The guidance (available at tinyurl.com/26rfx3n) is designed to ensure that incentive compensation arrangements at banking organizations appropriately tie rewards to longer-term performance and do not undermine the safety and soundness of the firm or create undue risks to the financial system. Because improperly structured compensation arrangements for both executive and nonexecutive employees may pose safety and soundness risks, the guidance applies not only to top-level managers, but also to other employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group. The guidance was effective upon publication in the Federal Register.
The Federal Reserve, in cooperation with the other regulators, has completed a first round of in-depth analysis of incentive compensation practices at large, complex banking organizations as part of a so-called horizontal review, a coordinated examination of practices across multiple firms. During the next stage, the banking agencies said they will conduct additional cross-firm, horizontal reviews of incentive compensation practices at the large, complex banking organizations for employees in certain business lines, such as mortgage originators. The agencies will also follow up on specific areas that were found to be deficient at many firms, such as:
- Many firms need better ways to identify which employees, either individually or as a group, can expose banking organizations to material risk;
- While many firms are using or are considering various methods to make incentive compensation more risk sensitive, many are not fully capturing the risks involved and are not applying such methods to enough employees;
- Many firms are using deferral arrangements to adjust for risk, but they are taking a “one-size-fits-all” approach and are not tailoring these deferral arrangements according to the type or duration of risk; and
- Many firms do not have adequate mechanisms to evaluate whether established practices are successful in balancing risk.
Federal Reserve staff will prepare a report, in consultation with the other federal banking agencies, after the end of 2010 on trends and developments in compensation practices at banking organizations.
The FDIC adopted a final rule (available at tinyurl.com/2w62bda) extending the Transaction Account Guarantee (TAG) program for six months, from July 1, 2010, through Dec. 31, 2010. Under the TAG program, customers of participating insured depository institutions are provided full coverage on qualifying transaction accounts.
The final rule on the TAG program, which is effective upon publication in the Federal Register, is almost identical to the interim rule adopted on April 13. The rule requires that interest rates on qualifying NOW accounts offered by banks participating in the program be reduced to 0.25% from 0.5%. (NOW accounts are interest-bearing checking accounts that may be held by one or more individuals or nonprofit entities.) It requires TAG assessment reporting based on average daily account balances but makes no changes to the assessment rates for participating institutions. The rule also provides for an additional extension of the program, without further rulemaking, for a period of time not to exceed Dec. 31, 2011.
The FDIC also was updated on loss, income and reserve ratio projections for the DIF’s Deposit Insurance Fund (DIF). The restoration plan (tinyurl.com/36glc6c) maintains assessment rates at their current levels through the end of 2010 and applies a uniform 3-basis-point increase in assessment rates effective Jan. 1, 2011. Current assessment rates are projected to return the DIF to a positive balance in 2012 and the reserve ratio to the statutory minimum target of 1.15% during the first quarter of 2017. The FDIC collected $46 billion in prepaid assessments at the end of last year, which is projected to be more than sufficient to fund resolution activities.
The FDIC also reported that the DIF balance improved slightly by $145 million or 0.96% to negative $20.7 billion in the quarter ending March 31, 2010. The First Quarter 2010 CFO Report to the Board (tinyurl.com/26kl3ea) said this was the first positive change in the DIF balance since the first quarter of 2008 and was an improvement from a total comprehensive loss of $4.3 billion in the same period in 2009. The report said the FDIC took over 41 failed institutions during the quarter, with total assets of $22.3 billion and estimated losses of $6.3 billion.
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