Wall St. Regulators Propose Stricter Pay Rules for Bankers

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Proposed regulations would affect how financial institutions pay chief executives like, from left, Jamie Dimon of JPMorgan Chase, Richard Fairbank of Capital One and John Stumpf of Wells Fargo. Credit Mark Wilson/Getty Images; Michael Temchine for The New York Times; Alex Wong, via Getty Images

Regulators released on Thursday long-awaited proposed rules that would restrict how big financial institutions can pay their top executives.

The new rules would make bankers wait at least four years to receive portions of their bonuses and force banks to find ways to claw back bonuses from bankers if their behavior leads to big financial losses. The new rules would apply only to incentive-based compensation — generally bonuses — which varies according to the performance of the bank and the individual executive.

The structure of executive pay packages before the financial crisis was blamed for encouraging bankers to take unnecessary risks. In some cases, pay was set up to motivate bankers to seek short-term gains even when their actions led to losses over the longer term.

The 2010 Dodd-Frank legislation required the major financial regulators to collaborate on rules aimed at encouraging a longer-term approach to compensation at big financial institutions. The regulators were supposed to propose the rules within 90 days of the law’s passage.

Instead, the regulatory agencies delivered a first draft of new rules in 2011, but that draft was widely panned as being too weak. Now, five years later, the six agencies have delivered a new, stronger version of the rules.

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In the previous draft, the largest banks had to hold back at least 50 percent of all incentive-based pay for three years. Under the new rule, the same banks will have to withhold 60 percent of that pay for four years.

The new draft also applies the limits to a broader set of “material risk-takers” at big banks, not just top executives.

“This is pretty clearly an improvement of the 2011 rule, but the 2011 rule was very weak,” said Marcus Stanley, the policy director at the advocacy organization Americans for Financial Reform.

Mr. Stanley said he had hoped that banks would have to hold back pay for more than four years because big losses on bank investments can often take longer than that to materialize.

The new rules were debated and described for the first time at a meeting on Thursday of the National Credit Union Administration, the first of the six agencies to take up the proposal. Most of the rules will apply only to financial institutions that hold more than $50 billion in assets.

The public will have until July to comment on the new rules. Only after that will the agencies vote on bringing the new rules into effect.

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