Yesterday, the Federal Deposit Insurance Corp.’s (FDIC) board voted 3-2 to move forward with a proposal to charge banks higher fees for deposit insurance, in accordance with the riskiness of their pay packages. As the Wall Street Journal put it, the FDIC wants to use deposit insurance fees “as an incentive to encourage compensation practices that favor less-risky behavior.”
In order to draw favorable ratings from the FDIC, pay packages would need to have a healthy portion of restricted company stock, with extra bonus points for having compensation decided by independent members of boards of directors. “This isn’t about levels. It’s about structures,” said FDIC Chair Sheila Bair, who sided with two other board members in approving the proposal.
Meanwhile, the heads of both the Office of Thrift Supervision (OTS) and the Office of the Comptroller of the Currency (OCC) — bank regulators who also have seats on the FDIC board — voted against it. Bair was reportedly very displeased with the no votes, and took her fellow regulators to task, saying she can’t understand why they keep waiting to address Wall Street pay:
I must say, to take a position that we should not even be asking these questions is not one that I can understand. I also cannot understand why we need to keep waiting. We need to keep waiting for this or that, and in the interim, nothing changes. We just maintain the status quo, and the longer we try to [implement] meaningful reforms, the more momentum for that dissipates…To suggest this agency shouldn’t do anything, when there is such an overwhelming amount of evidence that this is clearly a contributor to the crisis and to the losses that we are suffering, I just cannot understand that.
Earlier this week, a former Wall Street banker slammed those bankers who “just don’t get it” on compensation, and now we have a regulator doing the same to her colleagues. I hope this is a sign that more people will begin to get serious on the real structural issues with banks’ executive compensation, especially with some of the bonuses that we are likely to see in the next few days.
As for the merits of the FDIC plan, I think it makes a lot of sense to have banks with compensation structures that encourage higher risk pay more for federal deposit insurance. Not only is it sensible in principle, but in the long-term, it’s a much better way of addressing Wall Street pay structures than coming up with a tax on bonuses (though that still leaves open the question regarding 2009 bonuses, which were largely earned on the backs of taxpayers).
The FDIC’s proposal, along with a fee on “too big to fail” banks that will be dedicated to funding a robust resolution authority, will help to address some of Wall Street’s perverse incentives that contributed to the economic crisis. Bair is right to want to get these efforts underway right now.