Executives deemed “negligent” and “substantially responsible” for a big bank’s failure can lose all of their compensation from the previous two years under a rule approved Wednesday by the board of the Federal Deposit Insurance Corp.
Banks objected to an earlier version of the rule, saying it would induce key executives to depart at the first sign of trouble rather than risking their compensation.
Acting Comptroller of the Currency John Walsh, who sits on the FDIC board and shared banks’ concerns, said he approves of the new standard.
The rule is part of the financial overhaul that Congress passed last summer. One section of the law creates an orderly way to shut down large, failing banks to prevent a crisis from spreading. The process aims to eliminate the category of banks deemed “too big to fail” because their collapse could endanger the broader financial system.
Under the new rules, a teetering financial company can be taken over by the government, broken apart, and sold off.
The FDIC is deciding how the proceeds of those sales should be divided among companies and people who are owed money by the failed bank.
The rule allowing regulators to take back executive pay is part of those plans.
The financial overhaul gives the FDIC the lead in shuttering big companies because the agency already is the government’s bank-closing expert. When regulators decide that a bank is dangerously close to failure, the FDIC seeks buyers, takes on some of the bank’s losses or sells off bank assets to help cover the shortfall.
FDIC employees also take over banks’ branches on Friday afternoons and spend the weekend auditing financial records and helping customers transition to accounts with the acquiring bank.
The FDIC insures bank deposit accounts up to $250,000. So far this year, 48 U.S. banks have failed.