Fed Faces Heat From Fellow Regulators on Banker Bonus Proposal

US regulators’ latest attempt to restrict banking executive bonuses is likely to fall short amid hesitation from the Federal Reserve, but the long-awaited proposal is poised to resurface in 2025 if President Joe Biden is re-elected.

Three agencies—the Federal Deposit Insurance Corp., the Office of the Comptroller of the Currency, and the Federal Housing Finance Agency—released a proposed rule May 6 that would potentially require clawbacks of incentive compensation for top executives and “risk takers” when a bank fails or engages in significant misconduct.

But the Fed and the Securities Exchange Commission didn’t sign on to the latest proposal, with the central bank seen as the key holdout. Those regulators, along with the National Credit Union Administration, must all agree to the rules for them to take effect. The NCUA is expected to act soon, according to the agencies.

The request for comment from the other regulators will function largely as a stalking horse to get the Fed involved in a new rulemaking next year, according to Nathan Dean, a Bloomberg Intelligence financial regulatory analyst.

“Even if the Fed were to sign on to this today and put this out there, I still don’t think they’d be able to finalize it,” Dean said.

The Fed said May 6 it is committed to working with its fellow regulators, but that the agencies need to conduct a new analysis of compensation policies and their impact before embarking on a new rulemaking. The Fed’s 2010 guidance outlining appropriate compensation practices has been effective, the agency said.

Fed Chair Jerome Powell went further in a March appearance at the House Financial Services Committee.

“I would like to understand the problem we’re solving, and then I would like to see a proposal that addresses that problem,” Powell said about the banker compensation rule.

The May 6 proposal largely mirrors a 2016 effort from the regulators, which itself followed a failed 2011 effort to fulfill one of the last remaining mandates from the 2010 Dodd-Frank Act.

Different Outcome

Financial reform advocates and Democratic lawmakers have been pushing federal regulators to finish the executive compensation proposal since Dodd-Frank was signed into law, arguing the changes were necessary after misaligned compensation practices contributed to the 2008 financial crisis.

A series of scandals at Wells Fargo & Co. involving fake accounts and other issues, as well as the failures last year of Silicon Valley Bank, Signature Bank, and First Republic Bank, have increased calls to curb banker bonuses.

“I look forward to the remaining agencies authorizing the publication of this required rule so that it can be quickly finalized,” Consumer Financial Protection Bureau Director Rohit Chopra, an FDIC board member, said in a May 6 statement.

While the meat of the proposal largely mirrors the 2016 version, the preamble includes a series of questions that could lead to a vastly different outcome than what was contemplated eight years ago.

Chief among them is figuring out who should determine when banker bonuses should be clawed back. The 2016 proposal says banks should make the final call, but the preamble to the new proposal says regulators are considering making the clawbacks subject to the agencies’ discretion.

The regulators are also considering expanding the rule to cover additional executives.

“The banking regulators’ announcement today is an important step towards implementing a rule that will help prevent the next financial crisis by increasing the accountability of executives while taxpayers are left to pick up the pieces,” Stephen Hall, legal director at financial reform advocacy group Better Markets, said in a Monday statement.

Proponents of the rule chided the Fed for not signing on.

People should “check to see if the windows are fogged” at the Fed to make sure the agency can see that bad incentive structures result in bad conduct at banks, Bartlett Naylor, the financial policy advocate for Public Citizen, said Tuesday.

“The basic theme is the Fed is the problem,” he said.

Pressure Tactic

The Fed’s reticence to move forward on an executive compensation rule leaves open two possible reasons for the other regulators to act first, said Ian Katz, a managing director at Capital Alpha Partners.

“One is that they are trying to pressure the Fed, and the other is that they don’t think they are going to get the Fed’s agreement anytime soon, so might as well just do it,” he said.

The SEC is facing less heat than the Fed in large part because the securities regulator seems to be more on board, Dean said.

A rule implementing Dodd-Frank Section 956 was on the SEC’s Fall 2023 rulemaking agenda. But the SEC is subject to unique cost-benefit analysis requirements that would slow down any action on a final rule, and it’s dealing with a long list of other major pending rules that are taking priority, Dean said.

Election Results

The fate of any banker bonus clawback rules depends on the 2024 election, Dean said.

If President Joe Biden wins re-election, and the banking regulators have wrapped up a major rewrite of capital regulations, a fourth banker executive compensation rule would rise to a higher level even on the Fed’s agenda, he said.

A win by presumptive Republican nominee Donald Trump would likely shut down the rulemaking effort.

FDIC Vice Chairman Travis Hill, a Republican, said in a May 6 statement that he doesn’t support the proposal on substantive grounds, as well as the lack of support from all six agencies.

The new proposal won’t be submitted to the Federal Register, making it effectively a request for feedback. Even so, the banking trade groups will likely submit comments to start shaping a potential future regulation, Katz said.

Several banking trades have already blasted the proposal.

Monday’s “action by the FDIC and OCC is purely political. They have agreed on a proposal, which they acknowledge is legally ineffective, to send a political message,” Bank Policy Institute President and CEO Greg Baer said in a statement.