WASHINGTON — The Federal Deposit Insurance Corp. unveiled its plans Tuesday to tie bank compensation practices to premium assessments, but the agency's outside directors made it clear they oppose the idea.
Both Comptroller of the Currency John Dugan and acting Office of Thrift Supervision Director John Bowman raised objections to charging higher premiums to banks with riskier compensation practices, which meant FDIC Chairman Sheila Bair had to rely on the agency's two other board members for the votes needed to put the plan out for public comment.
"It's regrettable when we have a split vote on this board, but I must say: I think … the position that we should not even be asking these questions is not one that I can understand," Bair said at the contentious meeting.
Earlier she said that while "we have been told that the industry has reformed past excesses … it is unclear whether this represents lasting reform, or is simply politically expedient given populist outrage."
Pressure from policymakers to curb executive compensation continues to escalate. House Financial Services Committee Chairman Barney Frank scheduled a press conference for today to announce a hearing on the topic.
The FDIC's preliminary proposal — the 3-to-2 vote put the advance notice of proposed rulemaking out for 30 days of public comment — lists a series of questions on how best to tie premiums to compensation, but it also described the types of pay plans that would be looked on favorably.
Dugan and Bowman said the move conflicts with other pending policies restricting executive compensation, and argued that the supervisory process — not premium calculations — is the place to police pay.
"I have substantial concerns about trying to address the real problem of risky compensation arrangements through finely calibrated increases in deposit insurance assessments," said Dugan, who read a long statement objecting to the plan.
The proposed model would not set specific compensation limits, but institutions would be discouraged from awarding too much up-front compensation to lenders and other employees in risk-taking jobs. A "significant portion" of pay for those employees would have to be in the form of "restricted, nondiscounted" stock, according to the proposal. Large stock awards could only be vested over multiple years, and would have to be subject to "clawbacks," or provisions allowing banks to recoup the money from employees if risk-taking led to losses.
A bank's employee compensation plan would have to be approved by a subcommittee of the board made up of independent directors who sought the input of outside compensation consultants. Banks could declare whether they met the agency's requirements, but these self-evaluations would be subject to verification by examiners.
"Liberal commentators as well as … economists have pointed to the skewed incentives for excessive risk-taking that are created when fees are paid at the onset of a transaction, without regard to its performance over time," Bair said at the outset of the meeting.
Premiums have historically been based on a bank's Camels rating and keyed primarily to how much capital it has and how well it is managed. But the FDIC has begun to tweak its pricing formula to reflect the risks that it says led to a high level of bank failures over the past year. For instance, the agency recently announced it will charge higher premiums to banks that rely too heavily on funding from the Federal Home Loan banks or brokered deposits.
Agency officials said loose compensation practices have also led to some bank failures.
Both Dugan and Bowman argued that compensation limits are being tackled by other policymakers. They cited a pending proposal from the Federal Reserve Board as well as measures in the regulatory reform legislation.
"It would be very unfortunate to have an end result where insured institutions — and perhaps their holding companies — were subject to inconsistent schemes evaluating the risk of their executive compensation programs," Dugan said. "We should wait until we have the results of the" Fed's "efforts before heading down a path that could be both unnecessary and inconsistent."
Bair rejected that thinking.
"I cannot understand why we need to keep waiting — we need to keep waiting for this or that, and then in the interim nothing changes," she said. "We just maintain the status quo, and the longer we try to instigate meaningful reform, the more momentum for that dissipates. We are simply asking the question."
Bowman questioned whether Bair is exceeding her authority.
"I need to ask: What are the limits of the FDIC's authority to include in the DIF assessment base factors other than those explicitly set out" in law? Bowman said. "Are we setting a precedent for utilizing the DIF assessment system for purposes beyond what Congress intended?"
He also said most bank executives are not overpaid.
"We have not done sufficient empirical research that establishes a link between incentive compensation and excessive risk-taking that causes a loss to the Deposit Insurance Fund as it relates to the vast majority of institutions. It is true that several material loss reviews of banks that have failed in the past year have referred to incentive compensation of individual employees as a 'contributing factor' in the failure of the institution. It is critical to emphasize the word 'contributing.' "
But Bair told reporters before the meeting that connecting deposit insurance with compensation could give wary institutions the push they need to be more prudent.
"Some boards want to be more aggressive in clawback provisions, and stringing out compensation over a longer period of time and doing more with restricted stock, but they're very worried about the negative competitive impact that could have," she said. "They're clamping down on their compensation, but the guy down the street is still paying a lot of cash up front."