US
banking authorities have resumed developing guidelines for long-delayed
reparations.
May
6, Washington, DC (Reuters) – Three U.S. financial regulators have started
working again on a long-delayed rule-writing effort aimed at increasing the
risk sensitivity of executive compensation schemes at banking businesses. The regulation was jointly proposed by
the Federal Deposit Insurance Corporation, the Office of the Comptroller of the
Currency, and the Federal Housing Finance Agency. According to the agencies, it
would prohibit incentive-based plans that fail to take risks into account or
permit payments to be withheld or forfeited.
Reiterating
a 2016 plan, the revived effort is the most recent attempt in a years-long
endeavour to enact new regulations mandated by the 2010 Dodd-Frank banking
reform law. The purpose of the proposed regulations is to prevent financial
institution executives from being incentivized to take on unwarranted risk in
an effort to increase their own income.
FDIC Chairman Martin Gruenberg noted in a statement that among the problems
found in Silicon Valley Bank’s failure last year were poor compensation
practices. “When poor compensation practices involve the largest financial
institutions, the negative impacts of inappropriate risk-taking can have
broader consequences for the financial system,” Gruenberg said.
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The
plan, which would apply to banks with more than $1 billion in assets—with companies
having more than $250 billion in assets subject to the harshest requirements—was quickly criticized by the sector.
The proposal was criticized in a statement as being “purely
political” by the Bank Policy Institute, which advocates for larger banks.
The requirement that six agencies—the FDIC, OCC, FHFA, National Credit Union
Administration, Securities and Exchange Commission, and Federal Reserve—agree
on a unified plan has caused regulators to battle for years to implement the
mandatory requirements.
The
agencies said the NCUA is expected to adopt the proposal in the “near
future,” and the SEC also has it on its rule-making agenda. The Fed has
not announced any plans to issue the rule as well. In March, Fed Chair Jerome
Powell said compensation was a minor contributor to SVB’s issues, and added
that the U.S. central bank would not commit to completing work on the rule this
year. “I would like to understand the problem we’re solving, and then I
would like to see a proposal that addresses that problem,” he said in
congressional testimony.
A Fed spokesperson said on Monday the
central bank is committed to working with regulators on a joint rule, but it
should be considered with updated information reflecting current industry
practices. If all regulators do not issue the same proposal, the agencies
cannot officially solicit public feedback on the plan, a necessary step before
finalizing any new rules. For now, the agencies that issued the proposal said
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