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Regulations Spotlight: Fed Issues Executive Compensation Proposals

Thursday, January 1, 2009

The federal government is looking at executive compensation practices as one of the many factors contributing to the financial crisis. As part of the ongoing financial reform discussion, the Federal Reserve Board issued in late October a two-part proposal that considers an organization’s compensation incentives without undermining safety and soundness.

The first part of the proposal concerns 28 large-bank organizations, while the second is geared toward community, regional and other banking organizations (ones that aren’t classified as large and complex according to regular risk-focused examinations).

Supervisors would review the compensation practices for each organization and tailor reviews according to size, complexity and other characteristics. The guidance and supervisory reviews would cover all employees who have the ability to materially affect the risk profile of an organization, either individually or as part of a group. The findings would be included in the organization’s supervisory rating.

The comment period closed before this issue of Central Banker was published, but you can read the proposed guidelines in full on the Board’s web site.

Agencies Propose Substantive Changes to Accounting Standards

The federal banking and thrift regulatory agencies are proposing changes to the regulatory capital rule of accounting standards. Beginning in 2010, the agencies will make substantive changes to how banking organizations account for many items, including securitized assets, that are currently excluded from these organizations’ balance sheets.

The agencies are issuing the proposal to better align regulatory capital requirements with the actual risks of certain exposures. Banking organizations affected by the new accounting standards generally will be subject to higher minimum regulatory capital requirements. The specific standards that would be changed are Financial Accounting Standards 166 and 167. The new rule will incorporate public opinions gathered during the fall. Read the original proposal.

Limits Sought on Financial Institution Reporting Burden

Federal agencies are proposing certain changes to Call Report requirements that are intended to provide data needed for reasons of safety and soundness or other public purposes.

Among the proposed revisions are establishing reporting thresholds for the collection of Call Report information where practicable to limit the reporting burden imposed on banking institutions. In establishing such thresholds, the agencies weigh the characteristics of the institutions involved in the activity that would be subject to the reporting requirements, the number of institutions affected by the reporting requirements, the type of information being collected, how that information will be used by the agencies, and banks’ costs associated with gathering and reporting the requested information.

The proposed Call Report changes would take effect on March 31, 2010.

Final Rules Issued for Mortgage Loans Modified under HAMP

Mortgage loans modified under the Treasury’s Home Affordable Mortgage Program generally will retain the risk weight appropriate to the loans before they were modified. Federal agencies (Office of the Comptroller of the Currency, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and Office of Thrift Supervision) adopted the final rules with one modification. Mortgage loans whose HAMP modifications are still in the trial period and not yet permanent will qualify for the risk-based capital treatment contained in the final rules. The rules are effective in late December.