U.S. regulators will be able to snatch back up to two years of Wall Street executives' pay if they are found responsible for the collapse of a major financial firm, under a rule approved on Wednesday.
The provision is part of a broader Federal Deposit Insurance Corp rule laying out the order in which creditors will be paid during a government liquidation of a large, failing financial firm.
The 2010 Dodd-Frank financial oversight law gives financial agencies this power to recoup executives' pay. Bankers have complained regulators were too vague in an earlier proposal about what could trigger a clawback.
The FDIC's final rule provided some relief by clarifying "negligence" as the standard. The agency was careful to point out that it was not using the more narrow standard of "gross negligence."
Acting Comptroller of the Currency John Walsh, who had raised concerns about the standard being too broad, said he was pleased with the changes.
"I was concerned that it seemed to focus more on job titles than the actual actions that people had taken," he said.
The liquidation authority is a major part of the Dodd-Frank law.
The idea is to preserve economic stability by unwinding troubled firms, but in a way that is less politically explosive than taxpayer-funded bailouts and less traumatic to the markets than bankruptcy, like the Lehman Brothers collapse of 2008.
At the top of the list for who, or what, will be paid off first under the new resolution system are any debts the FDIC or receiver took on as part of the cost of seizing a firm, administrative expenses, money owed to the U.S. Treasury and money owed to employees for such things as retirement benefits.
Further down the list are general creditors.
Banks and financial services companies have complained the framework gives the FDIC too much latitude to treat some creditors differently.
FDIC leaders downplayed these concerns again on Wednesday, saying their rules are based as much as possible on the bankruptcy code as industry officials have advocated.
Also on Wednesday, the FDIC board discussed, but did not vote on, a final rule on how large financial firms should draft "living wills." These company-drafted documents will give regulators a roadmap for how they can be broken up if they fail.
The FDIC and the Federal Reserve, who will jointly issue the living will rule, are still deciding details.
FDIC Chairman Sheila Bair, who is leaving the agency on Friday at the end of her five-year term, said she hoped a final rule would be done in August.