Tags: bank | fees | risky | schemes

Bank Regulators Eye Higher Fees for Risky Schemes

Wednesday, 13 Jan 2010 03:12 PM

Regulators have floated the idea of boosting deposit insurance fees for banks that offer pay schemes that encourage "excessive risk taking."

The Federal Deposit Insurance Corporation (FDIC) said Tuesday it had begun taking comments on the proposal, which would provide additional funds to deal with bank failures.

"A broad consensus of academic studies agrees that poorly designed compensation structures can misalign incentives and induce risk taking. I share those concerns," FDIC chairman Sheila Bair said in a statement.

"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."

The initiative was the latest effort to clamp down on hefty executive pay and bonus arrangements that some say pushed banks and other financial institutions into risky positions that led to the global financial crisis.

The FDIC effort seeks comments on a possible rule that would force the banks with riskier pay programs to pay higher fees than those with better risk management.

"The FDIC is seeking to identify criteria upon which to base adjustments to the risk-based assessment system in order to correctly price and assess the risks presented by certain compensation programs," the agency said in its rulemaking notice.

This effort would not cap pay or bonuses, but would "focus on whether an employee compensation system is likely to be successful in aligning employee performance with the long-term interests of the firm and its stakeholders, including the FDIC," the document said.

The news came as major US banks are gearing up to announce annual bonuses for top executives while bracing for a political firestorm over compensation practices that critics say fueled the global financial crisis.

But one official said the FDIC effort is premature.

John Dugan, the Comptroller of the Currency — the Treasury office that issues bank charters — said Congress and the Federal Reserve are also looking at similar efforts.

"I do not believe that a sufficient basis has been demonstrated to support the approach" of the FDIC proposal, he said in a statement.

He also argued that there is "no empirical connection" to compensation programs and losses sustained by the deposit insurance fund.

© AFP 2017

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Regulators have floated the idea of boosting deposit insurance fees for banks that offer pay schemes that encourage excessive risk taking. The Federal Deposit Insurance Corporation (FDIC) said Tuesday it had begun taking comments on the proposal, which would provide...
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2010-12-13
 

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