PHOENIX - Federal Reserve Chairman Ben S. Bernanke yesterday called for government banking supervisors to pay "close attention" to executive compensation practices as they examine the soundness of financial institutions this spring.
Banking regulators, he said, already have observed that "poorly designed compensation policies" can create incentives for managers to make corporate decisions that jeopardize a bank's health.
The Fed chief's remarks, at a meeting here with officials of small, community banks, came amid public and congressional outrage over millions of dollars in bonuses paid to employees of American International Group Inc., which has been bailed out by the federal government four times since September.
Bernanke did not name any companies in his speech, but he said management policies should be aligned with the "long-term prudential interests of the institution . . . [and] provide appropriate incentives for safe and sound behavior."
He also used the forum to make a fresh pitch for an overhaul of banking regulations to prevent another financial crisis like the one gripping the United States and other countries worldwide.
His suggestions:
Close regulatory gaps that allow financial companies to operate without sufficient oversight - especially for making risky investments.
Regulators must make sure financial companies have a sufficient capital cushion against potential losses from their investments.
Congress must enact legislation so that the failure of a huge financial institution, such as AIG, can be handled to minimize fallout to the national economy - similar to how the Federal Deposit Insurance Corp. deals with bank failures.
Such "too big to fail" companies must be subject to more rigorous supervision to prevent them from taking excessive risk, Bernanke said.
President Obama said this week his administration soon would propose new financial-industry oversight that includes a resolution authority with powers similar to those of the FDIC, which can seize control of banks, take over their bad assets, and sell the good ones to competitors.
Separately at yesterday's small-bank conference, Sheila Bair, chairwoman of the FDIC, said a planned one-time fee on banks to prop up deposit insurance was needed to maintain a "stable banking system," as she sought to quell opposition from community bankers.
The FDIC plans to charge banks the assessment July 1 to replenish its deposit insurance fund, which was drained by 25 bank failures last year. Bair said the FDIC may "trim back" the levy of 20 cents per $100 of insured deposits to "single digits" if lawmakers pass pending legislation to expand the agency's borrowing authority from the Treasury Department.