What? Photographer: Andrew Harrer/Bloomberg

Are Bank Regulators Overpaid?

Matt Levine is a Bloomberg View columnist. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz and a clerk for the U.S. Court of Appeals for the Third Circuit.
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Hahahahahahahahahahaha no come on that is so dumb I can't believe you even asked. Oh you didn't, that's right, Paul Kupiec did, in a Wall Street Journal op-ed. Kupiec, an American Enterprise Institute resident scholar and apparently disgruntled former banking regulator, has this to say:

It is true that the very top bank executives make more in a year than most of us make in a lifetime, but compensation of this magnitude is rare. Most banks in this country are small businesses and pay employees modest salaries. The Bureau of Labor Statistics reports that the average annual salary of a bank employee was $49,540 in 2012, not much higher than the average annual across all occupations, $45,790.

Yet one group in banking stands out as highly paid — federal bank regulators. Before the Dodd-Frank Act, the average employee of a federal bank regulatory agency received 2.3 times the average compensation of a private banker. By 2013 this ratio increased to more than 2.7 — and in some cases considerably more.

The average compensation at the Office of the Comptroller of the Currency (OCC), the Federal Deposit Insurance Corp. (FDIC) and the Consumer Financial Protection Bureau (CFPB) exceeded $190,000 in 2012. The staff at the Federal Reserve is likely even better compensated, but the Fed refuses to release employee salaries.

One group in banking stands out as highly paid! One group! FYI, the OCC has 3,898 full-time-equivalent employees, the FDIC has 7,199, the CFPB has 1,545, and the Fed has 21,311. That's a total of 33,953 employees of all the bank regulatory agencies, making their $190,000 salaries like entitled fat cats. As it happens, that one group is roughly the size of Goldman Sachs, whose 32,900 employees make an average of $383,000 a year. So, two groups in banking stand out as highly paid! Regulators and Goldman. Oh but Morgan Stanley's 55,794 employees average $291,000 each. Three groups! I'll stop there, though it's pretty easy to find groups that make more than the regulators. ("Securities industry employees in New York" is a good one.)

Especially since that $190,000 number seems ... wrong? These agencies release budgets, you know, even the sneaky sneaky Fed. Here are some average salaries computed from the budgets:

So the average federal financial regulator makes somewhat less than a third-year investment banking analyst.

Yes, fine, the average regulator makes more than the average employee of a small-business bank that pays its employees modest salaries, but that's not where they spend their time. We have a big sophisticated banking system, and we want big sophisticated regulators to regulate it. If you set regulatory compensation to compete with teller jobs at Bob's Bank and Tackle Store, you'll be able to hire away Bob's tellers, and I suppose they will have some useful insights into regulating small-business banks. (Will they? Why?) But what will they do with the London Whale?

Of course, I mean, what did the Fed and OCC do with the London Whale, but still. Kupiec's solution is to cut regulatory salaries, with targeted exceptions for employees with specialized skills. It's hard for me to imagine that this would improve regulatory morale and diligence, or make financial regulation an attractive career path for smart sophisticated people with the ability and desire to understand the businesses they regulate.

And I doubt it would cut back on the perception (and possible reality) of revolving-door corruption. But I guess Kupiec isn't worried about that? After all, why would you leave your cushy job at a regulator for a $49,540-a-year job in the private sector? And yet it keeps happening. Not the $49,540-a-year part, but you know what I mean.

Obviously a lot of people want to cut back on banking regulation. That is an understandable desire, and there are places where I share it. Dumb regulations are dumb, and we should have fewer of them. The problem is that underpaying regulators is not an optimal way to cut back on regulation. Perhaps your $49,540-a-year regulators will be lazy and not regulate at all, but perhaps they'll be unsophisticated and regulate in draconian and destabilizing ways; certainly there's no shortage of simple-but-onerous regulatory proposals these days. The way to get good regulation is to get good regulators. And, unfortunately, those cost money.

  1. That's 2,540 "board operations," 115 in Office of Inspector General, and 18,656 at the regional Federal Reserve banks.

  2. Sources: OCC 2013 budget, page 12 (Personnel Compensation (Total) and FTEs). FDIC 2014 budget, pages 5 (Salaries and Compensation budget item) and 1 (FTEs); you can adjust to reflect 2013 numbers but you'll get an even lower average. CFPB 2014 budget, pages 13 (Personnel Compensation) and 12 (FTEs). Fed 2013 budget, pages 36 (salaries of Board of Governors), 37 (positions at Board of Governors), 43 (salaries of Federal Reserve Banks), and 42 (employees at Federal Reserve Banks). Note the Fed's inspector general has a separate budget without salaries broken out, so I omit it; it's small, but that's why the table doesn't match the total number in the text.

  3. Although right about in line with the average pay of JPMorgan's 251,196 employees, including tellers ($122,000 and change).

  4. And this may be a fair point:

    Instead of raising salaries to attract and retain employees for specialized, hard-to-fill jobs, federal bank regulatory agencies have increased the salaries of all employees. Ironically, the hard-to-fill jobs that require substantial education or professional experience -- such as attorneys and economists with banking experience -- have the smallest premiums over comparable private positions.
  5. Brown-Vitter! Err, the Volcker Rule, sort of.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Matthew S Levine at mlevine51@bloomberg.net

To contact the editor on this story:
Toby Harshaw at tharshaw@bloomberg.net