March 26, 2018 / 4:32 PM / in 6 months

NY Fed's Dudley says regulators should increase focus on bank executives

WASHINGTON (Reuters) - Banks should adopt compensation plans that discourage excessive risk-taking and place greater onus on senior managers for wrongdoing, the outgoing head of the New York Federal Reserve said on Monday.

FILE PHOTO: William C. Dudley, President of the Federal Reserve Bank of New York answers questions delivered by moderator Rob Cox during a Reuters Newsmakers panel titled "Banking Culture: Still Room for Improvement?" in the borough of Manhattan, New York City, U.S., February 7, 2018. REUTERS/Ashlee Espinal/File Photo

William Dudley, who plans to step down later this year, said regulators should encourage banks to overhaul their corporate cultures to reduce risk and bad behavior, even as regulators move to relax other rules introduced following the 2007-2009 financial crisis.

Dudley broadly defended the post-crisis regulatory regime, while giving credence to the push from the Trump administration to ease those rules in an effort to spur economic growth. He said changes under consideration at the Fed, including simplifying the “Volcker Rule” on bank trading, are “common sense.”

He also offered praise for legislation under consideration in the U.S. Congress about easing rules on banks, saying it maintains the key parts of post-crisis rules while easing requirements on smaller banks.

In fact, he argued that there are pitfalls to having too many rules, as it could create a dynamic where banks feel free to do anything that falls within the letter of the rules, even if it runs counter to the goals of those rules.

Instead, Dudley said banks, with help from regulators, need to overhaul their internal cultures to discourage misbehavior without requiring regulators to shine a spotlight on it.

“If you have a good culture, you’d say, ‘I could do this, but it’s misleading, it’s unethical and therefore it’s inappropriate,’” he said.

Some banks have already altered compensation plans to discourage risk-taking by minimizing the use of cash and deferred stock, with a greater emphasis on deferred long-term debt. Dudley said regulators could help more banks adopt that approach.

“Some banks have experimented with such compensation schemes, and I would encourage more to do so. But, this type of reform may also need a push from the regulatory side,” he said at an event hosted by the U.S. Chamber of Commerce in Washington.

“Another possible reform could involve putting a greater onus on senior management for the costs incurred from regulatory fines or other legal liabilities, rather than on shareholders alone,” he added.

Regulators in other markets including the United Kingdom and Hong Kong have introduced rules that would make senior bank managers more responsible for corporate malfeasance, in a bid to curtail risk-taking.

Reporting by Pete Schroeder; Editing by Chizu Nomiyama

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