US banks whose compensation plans encourage excessive risk-taking would have to pay more for deposit insurance under a proposal floated yesterday by the Federal Deposit Insurance Corp (FDIC).
The proposal is preliminary and was contentious even among the members of the FDIC board, which voted 3-2 to seek public comment on the proposal.
The plan would use the incentive of lower insurance premiums to reward pay structures that tie banker pay to long-term performance and include “clawback” provisions to recoup payments if they were based on performance results that do not hold up over time. Banks with risky payment schemes, including huge cash components and incentives for short-term results, would have to pay more in insurance fees.
“There is such an overwhelming amount of evidence that this was a contributor to the crisis,” FDIC chairman Sheila Bair said during the FDIC board meeting, referring to improperly structured pay plans.
There was significant disagreement on the board about the proposal, and while the tone of the meeting was cordial, there was clearly tension about the merits of the FDIC plan.
City A.M. Reporter