Regulators OK rule to seize pay of bank execs

Failed institutions' chiefs subject to punishment

7/7/2011

WASHINGTON -- Federal regulators will be able to take back two years of pay from executives held responsible for a large bank's failure.

Executives deemed "negligent" and "substantially responsible" for a big bank's failure can lose all 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 risk their compensation. John Walsh, acting comptroller of the currency, who sits on the FDIC board and shared banks' concerns, approves of the new standard.

The rule is part of the financial overhaul Congress passed last summer. One section of the law creates an orderly way to shut 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 firm can be taken over by the government, taken apart, and sold.

The FDIC is deciding how the proceeds of those sales should be divided among firms and people 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 firms because the agency already is the government's bank-closing expert. When regulators decide 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. So far this year, 48 banks have failed.