Today, Federal Reserve Chairman Ben Bernanke appeared before the House Financial Services committee to comment on a whole host of regulatory reform issues, including the Fed’s newfound motivation to regulate compensation at financial institutions. During the hearing, Bernanke tried to drive the point home that the Fed is taking compensation reform very seriously:
As you may know, the Federal Reserve is about to issue guidance for comment on executive compensation, which will apply not only to the top five or ten executives, but way down into the organization, day-traders or anybody whose activities can affect the risk-profile of the company. And we view this as a “safety and soundness” issue.
At least rhetorically, Bernanke is hitting all of the right notes, and if the Fed’s actions matched his words, I’d be feeling pretty good about the prospects of getting compensation at financial institutions back in line. But then, the Financial Times reported today that the U.S. bank regulators, including the Fed, plan to “take a flexible approach to interpreting global guidelines on bankers’ bonuses” that were settled on at the G-20 meeting last week:
[T]he US is sticking to its belief that one-size-fits-all requirements do not make sense. The Fed’s view is that banks – subject to supervisory review – should be able to choose how to meet the test that compensation schemes should reward risk-adjusted performance and not encourage excessive risk-taking.
So on the one hand, Bernanke sounds gung-ho about reform, but on the other, the Fed admits that it will leave the ultimate decision on compensation up to the banks themselves (unless the “supervisory review” is especially rigorous).
But can we really count on self-regulation? Remember, this comes at a time when we’re seeing short-term incentives increase in executive pay packages, and Wall Street banks return to handing out guaranteed bonuses. And according to a University of Southern California Marshall School of Business survey, “while many directors think executive pay is a problem elsewhere, an overwhelming majority say it’s not at their own firms. Eighty-six percent said their own CEO’s compensation plan was ‘effective or ‘very effective.’”
“It’s nice to see the Fed make a play at populism,” said Rep. Dennis Kucinich (D-OH). “It’s just I would suggest that it’s an ill-fitting suit.” Indeed, I still feel that most of the steps that the Fed has taken in recent weeks — from promising to regulate subprime lenders to Bernanke’s assertions on pay reform today — are meant to head off Congressional action (by providing assurances that past missteps won’t be repeated), but won’t amount to significant changes in the long-term.