Wall StreetRICHARD DREW/The Associated Press
U.S. regulators on Monday made their most forceful attempt yet to clamp down on bank bonuses since the 2007-09 financial crisis, but the proposals pale in comparison to harsher restrictions already set in Europe.
The Federal Deposit Insurance Corp. proposed that executives at the largest financial institutions have half of their bonuses deferred for at least three years.
Yet the U.S. plan is markedly softer than the European Union, which in December set guidelines that top bankers be limited to receiving 20 per cent of their annual bonuses upfront in cash, with some exceptions.
Massive cash payouts that reward bank executives and traders for short-term returns, without regard to long-term risk, have been blamed by international regulators as a factor in the recent financial crisis.
The FDIC plan responds to both the Dodd-Frank financial overhaul law of 2010 that directed regulators to curb pay plans that encourage excessive risk-taking and principles agreed in 2009 by the world's group of 20 leading economies (G20).
Many Wall Street firms have already spread out their bonus payments in response to the impending rules.
"This has all been kind of baked into people's plans and thinking today," said Alan Johnson of the compensation consulting firm Johnson Associates, about the FDIC's proposal.
But there are signs in both the United States and Europe that there is upward creep in total compensation figures that offsets the curbs.
Goldman Sachs Group revealed last month that it tripled chief executive officer Lloyd Blankfein's base salary and awarded him $12.6-million (U.S.) of stock, even after the bank's net income plunged last year.
And earlier this month, Citigroup's board approved a base salary of $1.75-million for CEO Vikram Pandit. Mr. Pandit had vowed in 2009 to receive an annual salary of $1 until Citigroup returned to sustained profitability.
In Britain, banks such as HSBC and Barclays have raised the fixed part of bank pay in what they say is an essential move to retain staff.
The FDIC's proposal would tackle pay for top executives at financial companies with $50-billion or more in assets such as Bank of America Corp., JPMorgan Chase & Co., Goldman Sachs and Morgan Stanley.
How much of the deferred pay an executive could receive would be tied to the performance of the company based on decisions made by the executive during the period covered.
The FDIC's proposal is just a first step that must be approved by other U.S. financial regulators, such as the Federal Reserve and Securities and Exchange Commission, before being finalized. It is unclear when the other regulators will act.
The G20's regulation task force, the Financial Stability Board, found in a study last year that implementation of pay reforms has been patchy and it will do another review soon.
While Asia avoided the worst of the financial crisis, China, Hong Kong and Singapore have all introduced rules or guidelines that aim to put the G20 agreement into practice.
FDIC chair Sheila Bair acknowledging that international counterparts have moved more quickly on bank pay reform, and in some cases have been more prescriptive in their rule making.
"It does bring us closer to international standards that have been adopted," Ms. Bair said of the FDIC's proposal that will be put out for 45 days of public comment.
Reuters