Banks paying executives salaries that are deemed to encourage risky financial activities would be levied a higher premium by the FDIC, according to the provisions of a proposed regulation that the agency sent out for comment today.
In its statement accompanying the proposal, the agency said the rules would “broaden and improve the regulatory approach to addressing compensation issues by providing institutions with an incentive to choose to exceed base supervisory standards.”
Banks that are able to get executives to take a reduction in salary could have their premiums. Those banks that create packages that encourage risky business practices that could potentially endanger the bank or the deposit insurance system would have to
pay a higher premium to the FDIC.
“A broad consensus of academic studies agrees that poorly designed compensation structures can misalign incentives and induce risk taking. I share those concerns. The recent crisis has shown that compensation practices that encourage excessive risk can create significant losses in the financial system and the deposit insurance fund,” FDIC Chairman Sheila Bair said in a statement.
There is a 30-day comment period. To see a copy of the proposal, go to www.fdic.gov/news/board/2010Jan12ANPR.pdf