Wednesday, March 16, 2011

FDIC Proposes Rule To Pay Bankers More

FDIC announced today that a proposed rule clarifying the "Orderly Liquidation Authority" would allow the FDIC to claw back compensation from senior managers and directors found substantially responsible for the failure of a bank.

What's the problem?  In an attempt to bring greater responsibility to bank managers, regulators actually propose increasing their personal risk.  (That's what I'd call taking away compensation after the fact...you certainly aren't reducing their risk!)  So, by increasing executive risk, executives will respond by demanding higher expected compensation.

[If the individuals in question didn't respond this way, then, by definition, they are risk seeking, rather than risk averse.  We most definitely do not want to encourage risk seeking people to engage in bank management!!]