8:13 PM
By Dave Clarke
WASHINGTON | Mon Feb 7, 2011 9:58pm EST
WASHINGTON (Reuters) - Regulators began their most forceful attempt yet to clamp down on bank bonuses since the 2007-2009 financial crisis, and warned firms they would seek to counter attempts to circumvent the reforms.
While the proposals pale in comparison to similar restrictions in Europe, the talk of keeping a keen eye on loopholes indicates regulators want to get tough on banks that make symbolic pay changes while finding ways to gut the intent of reforms.
The Federal Deposit Insurance Corp endorsed on Monday a proposal that executives at the largest financial institutions, such as Bank of America and Goldman Sachs, have half of their bonuses deferred for at least three years.
The bank regulators said they may go further to ensure the bonuses properly align executives' interests with investors, and are considering toughening the proposal to restrict executives from hedging deferred bonuses in the form of stock.
The concern is executives could use hedging techniques to make up for losses if their company's stock goes down during the deferral period, which could put executives' interests at odds with those of shareholders.
"Whether we should be prohibiting hedging in this, that is an issue that is left open," FDIC Chairman Sheila Bair said.
Despite the tough talk, the U.S. plan is markedly softer than the European Union, which in December set guidelines that top bankers be limited to receiving 20 percent of their annual bonuses upfront in cash, with some exceptions.
Massive cash payouts that reward bank executives and traders for short-term returns, without regard to long-term risk, have been cited by international regulators as a factor
in the recent financial crisis.
The U.S. plan responds to both the Dodd-Frank financial overhaul law of 2010, that directed regulators to curb pay plans that encourage excessive risk-taking, and principles agreed in 2009 by the world's group of 20 leading economies (G20).
The FDIC vote on Monday is just a first step and the proposal must still be approved by other U.S. financial regulators, such as the Federal Reserve and Securities and Exchange Commission, before being put out for comment for 45 days.
It is unclear when the other regulators will act, although FDIC staff said it should be within weeks.
PAYCHECK BOUNCEBACK
The U.S. proposal tackles pay for top executives at financial companies with $50 billion or more in assets, including JPMorgan Chase & Co and Morgan Stanley.
How much of the deferred pay an executive could receive would be tied to the performance of the company based on decisions made by the executive during the period covered.
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