Regulators would be able to claw back some pay from top U.S. financial executives if their company were liquidated by the government, under a rule adopted by the Federal Deposit Insurance Corp.
FDIC board members voted unanimously today to finalize the rule, which is part of the agency’s expanded authority under the Dodd-Frank Act to resolve the largest financial firms.
“We need shareholders and creditors out there conducting their own due diligence and asking the tough questions of executives and management,” FDIC Chairman Sheila Bair, who will leave the agency at the end of this week, said in Washington today.
The rule authorizes the FDIC to recover pay for the two years preceding its appointment as receiver from senior executives and directors “substantially responsible” for the firm’s failure. The agency would determine the size of the clawback after evaluating an executive’s role in the shareholders’ overall losses after liquidation.
Dodd-Frank, the financial-regulation overhaul enacted last July, expanded the FDIC’s resolution authority from winding down failed banks to also untangling the affairs of systemically important nonbanks when they collapse. Congress sought the liquidation authority after the September 2008 bankruptcy of Lehman Brothers Holdings Inc. exacerbated the credit crisis and highlighted the interconnectedness of the largest financial companies.
The clawback provision was adopted as part of a broader rule aimed at setting the framework for the FDIC’s orderly liquidation powers. The final rule included provisions laying out the order in which creditors would be paid in the event of a resolution.
“This rule will have a direct impact on market interactions, and that’s kind of the idea,” Bair said.
Lawmakers directed regulators to rein in executive pay after incentive-based compensation was faulted for inspiring risk-taking at firms such as Lehman Brothers and American International Group Inc., the insurer that was rescued by the government.
A coalition of the largest banking trade groups, representing firms including JPMorgan Chase & Co. and Goldman Sachs Group Inc., filed a comment letter with the agency in May calling parts of the rule “fundamentally unjustifiable and counterproductive.”
“Such a rule could encourage a revolving door of senior executives and directors seeking to avoid recoupment, a situation that would undermine, rather than promote, stability,” the groups wrote in the May 23 letter, which was signed by executives from the Financial Services Roundtable, Securities Industry and Financial Markets Association, American Bankers Association and The Clearing House Association.
The agency, in changes to the initial proposal released in March, clarified that an executive or director would be considered substantially responsible if there was a failure to conduct their responsibilities “with the degree of skill and care an ordinarily prudent person in a like position would exercise under similar circumstances.”
Acting Comptroller of the Currency John Walsh, who had voiced apprehension about the executive compensation piece of the proposal in March, called the clarifications a “good change.”
Bair said another part of the FDIC’s Dodd-Frank responsibilities would likely be completed in August. Along with the Federal Reserve it has been crafting a proposal designed to guide banks and other large firms in writing so-called living wills -- plans that would enable them to be unwound in an orderly fashion if they failed. Bair had been pushing to finish the task before she left office.
Under the living-will rules, companies with at least $50 billion in assets will be required to provide information on debt, funding, capital and cash flows. Firms that fail to file workable resolution plans could be subject to increased capital, leverage or liquidity requirements, and restrictions on growth or operations.
“Clarity is important and with respect to the resolution plans, the sooner the agencies can articulate what the procedural and substantive requirements are for resolution plan activity, the better off we’re all going to be,” said Thomas Curry, an FDIC director and President Barack Obama’s nominee to be the next Comptroller of the Currency.