U.S. officials are looking at ways to force reforms in financial industry compensation practices to discourage excessive risk-taking, which is considered to have sown the seeds of the current credit crisis.
Treasury Secretary Timothy Geithner told Reuters Television on Friday the administration is working with the U.S. Securities and Exchange Commission to seek industry-wide compensation reform.
This crisis was caused in part by the fact that compensation practices just got way divorced from reality, Geithner said. So it is very important that the financial industry change those compensation practices so they are no longer providing strong incentives for excessive short-term risk taking.
In addition, the Federal Reserve is also looking at what regulatory steps could be taken to discourage bank practices that may foster a dangerous level of risk taking and plans to issue proposals in the next few months..
The Federal Reserve intends to use its supervisory and regulatory authority to promote bank holding companies' conformity with executive and employee compensation practices that do not create incentives for behavior that puts the firm and financial system at risk, a Fed spokeswoman said. We are working on proposals in this area that may be issued in the next few months.
The Obama administration is pushing for a revamp of compensation practices throughout the financial industry, not just at banks receiving government bailout funds.
Officials have said financial firms paid executives and employees huge sums of money for actions that resulted in big short-term pay offs but which ended up putting the companies and the financial system as a whole at risk.
(Additional reporting by Tim Ahmann and Tom Ferraro, Editing by Chizu Nomiyama)