WASHINGTON — Having successfully lobbied for exemptions from key provisions of the Obama administration's regulatory reform plan, community banks are now pressing the Federal Reserve Board to shield them from new compensation guidelines.
In letters commenting on the Fed's proposed compensation guidance, community bankers argue they did not pay the exorbitant bonuses that have fueled widespread anger at Wall Street and do not have the resources to review their pay programs as thoroughly as the central bank would like.
"Quite frankly, I have more than enough to do right now in my efforts to keep up with all of the other changes that have or soon will be imposed on us," Albert Christman, the president and chief executive of Delhi Bancshares Inc. in Louisiana, wrote in a letter to the Fed. "I really don't need another issue to deal with, especially one that will not be helpful in any way to anyone."
In their letters, industry representatives also raised concerns about the impact the Fed's guidance might have on retaining employees and defended the use of so-called golden parachutes that allow executives to walk away from a company with a large check.
But much of the pushback centered on community banks. The Fed's guidance differentiates between small institutions and their mammoth counterparts. The 28 largest banks would be subject to a "horizontal review" where their pay packages would be stacked up against those at other firms. Large banks whose pay practices fall outside the norm would receive more scrutiny from the Fed.
For community banks, however, Fed supervisors would simply review compensation practices as part of the institution's typical examination process. But even that goes too far, according to community bank representatives.
"Few, if any, community banks had incentive compensation practices that had anything to do with the current crisis," wrote Christopher Cole, a vice president and senior regulatory counsel at the Independent Community Bankers of America.
For smaller banks, Cole wrote, "supervisory review of compensation arrangements should be confined to only those organizations that have incentive compensation arrangements that could possibly pose a material risk to the safety and soundness of that institution. Community banks that have only a few incentive compensation arrangements with senior officers should be exempt from supervisory review."
The Fed's guidance would require the board of directors at banks to spend more time reviewing compensation issues for any employee or group of employees whose pay could create risks for the bank.
But community bank representatives said that would unnecessarily burden these banks.
"With the expansion to all employees under the guidance, this evaluation and the process of performing an associated risk analysis will take a significant amount of time, cause increased legal exposure, and increase recruiting challenges, all of which translate to additional costs," Karen Neeley, the general counsel of Cox Smith Matthews Inc., wrote on behalf of the Independent Community Bankers of Texas. "The guidance significantly expands board of director and compensation committee duties, and community and regional banking organizations cannot afford to compensate directors and committee members for this additional time constraint."
Even larger banks raised concerns about the ability of boards to broadly review compensation practices.
"It is the responsibility of management to possess and develop this expertise, and for the board to supervise management," wrote Raymond Fortin, the corporate executive vice president and general counsel at SunTrust Banks Inc.
The Missouri Bankers Association went so far as to raise concerns that the Fed's guidance might spur further industry consolidation.
"With all the new guidance, there is a very different 'moral hazard' that systemic risk will be ignored and community banks may surrender to consolidation, merger, or other means to realize value for their bank and end community banking," wrote Max Cook, the trade group's president.
Community banks have already won big battles over their coverage under laws brought about by the financial crisis.
The regulatory reform bill that passed through the House in December would exempt banks with assets of $10 billion and less from supervision under the proposed Consumer Financial Protection Agency.
President Obama met with 12 community bankers last week and made clear he understood they were not responsible for toppling financial markets.
"It's fair to say that most of these community banks were not engaged in some of the hugely risky activities that helped to precipitate the financial crisis," the president said.
"At the same time, they continue to try to do their best in their local and regional markets to make sure that businesses who are now being affected by the overall recession are able to pick themselves back up."
A spokeswoman for the Fed would not say when the compensation guidance, which was issued in October, might be finalized, but she signaled that the central bank is receptive to community banks' concerns.
"The Federal Reserve is reviewing the comments, a number of which discuss the need to tailor the guidelines to take into account the size and complexity of the firms," the spokeswoman said. "We specifically asked for comment on this issue recognizing the variety of firms we supervise, and we expect the comments to be helpful in implementation."
The Fed's guidance amounts to the broadest government effort to respond to public outrage over hefty pay packages given to executives in an industry that has received extraordinary assistance from taxpayers. Since the biggest banks have repaid the money they borrowed from the Troubled Asset Relief Program, the Obama administration's pay czar does not have much sway over the industry anymore.
But the Fed's guidance, as proposed, touches all bank holding companies, where compensation decisions for the whole depository institution are often made. It would also apply to foreign banks operating in the U.S. and state member institutions.
The guidance is designed to help banks develop proper pay practices.
It tells them to avoid structures that lead to big paychecks in the short term but do not take into account longer-term goals and stability. Banks are told to consider three goals when drawing up compensation packages: providing incentives that discourage risk taking, matching "effective controls and risk management" and supporting strong corporate governance.
The Fed did not explicitly ban big payoffs for departing executives, but it did question whether such arrangements "affect the risk-taking behavior of employees" along with the bank's safety and soundness.
The industry offered a hearty defense of such structures.
"Elimination of golden parachutes could potentially limit the attraction and retention of talent," wrote G. William Beale, the president and CEO of Union Bankshares Corp. in Bowling Green, Va.
"The most senior positions at any banking organization are fraught with risk because of the intense oversight, demand for performance and oftentimes unreasonable expectations. Any reasonable person would expect some form of downside protection to be available."
Kenneth Bentsen, a former Democratic congressman from Texas who is now the executive vice president for public policy and advocacy at the Securities Industry and Financial Markets Association, wrote that restrictions on golden parachutes would not be an "effective means of protecting a banking organization's safety and soundness."
"Each institution must determine for itself, based on its own needs, what compensation practices will best promote its safety and soundness," Bentsen wrote.
Others in the industry said the guidance itself is unnecessary and that regulators already have authority to target compensation practices if they are endangering the bank.
The American Association of Bank Directors "feels compelled to be politically incorrect in questioning the wisdom and need for the proposed guidance," wrote David Baris, the group's executive director.
"Absent a demonstration by the [Fed] that incentive compensation arrangements have undermined institutions of all sizes sound risk management systems, thereby causing unsafe or unsound banking practices, we recommend that the [Fed] withdraw the proposed guidance and not issue a final guidance."
Still, reflecting the passions that arise over executive compensation, others said the Fed has room to go even further in its guidance. Justin Levis, a senior research associate at the Council of Institutional Investors, told the Fed that compensation committees on bank boards of directors should publish the metrics they used to determine pay.
"Such disclosure would provide the marketplace the information necessary to evaluate whether the compensation programs encourage excessive risk taking," he wrote.
The Service Employees International Union said the Fed should expand the scope of employees covered under its guidance to include tellers and pressed the central bank to reissue the guidance as a binding rule.
"Such a move is imperative for giving the principles contained in the guidelines real strength and meaning," wrote Anna Burger, the group's international secretary-treasurer.
Highlighting just how much of an issue compensation has become in the public's consciousness, citizens with no apparent direct ties to banking wrote to the Fed to sound off.
"Our financial institutions and Wall Street just don't seem to get it," wrote Linda Pressler. "The American public is struggling and the money guys still want bonuses that could support a small country's budget."
