NEW YORK (TheStreet) -- Federal regulators are considering a proposal that would force executives at large banks to defer at least 50% of their bonuses for a minimum of three years in order to curb excessive risk taking.
On Monday, the Federal Deposit Insurance Corp. outlined its ideas for the incentive-based compensation rules that the agency is required to devise and implement under the Dodd-Frank financial reform law.
While the FDIC is proposing that all financial firms put in stricter pay standards and supervision, those firms with at least $50 billion worth of assets require executive officers to fall under the three-year, 50% bonus deferral rule.
During the three-year timeframe, trades or decisions made by affected employees would be reviewed. If those business moves ultimately led to losses, the executive's bonuses would have to be scaled back or eliminated.The FDIC also proposes that boards of directors of larger institutions identify employees who "individually have the ability to expose the institution to substantial risk," and implement standards to pay such individuals that balance risks and rewards. "This proposed rule will help address a key safety and soundness issue which contributed to the recent financial crisis - that poorly designed compensation structures can misalign incentives and induce excessive risk-taking within financial organizations," FDIC Chairman Sheila Bair said in a statement. "Importantly, we believe the rule will accomplish its objectives in a way that appropriately reflects the size and complexity of individual institutions." The FDIC's board plans to vote on the matter Monday. Following that, the proposed rule would be open to public comment for 45 days and then require approval of other federal regulators. Firms that would be most affected by the proposed rule include Bank of America (BAC), JPMorgan Chase (JPM), Goldman Sachs (GS), Citigroup (C), Morgan Stanley (MS) and Wells Fargo (WFC). Those firms and others that suffered losses from the financial crisis and received bailout funds have implemented new pay practices that weigh more pay in restricted stock. Still, big banks' quarterly reports indicate that pay is on the rise again, and there's no regulatory standards for proper compensation. Bair pointed out that the inter-agency rule would apply across all types of financial firms, "limiting the opportunity for regulatory arbitrage." -- Written by Lauren Tara LaCapra in New York.
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