Even though the U.S. government acknowledges the compensation given by small banks to their executives had nothing to do with the banking crisis, they continue to pursue a policy of interfering with small banks by writing up compensation guidelines, which by their own admission, small banks don’t need.
While small banks are exempt from the major provisions of the banking reform plan of the Obama administration passed by the House this month, with banks with assets of less than $10 billion not affected by the new rules, they contend that the inclusion of them under the guidance of the Federal Reserve concerning compensation, based on their already existing healthy executive pay practices, would place an undue burden on them. The smaller banks also say they in no way have the resources to go over their pay packages in the way the Federal Reserve has put forth to them.
Albert Christman, the president and chief executive of Delhi Bancshares Inc. in Louisiana, said this in a letter to the Federal Reserve, “Quite frankly, I have more than enough to do right now in my efforts to keep up with all of the other changes that have or soon will be imposed on us. I really don’t need another issue to deal with, especially one that will not be helpful in any way to anyone.”
Many small banks also state that along with the added burden of reviewing pay of employees would be the additional costs associated with that for board members, who would be required to go through the process, which would result in the need to compensate them for the time they spend doing their extra duties.
Representing the Independent Community Bankers of Texas, general counsel of Cox Smith Matthews Inc., Karen Neeley stated this:
“With the expansion to all employees under the guidance, this evaluation and the process of performing an associated risk analysis will take a significant amount of time, cause increased legal exposure, and increase recruiting challenges, all of which translate to additional costs. The guidance significantly expands board of director and compensation committee duties, and community and regional banking organizations cannot afford to compensate directors and committee members for this additional time constraint.”
The Fed tries to differentiate how it would work for the smaller banks in contrast to the larger banks, as the 28 largest banks would be placed under “horizontal review,” which means the pay packages offered by them would be compared with those of their competitors. Those differentiating too much would be under a higher scrutiny from the Fed.
For smaller community banks, they would be reviewed concerning compensation as part of the normal examination of the bank, but they contend it’s still an unnecessary step based on it already being determined nothing they’ve done in that area has contributed to the banking crisis.
The problem with all of this is the interference of the government by bailing out banks in the first place. The market already has a powerful mechanism in place which deals with poor business practices, and that is called business failure. It’s perfect, as those that don’t have good business practices succumb, while those with solid operations continue on.
The market is always the best mechanism for handling the way a business is run, and the government or Federal Reserve are clueless to the ways of the market, as their actions throughout this economic crisis has already proven.
It’s bizarre when you look at it from that perspective, as the government interference in the market through bailing out poorly run banks with taxpayer dollars, has resulted in a backlash against executive pay, because of the government taking actions it had no right to take.
So many taxpayers who don’t understand the free market and what government interference does, now are angry because of the use of their money to bail out the huge banks, which was decided by the government and Federal Reserve, not the banks and financial institutions bailed out; many of which didn’t want to be bailed out in the first place.
Now that the government has created the scenario, they have to placate the anger of taxpayers by deflecting the blame from themselves and guiding it toward the key executives at the companies.
Even by the poor standards of the government reasons for interfering with executive pay, the small banks rightly contend there’s absolutely no reason to bring that compensation ‘guidance’ to their level, which, again, has been confirmed has absolutely nothing to do with the economic crisis we’re in.
