The Federal Reserve is considering a requirement that the biggest banks add their bonds to pay packages for top executives.
The goal would be to align bankers' compensation more closely with their institutions' financial stability. Stock awards provide incentives to boost profits, while bonds would decline in value if a bank takes too much risk.
The concept has support from other regulators who are growing impatient with continued abuses on Wall Street.
"When you are talking about encouraging proper behavior," incentives are "very important, and certainly compensation is a huge factor on how people conduct themselves," Thomas Curry, the comptroller of the currency, said in an interview.
During the global financial crisis, "some risks were taken that may not have been in the best long-term interest of the banking organization, its shareholders or the deposit-insurance fund that backs it all up," added Curry, whose agency supervises 1,212 national banks with $9.4 trillion in assets.
Federal Reserve Bank of New York President William C. Dudley supported the idea in a February speech in Auckland, New Zealand.
"Structuring a long-term debt requirement so that a meaningful component consists of deferred compensation held by senior management would presumably strengthen the incentives for proactive risk management," he said in his prepared remarks.
One impetus driving the concept is a sense among regulators that Wall Street needs a cultural overhaul. They thought a financial crisis, record fines and stronger oversight would curtail ethical lapses, yet new problems keep emerging. These include an examination by regulators from Bern, Switzerland, to Washington of allegations that traders at banks colluded to manipulate benchmark exchange rates in the $5.3-trillion-a-day currency market.
In a November speech, Dudley lamented "evidence of deep- seated cultural and ethical failures at many large financial institutions."
Officials at the Fed and the Office of the Comptroller of the Currency also are looking for ways to better define the role of boards. The OCC proposed a rule in January, currently pending final approval, that would make its "heightened expectations" for big banks enforceable. One expectation is that boards show a "willingness to provide a credible challenge to bank management's decision-making."
Supervisors discussing the addition of bonds as executive pay figure that if officers hold more debt which would fall in price if the bank tilted toward insolvency they also would be inclined to conserve capital and manage risks better.
The plan is different from a rule on pay that regulators proposed in March 2011. The proposal included provisions that banks with more than $50 billion in assets defer at least 50 percent of top executives' incentive pay for at least three years and adjust it for losses. The proposal followed detailed guidance on compensation issued in June 2010.
Not long after the proposed rules were published, the Fed followed up with a 27-page report reviewing compensation practices across the 25 largest banks, including the U.S. operations of banks such as Credit Suisse Group AG and Deutsche Bank AG. The so-called horizontal review involved more than 150 regulatory staff and set standards for day-to-day oversight on compensation, which regulators have stepped up.
One result is the Fed has pushed the concept of who is a risk taker inside a bank "so much deeper" than it was before, said Robert Dicks, the head of Deloitte Consulting LLP's human- capital practice for financial-services firms.
"The Fed is now spending time understanding what affects risk and decision making," and it wants financial institutions to discuss how pay practices for a particular team mesh with overall risk management, Dicks said. "Just consistently, anything the Fed is looking at around risk will end with the question, 'And how are they paid?'"
Regulators are trying to "speed up what would normally take a generational change" to revamp the culture of Wall Street, he added.
Aside from tying some portion of executive pay to debt, regulators also are considering levying more fines against individuals rather than institutions.
The Fed fined banks $1.05 billion in 2012 and another $250 million in 2013, the biggest two years on record. These were also the two biggest years for fines by the Comptroller of the Currency, which imposed $536 million in 2012 and $420 million in 2013. A large share of the 2013 total for both agencies included September penalties against JPMorgan Chase & Co. for the $6.2 billion trading loss in its chief investment office.
Benjamin Lawsky, New York's superintendent of financial services, said last month that individual misdeeds should be exposed in greater detail.
"If we're just getting large fines from the corporations and remember, those fines are typically just hits to shareholders who usually had nothing to do with the violations are we really deterring future bad conduct?" Lawsky said March 19 in a speech in Washington. Bank regulators are asking similar questions about enforcement actions that charge large penalties against the companies, not individuals.
Sheila Bair, former chairman of the Federal Deposit Insurance Corporation, said regulators need aggressive measures and approved of Dudley's idea to compensate executives partly with debt.
"We bailed everybody out including the traders," said Bair, a senior adviser to the Pew Charitable Trusts. "I don't know why people are surprised now that they haven't learned their lesson."