Banks’ pay policies would be policed by the Federal Reserve for the first time, with the aim to ensure they don't encourage excessive risk-taking, under a plan the Fed is drafting.

The proposal has come as the latest response by the Fed to the censure that it could not crack down on lax lending, reckless gambles and other practices that led to the financial crisis.

However, the central bank's more activist stance carries along the risk of more forceful accusations from lawmakers and other critics that the Fed is overstepping its bounds, and that its attempts should be restrained.

It is being predicted that the compensation issue will appear when President Barack Obama meets with his counterparts from other major industrialized countries, in Pittsburgh next week. A European attempt is being led by French President
Nicolas Sarkozy, in order to control banker bonuses at the Group of 20 Summit.

In April, G-20 leaders pledged at their London meeting to pass tough new principles on pay and compensation; however, not much progress has been made till now. 

The sources familiar with the plans said on the condition of anonymity, since the proposal has not been finalized, “Under its proposal, the Fed would review — and could reject — pay policies that could cause too much risk taking by executives
or other employers. However, the Fed would not actually set compensation.” 

In spite of this, the proposal is far reaching. The FED shall review salaries, bonuses and other compensation for CEOs and other senior management, along with covering certain employees, like traders, who can take big risks on behalf of a
firm.

It shall also cover some workers whose compensation could affect their risk-taking, such as loan officers making mortgages. 

The Fed has the liberty to not only investigate the compensation level, but also how it's structured, and when it is awarded. 

The sources said further, “The goal is to make sure banks' pay policies don't encourage top managers or other employees to take gambles that could endanger a company, the broader financial system or the economy. The failure of many
banks to closely monitor risk and limit compensation that might encourage too much risk contributed to the financial crisis.” 

The proposal, which has been in works since early July, could be released within a few weeks.

“The public, the industry and others would be able to comment on the proposal, which could be revised. A final plan, subject to approval by the Fed's Board of Governors, could be adopted by year's end,” said sources. 

All banks, (nearly 6,000 of them), maintained by the Fed, would be covered by the proposal. It should be noted that savings and loans or other institutions overseen by the Federal Deposit Insurance Corp. or other regulators would not be
covered by it.