Federal Deposit Insurance Corp. Chairwoman Sheila Bair, over the objections of her two most prominent board members, has begun considering whether to impose new rules on banks' executive compensation practices.
The idea behind Bair's initiative is to divine whether the FDIC should charge higher deposit insurance premiums on banks that reward senior executives and top earners with incentive-pay formulas that might encourage risky lending or other activities that threaten the institutions' safety and soundness.
Although Bair insists that the idea is in the earliest stage, her endeavor has met with strong resistance. Judging by the reactions of Comptroller of the Currency John Dugan and Office of Thrift Supervision Acting Director John Bowman, it would appear as if they believe Bair is planning to rush through a new set of compensation rules.
Dugan, whose agency oversees national banks, and Bowman, whose shop regulates federally chartered savings and loans, insist that the FDIC already has sufficient authority to discourage risky compensation practices through the examiners' ratings, which are used to help set deposit insurance premiums.
The addition of a new set of rules could infringe on the power of bank boards to set compensation, they say, and could conflict with separate efforts by the Federal Reserve Board, Congress and international bodies to address bank pay practices. "I think we should wait until we have the results of the board's efforts before heading down a path that would be both unnecessary and inconsistent," Dugan said at the FDIC's Jan. 12 board meeting.
Bair, who has tangled with Dugan and Bowman in other FDIC proceedings, said she was mystified by her colleagues' reluctance to even explore the issue. She stressed that a formal proposal for new rules is a long way off and there will be plenty of opportunity to coordinate with the Fed and Congress.
"There's nothing we are doing that conflicts with what the Fed is doing -- it complements that -- or what Congress is doing," she said.
Bair is seeking comment on an idea with three core elements. One would be to charge depository institutions higher premiums unless performance-based pay is weighted toward restricted, nondiscounted company stock. Second, the shares should become vested over several years and would be subject to a "clawback" if the employees' activities ultimately resulted in losses. Finally, the FDIC plan envisions compensation being administered by a committee of independent board members with input from outside compensation experts.
From the kinds of questions Bair wants answered, it's clear she's not close to being ready to impose a final rule. For instance, the FDIC wants input on such basic issues as whether risk-based assessment should reward institutions that implement pay plans that mitigate risk or penalize firms that don't. The agency is also seeking input on how bank directors can effectively oversee the design and implementation of pay programs. Also up for discussion: which employees should even be covered by the rules.
Bankers, not surprisingly, are hostile to the idea of tying pay practice evaluations to deposit insurance premiums. "Our bankers are very, very concerned -- to put it mildly," says Sally Miller, senior vice president of the American Bankers Association's Center for Securities, Trust and Investments. The primary determinant of deposit premiums should continue to be the actual risk examiners find on the books, they say. Miller agrees with both Dugan and Bowman that the current rating system for setting premiums, which includes an examiner's assessment of management, could incorporate pay packages to a less burdensome degree.
Noting that the FDIC is giving only a month to prepare comments,
Miller says bankers fear Bair has put the rules on a fast track,
despite her insistence that no rule is imminent. However, FDIC
spokesman David Barr pointed out that no final rule could be
implemented without another, probably longer, period for comments of a
Bill McConnell is The Deal's Washington bureau chief.