Federal regulators should issue regulations or guidelines to prohibit incentive-based compensation arrangements that encourage excessive risk-taking at larger financial institutions, the Government Accountability Office said in a report released today.
Section 956 of the Dodd-Frank Act requires six agencies — the Federal Reserve, FDIC, OCC, National Credit Union Administration, Securities and Exchange Commission and Federal Housing Finance Agency — to issue regulations on executive compensation at institutions with at least $1 billion in assets. A 2016 proposal to do just that was reintroduced last year by four of the agencies, but not the SEC or Fed. The American Bankers Association was among the groups that opposed the proposal.
The GAO studied the issue at the request of House Financial Services Committee Ranking Member Maxine Waters (D-Calif.). As part of its research, the office compared the executive compensation packages at the three large institutions at the heart of the 2023 bank industry turmoil — Silicon Valley Bank, Signature Bank and First Republic Bank — to those of similar-sized institutions. It noted peer banks that all the packages incorporated risk-mitigating elements that align with practices described in federal compensation guidelines.
At the same time, the GAO also said that more than 13 years have passed since Dodd-Frank required federal agencies to finalize regulations on compensation. Instead, the agencies have employed other strategies, such as agency guidance and supervision, according to the report.
“However, the numerous supervisory concerns identified related to incentive compensation underscore the need for the agencies to reconcile differences in their regulatory preferences,” the GAO said. “By finalizing regulations or guidelines, the agencies would ensure compliance with Section 956 and better prevent compensation practices that can undermine the safety and soundness of large financial institutions.”
