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Fed Move to Veto Banker Pay in Works: Report

The Federal Reserve headquarters in Washington, DC.
The Federal Reserve headquarters in Washington, DC.

The Federal Reserve is preparing regulation that would see it veto banks' compensation policies if it believes they encourage bank employees to take too much risk, the Wall Street Journal reported Friday.

The pay for tens of thousands of bank employees from chief executives, to traders, to loan officers in the US would likely require approval from the Fed, and the country's largest banks, about 25 in number, would be under close scrutiny, the paper reported.

The Fed plans to compare these banks as a group to see if any of their practices are unusually dangerous to their companies, according to the report.

The central bank believes it has the legal authority to take such action through its existing supervisory powers, and the proposal, which is still a few weeks from completion and could still be revised, requires only a vote by the central bank's board, not approval by Congress.

The proposal is likely to push banks to use "clawbacks" – clauses to reclaim money back from employees who take risks that hurt their firms - in certain pay packages, the paper said.

The Fed could also require that more bonuses be offered through restricted stock or other forms of long-term compensation to avoid taking short-term risk, according to the report.

Meanwhile, in Europe "there is total agreement" over regulating financial pay, European Monetary Affairs commissioner Joaquin Almunia said, but did not elaborate on whether any concrete measures had been approved.

Economist James Tobin's proposal to tax currency trades as a way of cutting speculation and volatility is a good idea, but needs more work to be viable, Almunia also told a Spanish radio station.

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