Federal bank regulators proposed a joint rule Monday that would force banks to claw back pay from executives who show an insensitivity to risk.
The Federal Deposit Insurance Corp, Federal Housing Finance Agency and the Office of the Comptroller of the Currency issued a notice of proposed rulemaking to curb incentive-based compensation arrangements, an as-yet-unfulfilled Dodd-Frank requirement.
The proposed rule was expected following reports from Bloomberg and The Wall Street Journal last month, which cited sources familiar with the matter.
“[P]oorly designed financial institution compensation programs can provide incentives for short-term risk taking that can jeopardize the safety and soundness of the institution,” FDIC Chairman Martin Gruenberg said in a prepared statement Monday.
“The proposal, along with proposed alternatives and questions in the preamble, seeks to align employee incentives with the long-term interests and safety and soundness of covered financial institutions,” he said.
Under regulators’ Monday proposal, executives at big banks would be required to defer some of their incentive-based pay for a certain amount of time. Some executives would have 40% to 60% of their pay delayed for up to four years.
Similar measures failed to gain traction in both 2011 and 2016. For the rules to become effective, they also have to be proposed and adopted by the Federal Reserve, the Securities and Exchange Commission and the National Credit Union Administration.
The NCUA is expected to take similar action in the future, and the issue has made it onto the SEC agenda, according to the FDIC website.
The Fed is, at this point, absent from the proposal.
“We are committed to continuing to work with the other regulators to develop a joint rule … any rule should be considered following updated analysis so that it reflects current banking conditions and practices,” a Fed spokesperson told American Banker. “Executives who are responsible for a failed bank should not profit from that failure, and bank executives' pay should appropriately take into account risk.”
