Federal banking regulators are considering a plan to link the insurance premiums U.S. banks must pay to the degree of risk-taking encouraged by their executive compensation policies.
The board of the Federal Deposit Insurance Corp. is expected to make public next Tuesday a preliminary proposal for using executive compensation as a factor in assessing the fees paid by banks for the deposit insurance fund, a person with direct knowledge of the matter said Thursday.
The move comes amid a public outcry over compensation and recent actions by other regulators, including the Federal Reserve and the Securities and Exchange Commission.
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.
The discussions on a new FDIC plan are at an early stage that may lead to a formal rule being proposed and eventually adopted by the agency, two people familiar with the matter said. They spoke on condition of anonymity because the process is still preliminary.
The plan could involve both carrots and sticks for banks, one of those people said.
A carrot: Banks that are able to "claw back" compensation from executives under pay contracts could get their insurance premiums reduced.
Sticks, on the other hand, would call for increased fees for banks deemed as having pay deals involving greater 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.
The FDIC posted a notice Wednesday of a board meeting next Tuesday on a preliminary rule making related to employee compensation. It did not provide further details.
The board members include FDIC Chairman Sheila Bair as well as the heads of two Treasury Department agencies: the Office of the Comptroller of the Currency and the Office of Thrift Supervision.
The FDIC's consideration of the new plan was first reported by The Wall Street Journal and The Financial Times.
Last year, 140 U.S. banks succumbed to 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.
FDIC Chairman Sheila Bair has said the number of bank failures could rise further 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.
Depositors' money — insured up to $250,000 per account — is not at risk, with the FDIC backed by the government.
Besides the fund, the FDIC has about $21 billion in cash available in reserve to cover losses at failed banks.
The Federal Reserve, meanwhile, is working on a plan to get a broad picture of banks' pay practices, part of a larger effort to crack down on packages that encourage irresponsible risk-taking.
The 28 biggest banks — including Citigroup, Bank of America and Wells Fargo & Co. — will develop their own plans to make sure compensation doesn't spur undue risk-taking.
If the Fed approves, the plans would be adopted and bank supervisors would monitor compliance.
Last month, the Securities and Exchange Commission required all public companies to disclose more information about how they pay their executives, including data on how a company's pay policies might encourage excessive risk-taking.
The SEC also changed a formula that critics said allowed companies to understate how much their senior executives are paid.
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