WASHINGTON (AP) — Federal regulators on Monday adopted a plan to ensure that banks’ pay policies don’t encourage employees to take reckless gambles like those that contributed to the recent financial crisis.
The plan, originally proposed by the Federal Reserve last year, was also endorsed by other key banking regulators — the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
Many banks’ practices have been found deficient in curbing risk-taking based on an in-depth analysis by regulators, the Fed said. It has directed banks — which weren’t identified — to take steps to fix their policies.
“Many large banking organizations have already implemented some changes in their incentive compensation policies, but more work clearly needs to be done,” said Fed Governor Daniel Tarullo, the central bank’s point person on the matter.
The regulators won’t actually set compensation. Instead, they would review — and could veto — pay policies that could cause too much risk-taking by executives, traders or loan officers.
As part of that process, the regulators will be conducting additional reviews of banks’ compensation practices and making sure that they follow up on deficiencies.
Many banks need better ways to identify which employees can expose the entire institution to risk, the Fed said. Many banks’ policies aren’t fully capturing the risks involved and not applying risk-curbing measures to enough employees. Many banks also don’t have sufficient ways to evaluate whether their compensation practices are successful in curbing risks. And, many are not tailoring their practices to discourage risks, the Fed said.
All told, nearly 8,000 banks would be covered by the plan.
In the heady days leading up to the 2007-2009 financial crisis, banks too often rewarded employees for increasing the firm’s short-term revenue or profit, without adequate recognition of the risks posed for the company.
The regulators, among other things, suggest that banks carefully review “golden parachutes,” which typically provide senior executives with large payments without regard to outcomes, to ensure they don’t encourage undue risk-taking. Regulators also suggest doling out compensation payments over longer time frames and deferring payments for a “sufficiently long” time for certain employees.
For example, regulators suggest that a “substantial portion” of senior executives’ compensation be deferred over a multi-year period, with payment made in the form of stock or other equity-based instruments.
The plan neither dictates nor bans specific forms of compensation. Instead it provides a broad framework to banks — both large and small — to rethink their compensation to key employees.
Although regulators didn’t provide any blanket exemptions, they said that “tellers, bookkeepers, couriers and data processing personnel” would not likely expose the company to the type of risk-taking the plan seeks to curb.
Under the plan, the 25 biggest banks — including Citigroup, Bank of America and Wells Fargo & Co. — are developing their own plans to make sure compensation doesn’t spur undue risk taking. If the regulators approve, those plan would be adopted and bank supervisors would monitor compliance.
At smaller banks — where compensation is typically smaller — banking supervisors will conduct reviews. Those banks don’t have to submit plans to regulators.
The plan comes as President Barack Obama and leaders of 19 other countries gather later this week to explore ways to beef up global financial oversight to prevent another financial crisis from occurring.
One of the issues that has touched a nerve with the American public is that bank executives continued to be paid handsomely — even as their firms’ lax lending standards and hardy appetite for risk contributed to financial and economic chaos.
In response, the Obama administration installed a pay czar to limit compensation at companies that received taxpayer bailouts. The plan announced Monday applies to banks overseen by the four federal banking agencies regardless of whether they received taxpayer aid.