WASHINGTON — With the industry's compensation practices once again in the limelight, banking regulators moved forward Monday with aggressive plans to clamp down on pay packages.
The industry's effort to fight a crackdown on compensation could be blunted by a speedy implementation time line from the Federal Reserve Board. A source at the central bank said Monday the public would have 30 days to comment on guidance that could be released in a matter of weeks.
The Fed's goal is to finalize the guidance by yearend.
The Office of the Comptroller of the Currency, meanwhile, is also developing a proposal that would target pay at national banks. Few details are available on that plan but a knowledgeable source said the agency has begun to sketch out a proposal on paper.
The Fed's proposal is expected to come in the form of guidance with a number of principles attached, the central bank source said. The principles have not been fully enumerated yet but are said to closely follow standards released in April by the Financial Stability Forum.
The core of the international body's guidelines called on compensation practices to take a longer-term view of risk when determining financial incentives for its executives.
"Two employees who generate the same short-run profit but take different amounts of risk on behalf of their firm should not be treated the same by the compensation system," the Financial Stability Forum said.
The goal is to establish high-level guidelines while still giving examiners discretion in judging compensation.
If the Fed's proposal is enacted as currently envisioned, the largest institutions - roughly 25 - would be subject to a "horizontal review" that would compare pay practices across banks. If an institution's compensation package is judged out of bounds by the Fed's safety and soundness examiners, the central bank would further scrutinize the bank's risk management, possibly requiring clawbacks or other restraints.
Fed Gov. Daniel Tarullo is leading the central bank's efforts to crack down on compensation.
"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," he told the Senate Banking Committee on Aug. 4.
Tarullo is consulting with the White House as the Fed's proposal comes together. The Treasury Department outlined broad principles in June that would rein in compensation at banks, including a call for legislation to require compensation committees to be independent of management and have adequate resources.