The Federal Reserve Board has issued a proposal designed to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of their organizations.
The proposal includes two supervisory initiatives. One, applicable to 28 large, complex banking organizations, will review each firm’s policies and practices to determine their consistency with the principles for risk-appropriate incentive compensation set forth in the proposal. These firm-specific policies will be assessed by supervisors in a special “horizontal review,” a coordinated examination of practices at the 28 firms. The policies and implementing practices adopted by these firms in response to the final supervisory principles will become a part of the supervisory expectations for each firm and monitored for compliance.
Second, supervisors will review compensation practices at regional, community and other banking organizations not classified as large and complex as part of the regular, risk-focused examination process. These reviews will be tailored to take account of the size, complexity and other characteristics of the banking organization.
The findings from these reviews will be incorporated into the banking organization’s supervisory ratings. In appropriate circumstances, the Federal Reserve may require an organization to develop a corrective action plan to rectify deficiencies in its incentive compensation programs and processes.
See press release for full details.