Listen to any speech from a Federal Reserve Board official and at some point, they are almost certain to preach the virtues of greater transparency - both in financial markets and at the central bank itself.

But the findings from the Fed's latest "horizontal review" of industry practices - this time, focusing on compensation - will not be made public. Citing the confidential nature of supervision, the Fed said it would not release the results of its review. That is a departure from earlier this year when the Fed laid bare the capital positions of the 19 largest banks, and markets rallied amid the newfound clarity.

The compensation review, part of a broader proposal the Fed released in October, targets executives, traders and other employees at the 28 largest financial institutions. (For smaller institutions, compensation oversight will be added to regular safety and soundness examinations.)

The question of how to handle information collected through horizontal reviews is likely to intensify. Fed Governor Daniel Tarullo told the House Financial Services Committee recently that the central bank plans to increase its emphasis on such reviews, which compare various banks' practices on particular issues.

To be sure, releasing compensation data is a lot different from telling markets that an institution has enough capital to survive a severe downturn. Fed Chairman Ben Bernanke last month called the stress tests "a unique event."

But Fed officials have claimed excessive compensation is the sort of risk that poses a broad threat to the financial system. The financial crisis "highlighted the potential for compensation practices at financial institutions to encourage excessive risk-taking and unsafe and unsound behavior - not just by senior executives, but also by other managers or employees who have the ability, individually or collectively, to materially alter the risk profile of the institution," Tarullo testified on Capitol Hill in late October. "Bonuses and other compensation arrangements should not provide incentives for employees at any level to behave in ways that imprudently increase risks to the institution, and potentially to the financial system as a whole."

If that is the case, some say, then the public has a right to know how an institution's compensation practices might affect the broader economy. "Of course that's a matter of public interest," says Gil Schwartz, a former Fed lawyer now in private practice.

Ultimately, releasing the compensation results could serve as a demonstration to the public that banks have learned lessons from the financial crisis and are making substantive reforms. "No matter how high the compensation is, it will restore some of the public's confidence," says Robert Gnaizda, of counsel to the Black Economic Council, who argued that banks could use the data to their advantage.

Banks already cite the pay of their five highest-paid people in annual proxy statements filed with the Securities and Exchange Commission. Given the information that already exists, Robert Clarke, the former comptroller of the currency who is now a partner at Bracewell & Giuliani, dismissed the Fed's contention that the details it picks up are protected as supervisory information. "Compensation information about institutions is much more commonly available and people are used to seeing it," he says. "Whatever this review produces is not going to cause a run on the bank."

Still, there are downsides to releasing compensation figures that worry the industry, including the possibility that unregulated firms could use the information to poach employees. Moreover, the Fed might not have much choice but to withhold compensation details if they are contractually required to be kept confidential.

The Fed has made strides in opening itself to the public and more clearly communicating the rationale behind its actions. The central bank now releases a monthly report detailing, among other things, how many borrowers use its liquidity facilities and the value of the collateral underlying the loans.

But given the continued pressure on the Fed to become more transparent, observers said Bernanke is almost certain to be pressed to go further.

"The Fed chairman testifies twice a year to the Congress and they ask him whatever is on their mind," says Chris Low, the chief economist at First Horizon National Corp.'s FTN Equity Capital Markets Group. "I imagine Bernanke is going to have to defend this decision."


Steven Sloan is a reporter at American Banker.

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