

The plan could involve both rewards and penalties 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.

If the 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. The idea is for institutions deemed to be higher-risk to pay bigger insurance fees.

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. The failures compare with 25 in 2008 and three in 2007. They cost the federal deposit insurance fund, which fell into the red, more than $30 billion last year.

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.