Dodd-Frank 30 Day Countdown: Day 9

Firms Oppose FDIC Claw Back Provision

On Wednesday (July 6, 2011), the Federal Deposit Insurance Corp. (FDIC) voted on a rule allowing the government to recover payments from both senior executives and directors who the FDIC determines to be “substantially responsible” for a financial firm’s failure. This rule, known as the “claw back provision,” is one of a many rules that the FDIC is responsible for drafting and implementing with respect to its new “post Dodd-Frank” liquidation powers.  Dodd-Frank positioned the FDIC as supervisor over these firms and gave the FDIC authority to dismantle any large “too big to fail” institution before the need for government bailouts arises.

Executive pay was an area of contention during the financial crisis as many felt that incentive-based payments lead to increased financial risk-taking by banks.  Now, under the claw-back provision, executives would be forced to give back two years of salary to regulators who seize control of a firm before it goes under.

Not surprisingly, banks are opposed to this rule and have expressed that the rule will encourage a revolving door of executives which will further decrease stability.

A second Dodd-Frank requirement under the purview of the FDIC imposes on banks the requirement to implement a “living will.”   The purpose of this living will is to allow a financial institution to be cleanly dismantled should it find itself on the brink of failure. The FDIC says they have several more weeks to go before the requirements related to this provision will be finalized.

-Stephanie Kane co-authored this post