Fed eyes new bank pay rules to fight risk

WASHINGTON (Reuters) - The Federal Reserve plans new rules on bank pay to curb the type of excessive risk-taking that sparked the global financial crisis and triggered international demands for action.

Public outrage at the stratospheric compensation of some bankers has boiled up to the level of the Group of 20 nations, whose leaders meet next week in Pittsburgh.

The United States, under pressure to act on pay at the G20 from France and Germany, has already said it aims to curb the culture of excessive risk-taking at the root of the crisis.

A Fed source said on Friday that guidelines would be proposed in the next few weeks and would apply to any employee able to take risks that could imperil an institution, not just the executives who have been the main target of popular ire.

The rules will be aimed at all firms the Fed regulates and be enforceable under its existing powers, said the source, who requested anonymity. The Fed oversees more than 5,000 bank holding companies and over 800 smaller state-chartered banks.

Massive losses inflicted by risky subprime mortgage bets destroyed some of the oldest names in U.S. finance and intensified a recession that has cost millions of jobs, putting both the banks and the regulators under scrutiny.

The Financial Stability Board, which answers to the G20 and will issue guidelines at the September 24-25 summit, said on Tuesday that poorly capitalized banks should not be allowed to pay large bonuses.

MULTIPLE TRACKS

The Obama administration has already appointed a "pay czar" to oversee executive compensation at firms getting taxpayer aid, and has indicated it will take further steps.

"Properly designed compensation practices constitute an important measure in ensuring safety and soundness in our system," White House adviser Lawrence Summers said on Friday.

Industry officials said many financial firms had already reined in pay practices and warned a heavy-handed approach by the Fed could be harmful.

"What we're worried about is if they place undue restrictions on the sales people because that could weaken the company itself," said Scott Talbott, senior vice president for government affairs for the Financial Services Roundtable, the industry's lobbying group.

Some analysts said Washington was bowing to populist pressure. "I think that talking about curbing Wall Street pay is emotional and not rational," said Tom Sowanick, co-president and chief investment officer of Omnivest Group LLC.

The Fed's proposal would take a two-pronged approach. A top tier of the largest banks, numbering around 24, would get particularly close scrutiny, while all other lenders under the Fed's supervision would receive less-intensive treatment.

Larger firms would also be subject to a review that would compare their practices against rivals, and would be required to submit their pay policies to the Fed for its approval. Continued...