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Federal Regulators’ Spotlight Focuses On Financial Institution Pay Practices By Barbara-Ann Gustaferro and David B. Miller As researchers, policy analysts and members ofthe banking industry continue to debate the actual extent to which bank compensation practices led to the financial crisis, federal banking regulator shave moved forward with efforts to require banking organizations to reconsider and, in many cases, revise their incentive compensation pay design and practices. The push by the Fed and its counterpart financial regulators to address bank pay comes as little surprise.In early 2009, media reports of large bonuses being paid to bankers whose employers had received bailout funds under the Troubled Assets Relief Program (TARP) ignited a public furor over executive compensation at financial institutions. The Federal Reserve and its counterpart financial regulatory agencies came under a firestorm of criticism for having allowed runaway bonus structures in the financial industry to fuel heedless risk taking which ultimately resulted in the economic meltdown Even if bank pay is found not to have played a significant role in the economic crisis,the Fed appears determined to avoid being accused of inaction on this subject.It is supported in its efforts by some financial economists who see increased government oversight of financial institution compensation as essential, pointing to certain factors that make banks particularly susceptible to imprudent risk taking Because banks make money by having their deposits flow to those in need of capital—and by the same token, don’t make money if they don’t—they tend to take on a higher proportion of debt relative to their equity. Although it is normally the case that shareholders will enjoy the upside of risk taking while debtholders will bear most of the downside, in the case of financial institutions, debtholders will be disproportionately vulnerable relative to shareholders . Government-provided deposit insura