Scholarly Articles and Other Contributions
 

Document Type

Article

Publication Date

1996

Abstract

This article examines the banking agencies' authority-both old and new-to regulate banks' compensation practices. The article considers whether the agencies' implementation of their statutory authority is appropriate. In evaluating the appropriateness of regulation in this area, the regulators' mandate to preserve the safety and soundness of banks is balanced against the banks' need to compete in an increasingly competitive marketplace.' 9 Also, the banking agencies' activities in this area are viewed against the backdrop of considerable legal and management scholarship addressing issues of compensation. Parts I, II and III of the article address the sources of the agencies' authority to regulate banks' compensation practices. This authority to regulate banks' compensation practices varies depending upon the financial health of the institution. Predictably, the agencies' powers expand as the health of the institution declines. Part I describes the agencies' authority to regulate the compensation practices of an institution regardless of its financial condition and explores the circumstances under which the agencies are most likely to exercise that authority. Part II examines the agencies' authority to regulate the compensation practices of financially troubled institutions and the application of that authority in practice. Part III analyzes the FDIC's authority, when acting as receiver for a failed institution, to repudiate contracts providing compensation.

Following the examination of the agencies' regulatory authority, part IV evaluates, on a comprehensive level, the regulators' approach toward compensation. Part IV concludes that while the banking agencies are appropriately interested in compensation practices because of their potential impact on banks' safety and soundness, the agencies would more effectively regulate in this area by focusing their attention on the decision-making process that forms compensation plans rather than attempts to regulate the content of such plans. In focusing primarily upon content, the regulators have failed to address adequately the fundamental causes of abusive compensation, i.e., the fact that compensation decisions are made by self-interested members of management. Limitations on the content of compensation plans-without regard for the causes of abusive compensation-could prove detrimental to banks' ability to compete with non-bank rivals for quality leadership and management. To the extent that these limitations cannot be justified as a necessary means for preserving banks' safety and soundness, such an approach does more harm than good.

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