The New York Department of Financial Services has issued new guidance directing that all banks regulated by the state ensure that employee incentive arrangements do not encourage inappropriate corporate practices.

The precautionary measure follows fines and other penalties levied against Wells Fargo Bank by the federal government for unauthorized accounts and credit cards employees opened to meet strict quotas.

"The inappropriate behavior we have seen at institutions like Wells Fargo are the same ones that led to the 2007 financial crisis and there must be zero tolerance for reckless policies that foster greed and put New Yorkers' financial futures at risk," Governor Andrew Cuomo said in a statement. "State charters banks are now on notice of their obligations and it is their responsibility to ensure their employees are acting in the best interests of their customers."

All of the state’s regulated banking institutions have been advised that no incentive compensation may be tied to employee performance indicators without effective risk management, oversight and control. Also, any incentive compensation arrangement at a bank must meet, at a minimum, comply with established principles.

Balance between risks and rewards: Any incentive compensation arrangement must appropriately balance risk and financial results in a manner that does not encourage employees to expose their organizations to imprudent risks.

Effective controls and risk management: A banking institution's risk management processes and internal controls must reinforce and support the development and maintenance of any incentive compensation arrangements.

Effective corporate governance: Incentive compensation arrangements must be supported by strong corporate governance, including active and effective oversight by the organization's board of directors.

These directives will apply to New York's 121 state chartered commercial banks, savings banks, and bank holding companies, 17 state chartered credit unions, 88 foreign branches, 14 foreign agencies, and 35 representative offices, all of which have assets totaling more than $2.5 trillion.

Lack of compliance with this guidance will be reflected in a bank’s regulatory examination rating and may subject an institution to additional regulatory action.

State banking examiners will review incentive compensation arrangements during the Department's regular risk focused examination process, including a review of the processes in place to identify and deter misconduct, as well as a review of risk management, internal audit, and board of director oversight structures. Banks must maintain records that document the structure and approval process of their incentive compensation arrangements, as well as the related risk management and oversight of such arrangements.