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FDIC to bonus-loving banks: Pay up!

By David Ellis, CNNMoney.com staff writer


NEW YORK (CNNMoney.com) -- The nation's top banking regulator is considering a new rule which could require lenders to pony up if they rely on potentially risky pay practices.

In a proposal made Tuesday, the Federal Deposit Insurance Corporation said it wants employee compensation to be another factor in how it determines payments banks are required to make in order to support the agency's deposit insurance fund.

In essence, banks that continue to dangle lucrative incentives in front of employees for making questionable loans, for example, would have to pay more than their fair share.

Many critics have cited that risky pay practices were not only a factor in the collapse of such large financial institutions as Bear Stearns and Lehman Brothers but also many of the regional and community lenders that have gone under over the past two years.

FDIC Chairman Sheila Bair noted however, that the proposal would not seek to limit pay of bank employees or its executives. Instead, the FDIC wants to push banks to tie pay with the company's long-term performance.

"This is not about levels, it is about structure," Bair said during a press conference Tuesday.

The FDIC's proposed move could help prevent the agency deposit insurance fund, which was designed to protect consumer bank deposits, from being at risk in the future. The rash of failures in 2009 pushed the fund into the red for the first time since 1991.

Hoping to combat that shortfall, the agency ordered banks at the end of last year to prepay their insurance premiums for the next three years. The move is expected to generate roughly $45 billion for the FDIC.

The FDIC's latest proposal, which is still very much in the infancy stages and could take at least a year to implement, is the latest federal effort to combat what some view as excessive banker pay. Bonuses and other forms of compensation in the financial services industry has become a source of populist anger in the wake of multiple bank bailouts in 2008 and 2009.

The Federal Reserve has already suggested that it review compensation programs at 28 of the nation's largest banks in an effort to make sure firms were not encouraging employees to take excessive risks.

And earlier this week, there was chatter that the White House may impose a tax on financial institutions to ensure that taxpayers who bailed out banks get paid back. To top of page

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