FDIC on Incentive Comp and NSFR

Federal
Deposit Insurance Corporation

Proposed
Rule on Incentive Compensation and Net Stable Funding Ratio

Tuesday,
April 26, 2016

Key
Topics & Takeaways

    Incentive-Based
    Compensation
    : Martin Gruenberg, Chair of the Federal Deposit
    Insurance Corporation, maintained that “poorly-designed” compensation programs
    can provide incentives for short-term risk taking and can “jeopardize” the
    safety and soundness of an institution. He recalled that the inspector generals
    of several financial regulatory agencies found that in a number of instances,
    poor compensation practices were a contributing factor to institutions’
    failures during the financial crisis. Gruenberg explained that the proposed rule
    seeks to align employee incentives with the long-term interests and safety and
    soundness of the covered financial institutions, and he indicated that the rule
    is “perhaps the most important Dodd-Frank rulemaking remaining to be
    implemented.” 

    Net Stable Funding
    Ratio
    :
    The Comptroller of the Currency, Thomas Curry, expressed
    his support for the notice of proposed rulemaking on the Net Stable Funding
    Ratio, claiming that it will “help ensure that an institution’s funding is adequate
    to support activities” to “further reduce the probability that covered
    institutions will encounter funding stress.” 

    Unanimous Approval:
    The Board of the Federal Deposit Insurance Corporation unanimously approved two
    notices of proposed rulemakings on incentive-based compensation arrangements
    and the net stable funding ratio.  
     

Speakers


Noticed of Proposed Rulemaking on Incentive-Based Compensation

Federal
Deposit Insurance Corporation Staff Presentation

Staff
of the Federal Deposit Insurance Corporation (FDIC) explained that Section 956
of the Dodd-Frank Act requires the regulatory agencies to prescribe rules that
require covered financial institutions to prohibit incentive-based compensation
that encourages inappropriate risks or could lead to material financial loss.
Staff noted that the joint agencies opted to propose a joint rule rather than
issue guidelines to ensure consistency across the covered institutions. 

Staff
explained that the notice of proposed rulemaking (NPR) would prohibit
incentive-based compensation that encourages inappropriate risk or could lead
to material financial losses to covered institutions with assets of $1 billion
or more.  Staff added that additional requirements and prohibitions would
be applied to larger (Level 1 and Level 2) institutions, since regulators
believe there is a “potential for greater risk taking at the largest, most
complex and interconnected institutions.”  Staff added that compensation
will be considered “excessive” unless it appropriately balances risk and
reward, is compatible with effective risk management and controls, and is
supported by effective risk governance.

In
addition to forfeiture and downward adjustment clauses, staff explained that
the rules prescribe clawback provisions by which vested incentive-based
compensation can be recovered for seven years after vesting in the event of
misconduct that results in significant harm to the covered institution. Staff
added that the rules require covered institutions to establish a board-level
compensation committee, adopt detailed policies and procedures, and provide
independent monitoring of incentive-based compensation program.

Martin Gruenberg, Chair, FDIC

In
his remarks,
Gruenberg maintained that “poorly-designed” compensation programs can provide
incentives for short-term risk taking and can “jeopardize” the safety and
soundness of the institution. He recalled that the inspector generals of
several financial regulatory agencies found that in a number of instances, poor
compensation practices were a contributing factor to institutions’ failures
during the financial crisis. Gruenberg explained that the proposed rule seeks
to align employee incentives with the long-term interests and safety and
soundness of the covered financial institutions, and he indicated that the rule
is “perhaps the most important Dodd-Frank rulemaking remaining to be
implemented.” 

Thomas Hoenig, Vice Chairman

Hoenig
expressed his support for the proposed rule and acknowledged that it is “one of
the more complicated rules,” so he stated that he is looking forward to
comments and suggestions from the public.

Thomas Curry, Comptroller of the
Currency 

Curry
expressed his support for the rule, claiming it would require “proper
alignment” of compensation incentives with an organization’s risk appetite.

Richard Cordray, Director, Consumer Financial
Protection Bureau 

Cordray
acknowledged that the Consumer Financial Protection Bureau (CFPB) is not
directly involved in the rulemaking but “take[s] a great interest in it.” 
He also noted that compensation practices are a “powerful motivator for
behavior.” 

Vote

The
motion to publish the NPR on incentive-based compensation was unanimously
approved by the FDIC Board.

Proposed Rule on Net Stable Funding Ratio

FDIC
Staff

Staff
recommended
that the FDIC Board publish the NPR on the Net Stable Funding Ratio (NSFR),
which they argued would improve financial stability by strengthening the
liquidity risk management of large banking organizations over a one-year horizon.
They claimed that the proposal is consistent with the international standard
set forth by the Basel Committee on Banking Supervision.  Staff contended
that the proposed rule would build upon the Liquidity Coverage Ratio (LCR) and
would promote resiliency by preventing excessive reliance on wholesale funding
sources. They added that the NPR would provide a 90-day public comment period,
and that the effective date of the rule would be January 1, 2018.

Martin
Gruenberg, Chairman, FDIC

In his remarks,
Gruenberg recalled that several large banking organizations experienced
liquidity squeezes during the financial crisis, and explained that the proposed
rule would “reduce the vulnerability of large banking organizations to the kind
of collapse in liquidity that occurred during the crisis.” Gruenberg noted that
the proposed NSFR would ensure that banks’ investment activities are
“sufficiently supported” by sources of stable funding over a one-year horizon.

Thomas Curry, Comptroller of the Currency

Curry expressed his support for the NPR, and explained that it
will “help ensure that an institution’s funding is adequate to support
activities” to “further reduce the probability that covered institutions will
encounter funding stress.”  He recognized that the proposed NSFR is one of
the remaining pieces of the broader regulatory effort to increase the
resiliency of the banking system.

Vote

The
NPR on the NSFR was unanimously approved by the FDIC Board.

For
more information on this meeting, please click here.