THE FEDERAL Reserve has presented new guidelines on pay practices at banks and said it will launch a review of the 28 largest firms to ensure compensation packages don’t create incentives for the kinds of risky investments blamed for the financial crisis.

“Compensation practices at some banking organisations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability,” Fed chairman Ben Bernanke said yesterday in a statement.

“The Federal Reserve is working to ensure that compensation packages appropriately tie rewards to longer-term performance.” The central bank’s action parallels efforts by US lawmakers, the administration of president Barack Obama and world leaders to overhaul incentives to reduce threats to the financial system.

Investments in mortgage-backed securities and other complex instruments have led to more than $1.6 trillion in credit losses and write-downs at firms from Zurich-based UBS to New York-based Citigroup, triggering the worst economic crisis since the 1930s.

“Today’s proposal is but one part of a broad programme by the Federal Reserve to strengthen supervision of banks and bank holding companies in the wake of the financial crisis,” Federal Reserve governor Daniel Tarullo, an Obama appointee who is leading an overhaul of Fed supervision, said in a statement. The Fed plan comes as the Obama administration slammed Wall Street by ordering average pay cuts of 50 per cent and caps on benefits for top executives at companies owing the government billions of dollars from bailouts.

The news triggered debate about the government’s reach into private industry, whether pay reductions would spread to other companies and if a talent drain from US firms would ensue. “I don’t think there will be any charity cases on Wall Street,” Barney Frank, a Democrat and chairman of the House Financial Services Committee said. – (Bloomberg)