WASHINGTON — The board of the Federal Deposit Insurance Corp. is expected to make public Tuesday a preliminary proposal for using executive compensation as a factor in assessing the fees paid by banks for the deposit insurance fund, a person with direct knowledge of the matter said Thursday.
Company policies that encouraged excessive risk-taking and rewarded executives for delivering short-term profits were blamed for fueling the financial crisis, and big banks especially were considered to have engaged in the practice.
Kansas banking officials think the proposal would have little effect on banks based in the state.
That's because most Kansas-based banks' executives have an ownership stake in the institutions they lead.
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Because those executives are owners, "they're incented to keep the bank safe and sound, not to take risk," said Shawn Mitchell, president and CEO of the Community Bankers Association of Kansas. "They don't have the risk profiles like Wall Street megabanks do."
The discussions on a new FDIC plan may lead to a formal rule being proposed and eventually adopted by the agency, two people familiar with the matter said. They spoke on condition of anonymity because the process is still preliminary.
The plan could involve carrots and sticks for banks, one of those people said. A carrot: Banks that are able to "claw back" compensation from executives under pay contracts could get their insurance premiums reduced. Sticks, on the other hand, would call for increased fees for banks deemed as having pay deals involving greater risk.
Steve Carr, president of Community Bank of Wichita, whose family has a 25 percent stake in the $55 million bank, said his bank's compensation does not encourage risk-taking.
"Our plan is to make sure we have a good, sound bank for the next generation," he said. "I've got relatives — and friends — that I have to face if things went south."
If the plan were adopted, banks' compensation structures would be added to the other risk factors now taken into account by the FDIC in assessing fees, including diminished reserves against risk and reliance on higher-risk so-called brokered deposits. The idea is for institutions deemed to be higher-risk to pay bigger insurance fees.
Last year, 140 U.S. banks succumbed to the soured economy and a cascade of loan defaults — the most in a year since 1992, at the height of the savings-and-loan crisis. The failures compare with 25 in 2008 and three in 2007. They cost the federal deposit insurance fund, which fell into the red, more than $30 billion last year.
The FDIC last year mandated that banks prepay for the first time about $45 billion in premiums, for 2010 through 2012, to replenish the insurance fund.
The Federal Reserve, meanwhile, is working on a plan to get a broad picture of banks' pay practices, part of a larger effort to crack down on packages that encourage irresponsible risk-taking.