Regs move forward Dodd-Frank rule on risk considerations in bank exec pay

The Federal Deposit Insurance Corporation (FDIC), the Treasury Department’s Office of the Comptroller of the Currency (OCC), and the Federal Housing Finance Agency (FHFA) released the NPR on Monday.

Other agencies, including the National Credit Union Administration and the Securities and Exchange Commission, have indicated similar rulemakings are on their agendas.

The Dodd-Frank Act of 2010 required six federal agencies—the five identified above and Federal Reserve Board—must “jointly prescribe regulations or guidelines with respect to incentive-based compensation practices at certain financial institutions that have $1 billion or more in assets,” the FDIC, OCC, and FHFA said in a joint press release.

The proposed rule would prohibit compensation arrangements for large bank executives that “do not include risk adjustment of awards, deferral of payments, and forfeiture and clawback provisions,” the release said. “The prohibitions also emphasize the important role of sound governance and risk management control mechanisms. These prohibitions would help safeguard covered institutions from the types and features of incentive-based compensation arrangements that encourage inappropriate risks.”

Included in the proposal are recordkeeping and disclosure requirements that would assist federal regulators in monitoring and identifying areas of potential concern.

Executive compensation arrangements for bank executives that did not also incentivize risk management controls were listed as one cause out of many by banking regulators regarding the failure of Silicon Valley Bank (SVB) in 2023.

SVB was the first of three mid-sized banks to fail last year, followed by Signature Bank and First Republic Bank.

The NPR’s $1 billion asset threshold would have it apply to all but the smallest of community banks.

Once the NPR is adopted by all six agencies, it will be published in the Federal Register for comment for 60 days. Each agency will publish the proposal on its website and accept comments.