The United States has issued new banking regulations to ensure that the amounts of salaries and bonuses paid by banks do not jeopardize their financial health; however, the new regulations do not specify unacceptable forms of incentive compensation, nor do they establish mandatory subsidy amounts or set limits on bank bonuses.
The U.S. government announced the new regulations five days before the G20 summit, hoping to contribute to the reform of the global financial system.
A statement released jointly by the Federal Reserve and three financial regulatory agencies stated that the purpose of these guidelines is to "ensure that financial institutions consider their potential risks when arranging incentive compensation and adhere to safe and sound practices."
The other three regulatory agencies that issued these regulations alongside the Federal Reserve are the Federal Deposit Insurance Corporation (FDIC), the Office of the Comptroller of the Currency, and the Office of Thrift Supervision. These agencies stated that the bonus regulation is based on three main principles: first, there should be a reasonable balance between risk and reward; second, effective controls and risk management mechanisms should be established; third, the board of directors must execute effective oversight.
These new regulations affect executives and employees who may expose banks to risk, such as traders who influence the "overall risk" of financial institutions.
These four U.S. agencies also unanimously believe that a "one-size-fits-all" incentive model may encourage some employees to engage in "reckless risk-taking." Federal Reserve Governor Tarullo stated in a statement: "Many large banks have made some changes to their incentive compensation policies, but that is clearly not enough, and further improvements are needed."
