FDIC Wants Insurance Fund Paid For Banks' Compensation Risks

The FDIC wants to adjust the premiums that banks pay into the deposit insurance fund based on the structure of a bank's employee compensation system. The FDIC in an advanced notice of rule making is seeking comments on ways that the FDIC could modify the risk-based deposit insurance assessment system to account for the risks posed by employee compensation programs.

Sheila Bair will not propose a cap on bank employee compensation. Whether her decision is based on politics, ideology or the belief that the structure of the employee pay system is more relevant to the institution's risk than the amount an employee is paid is an open question.

The FDIC press release follows:

FDIC Board Seeks Comment on Incorporating Employee Compensation Structures Into the Risk Assessment System:
Board Approves Advance Notice of Proposed Rulemaking

FOR IMMEDIATE RELEASE
January 11, 2010
Media Contact:
Andrew Gray (202-898-7192)

Board Approves Advance Notice of Proposed Rulemaking

The Board of Directors of the Federal Deposit Insurance Corporation (FDIC) today approved an Advance Notice of Proposed Rulemaking (ANPR) seeking input on whether certain employee compensation structures pose risks that should be captured in the deposit insurance assessment program.

"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.

The ANPR includes a broad set of questions designed to solicit information on the types of structures that should be encouraged and on whether and how employee compensation should be factored into the risk-based pricing system. The ANPR will go out for public comment for 30 days after publication in the Federal Register.

"I believe this ANPR suggests a good approach by targeting compensation structures, rather than levels of compensation. It contains no features which would limit the amount of compensation paid to employees. And I feel that the supervisory efforts underway can be strengthened by the FDIC's effort to provide incentives for banks to achieve higher standards," Chairman Sheila Bair said.

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