By Frank James

Halloween is apparently coming early for the financial-services sector. At least, that's the way a lot of bank executives are likely to view federal moves to restrain some of their industry's pay packages.

Fed Chair Ben Bernanke.

Federal Reserve Chairman Ben Bernanke wants to rein in excessive risk-taking fueled by pay packages. (Mark Wilson / Getty Images)

Not only is the Obama Administration cracking down on executive pay at the seven financial firms that received the most federal bailout money, the Federal Reserve said Thursday it planned to review the pay and compensation policies at the thousands of banks it oversees to try and derail the process of bank executives taking excessive risks in order to earn big bonuses.

Under the central bank's proposal, it would have special reviews of the top 28 too-big-to-fail financial firms, putting their pay and compensation policies under special scrutiny because a major mistake by any of those companies could have severe consequences for the entire system.

The pay policies at the rest of the thousands of banks not considered too-big-to-fail would be assessed as part of the regular bank examination process.

An snippet from the Fed's press release:

"Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability," Federal Reserve Chairman Ben S. Bernanke said. "The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."
Federal Reserve Governor Daniel K. Tarullo noted that the proposal on compensation practices is an important part of the Federal Reserve's ongoing effort to improve financial regulation.
"Today's proposal is but one part of a broad program by the Federal Reserve to strengthen supervision of banks and bank holding companies in the wake of the financial crisis," Tarullo said. "In customizing the implementation of our compensation principles to the specific activities and risks of banking organizations, we advance our goal of an effective, efficient regulatory system."
Flaws in incentive compensation practices were one of many factors contributing to the financial crisis. Inappropriate bonus or other compensation practices can incent senior executives or lower level employees, such as traders or mortgage officers, to take imprudent risks that significantly and adversely affect the firm. With that in mind, the Federal Reserve's guidance and supervisory reviews cover all employees who have the ability to materially affect the risk profile of an organization, either individually, or as part of a group.

categories: Economy

3:53 - October 22, 2009

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