daniel k tarullo : incentive compensation, risk management, and safety and soundness speech by mr daniel k tarullo, member of the board of governors of the us federal reserve system, at the university of maryland's robert h. smith school of business roundtable “ executive compensation : practices and reforms ”, washington dc, 2 november 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * it is a pleasure to be here this afternoon to give the closing address at this very timely conference on executive compensation. executive compensation has for some time been an important part of academic and policy discussions of corporate law and governance. the public's attention to the subject has periodically increased. such heightened interest is not often part of corporate governance debates, but rather in response to high compensation levels for certain executives, or the contrast between rising executive compensation and sluggish overall wage growth. i think it fair to say, however, that public scrutiny has never been more intense than in the past year. and never has it been more concentrated on a particular industry than in the current focus on large financial services firms. the interest and role of the federal reserve is both broader and more targeted than the issue of executive compensation as such. it is more targeted in that our concern with compensation matters rests squarely on our statutory responsibility to ensure the safety and soundness of the banking organizations we regulate. it is broader in that we are concerned not only with the compensation of executives, but also with compensation arrangements of employees other than executives where those arrangements may adversely affect the safety and soundness of their firms. in the remainder of my remarks, i will first elaborate a bit on how our safety and soundness mandate both defines and limits the scope of our activities on compensation. then i will turn to the supervisory approach we have taken in the proposed guidance we issued 10 days ago, before closing with an explanation of the specific supervisory processes we intend to follow in putting this guidance into practice. 1 compensation as a safety and soundness issue previous speakers have touched on some of the reasons why compensation arrangements of corporate employees can be a public policy matter. as i have already suggested, the compensation packages of employees – particularly senior executives – implicate the principal - agent concerns that inform much of corporate law. shareholders have interests both in providing employees with incentives to maximize shareholder value and in restraining employees from using their direct control over the firm '

incoming ” banks, from our point of view. they are making progress in preparing for the post - brexit world, although details and decisions are often still missing. that said, there are still some banks, mostly smaller ones, which seem to be delaying their final decision on relocating. second, there are those banks which access the uk market from the eu – the “ outgoing ” banks, from our perspective. most of these banks have also made plans, which is good. still, some of these plans remain a bit too high - level, in our view. so, more work needs to be done, even if the circumstances might be challenging. my message to all affected banks is this : don ’ t procrastinate. no one will wait for you. when brexit happens you will either be prepared, or not. i advise you to be prepared. and there are a lot of things that need to be considered. settlement finality, for instance, might be affected by brexit, because the protection of the eu settlement finality directive regarding the unwinding of transfer orders will no longer apply across the channel. another issue is the continuity of contracts, that is, the ability of market participants to continue servicing existing contracts, in particular derivatives contracts, without appropriate permissions in place. banks should therefore include this topic in their contingency plans. and finally, banks should assess what brexit means for their recovery plans. after all, it could 3 / 6 bis central bankers'speeches raise barriers and make certain recovery options less feasible. but brexit is not just something the banks have to think about. it also raises a lot of questions for us supervisors. and right from the start, we have worked hard to answer all these questions and map out our approach to brexit. we have to think about cross - border banking groups, for instance. in the wake of brexit, new banks will be set up in the euro area. and they will most certainly be part of banking groups which are headquartered outside the eu, in a third country. this raises the question of how autonomous the new euro area entities will be. will they become well - established banks? or will they end up as shell companies, which are overly reliant on other group entities from outside the eu? and to be very clear : that ’ s not what we want to see. we expect banks to manage some of their risks locally. they need local staff