Rules on incentive compensation, which figured into the demise of three large regional banks two years ago, should be finalized, according to a recommendation made by the congressional watchdog and published Thursday.
The Government Accountability Office (GAO), in a report, noted that the three banks that failed in 2023 – Silicon Valley Bank (SVB) of Santa Clara, Calif.; Signature Bank of New York, N.Y.; and First Republic Bank of San Francisco, Calif. – each paid top executives stock bonuses totaling $130 million in the months before their failures (in March for the first two banks, and in May for the third). The GAO asserted that one bank paid bonuses to executives the day that it failed.
Uninsured deposits at all three institutions played a key role in their failures, according to the Federal Deposit Insurance Corp. (FDIC).
The report notes that in 2010, Congress required six federal agencies to “jointly prescribe regulations or guidelines on incentive compensation by April 21, 2011.” The agencies formed a working group to draft and propose joint regulations but have yet to finalize them, the GAO said.
GAO indicated that the regulators differ among themselves about the best way to implement those regulations.
“Leaders within and across the agencies hold differing views on regulatory approaches for incentive-based compensation arrangements,” GAO stated. “For example, some agency leaders advocate a principles-based approach that outlines general principles and objectives for discouraging inappropriate risk-taking. Others support an approach with more specific and stringent requirements. Reconciling these differences and jointly prescribing regulations or guidelines would help prevent excessive compensation arrangements at financial institutions that encourage inappropriate risks.”
The agencies GAO recommended that should adopt the rules are the Federal Reserve, FDIC, Federal Housing Finance Agency (FHFA), National Credit Union Administration (NCUA), and the Office of the Comptroller of the Currency (OCC).
Bank Regulation: Agencies Should Finalize Rulemaking on Incentive Compensation
Leave a Reply