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Sheila Bair looks to be leading the regulatory race to the top. The agency she oversees, the Federal Deposit Insurance Corporation, has recently unveiled a handful of clever ideas to contain risky bank behavior and protect the nation’s deposit insurance fund. Rival watchdogs fighting for turf will find it difficult to ignore FDIC’s latest tactics.

Generating the most buzz is a sensible plan to tie the amount that banks pay for deposit insurance to the riskiness of their compensation plans. Banks with schemes that favor short-term gains would pay more than those that, for example, include multi-year claw-backs on bonuses. The agency will vote on the plan next week.

Of course, this comes as the Fed is also implementing its own proposal to include executive pay in its overall assessment of bank stability. It’s not clear which agency will be more stringent. But a little competition among the two wouldn’t be the worst outcome after years in which banking regulators rivaled each other in their laxity.

Linking pay to insurance premiums follows a handful of other changes FDIC is making. It recently revised the formula it uses to assess how much interest undercapitalized banks can pay to attract deposits. The net effect of the changes will be to reduce the rates banks can pay by an average of 12 basis points, analytics firm Market Rates Insight estimates.

This is a clever way to limit moral hazard. Failing banks, more concerned with survival than profitability, often make last-ditch attempts to attract new deposits by offering ultra-high rates on savings products wrapped by FDIC insurance.

Similarly, FDIC is pushing for a form of schmuck insurance from the buyers of failed bank assets. To mitigate some losses the fund incurs on assets in receivership, FDIC is pushing for the buyers of the assets to make payments linked to the increase in their share prices following the announcement of a deal.

In isolation, these may look like incremental, if sensible, changes to the way FDIC does business. But in the context of a regulatory turf battle over power and resources in Washington, it’s an encouraging sign indeed.

Source: FDIC Nibbling Nicely at Bank Risk