Published November 17, 2014
Federal regulators have proposed making top executives at large financial firms wait at least three years to be paid half of their annual bonuses, a move designed to cut down on risky financial transactions.
The Federal Deposit Insurance Corp. voted Monday to advance the rule, which builds on more general requirements in last year's financial regulatory law to curtail risk-taking. The rule targets firms with $50 billion or more in assets, seeking to tie bonuses with financial performance over a longer time period.
The FDIC also moved Monday to make larger banks pay a greater portion of fees to insure all U.S. banks.
The bonus requirement would apply to major financial institutions, such as Bank of America Corp., JPMorgan Chase & Co., Citigroup Inc., Goldman Sachs Group Inc., and Wells Fargo & Co.
Lawmakers and government officials have blamed outsize bonuses for helping to fuel the financial crisis, saying they encouraged short-term risk-taking. The financial regulatory law enacted last year simply directed government regulators to put in rules to prohibit incentive-based payments that encourage excessive risks.
Other financial regulators — including the Federal Reserve, two Treasury Department agencies, and the Securities Exchange Commission — must also vote to send out the bonus rule for public comment before it is finalized. They are expected to act in the next few weeks, and the final rule could take effect by the fall, officials said.
FDIC officials stressed the agency isn't looking to limit compensation.
"This proposed rule will help address a key safety-and-soundness issue which contributed to the recent financial crisis," FDIC Chairman Sheila Bair said before the vote.
Payment of bonuses makes more sense if a large chunk is spread over several years in a way that reduces the amount executives receive "in the event of poor performance," the FDIC said. "The risks of strategic and other high-level decisions of executive officers may not be apparent or become better known for many years."
Financial firms with at least $50 billion in assets also would be required to identify their employees beyond executive officers who could expose the firm to substantial losses. That could include traders. In addition, the firms' board of directors would be required to approve compensation packages for those employees that are based on incentives.
The proposed rule could lead some executives to go to private-equity firms or hedge funds, said Sandy Brown, an attorney at Bracewell & Giuliani in Dallas who represents banks.
"We've already lost some pretty talented people to other industries that aren't so highly regulated," Brown said in a telephone interview. "There's a chance that the pendulum has swung too far and it will make it more difficult for financial institutions to attract the best and the brightest."
The FDIC's proposal to make larger banks pay a greater portion of fees to insure all banks was required under the new law. The rule changes the basis for assessing a bank's premiums, from the amount of its deposits to its assets. Officials say that will more clearly reflect the risks to the insurance fund.
Last year 157 banks failed, the most in nearly two decades.