UPDATE 3-US FDIC backs pay clawback as Bair ready to exit
* Banking group says final rule allays concerns
* "Negligence" is spelled out as the standard
* Last FDIC board meeting for Sheila Bair
* FDIC sees final rule on "living wills" in August (Adds roundtable quote and confidentiality issue)
By Dave Clarke
WASHINGTON, July 6 (Reuters) - U.S. regulators could snatch back up to two years of Wall Street executives' pay if they are found responsible for the collapse of a major financial firm, under a provision approved on Wednesday.
It was part of a broader Federal Deposit Insurance Corp rule laying out the order in which creditors will be paid during a government liquidation of a large, failing financial firm.
The FDIC unanimously approved the rule at its last meeting chaired by Sheila Bair, who leaves on Friday after a five-year term dominated by the agency's response to the 2007-2009 financial crisis.
She has been a major advocate for establishing an orderly liquidation regime for the biggest, most complex, financial firms, arguing it will curb taxpayer bailouts and limit the sort of market turmoil caused by the 2008 bankruptcy of Lehman Brothers.
Bair has also been a critic of big pay packages, especially those that deliver bonuses based on short term gains by the company rather than long-term performance.
The 2010 Dodd-Frank financial oversight law gives financial agencies the power to recoup executives' pay. Bankers have complained regulators were too vague in an earlier proposal about what could trigger a clawback.
The FDIC's final rule clarified that "negligence" was the standard. The agency was careful to point out that it was not using the more narrow standard of "gross negligence."
One of the groups that complained to regulators about the earlier rule said it was pleased with the changes announced on Wednesday.
"By providing more certainty around the standards, that goes a long way to addressing our concerns," said Scott Talbott, who heads government affairs at The Financial Services Roundtable.
The group's members include companies that would fall under the new liquidation system like Bank of America (BAC.N), Citigroup (C.N) and JPMorgan Chase (JPM.N).
The pay clawback provision was added to the law in response to public anger that the heads of failed firms or those that received government money were raking in the cash in the years before the crisis.
For instance, former Lehman Brothers Chief Executive Dick Fuld was awarded $22 million for 2007, the year before the firm's bankruptcy.
The Group of 20 leading economies has endorsed finding new ways to seize and liquidate failing financial firms. U.S. regulators and industry officials have expressed concern, however, that other countries are not moving as quickly to establish these resolution systems.
The FDIC board discussed, but did not vote Wednesday, on a final rule on how large financial firms should draft "living wills." These company-drafted documents will give regulators a roadmap for how they can be broken up if they fail.
Bair has said large banks and other important financial companies might have to restructure themselves if they cannot show they can be easily dismantled in their present form.
The FDIC and the Federal Reserve, who will jointly issue the living will rule, are still deciding details.
Bair said she hoped a final rule would be done in August.
Banks, like Wells Fargo & Co (WFC.N), have raised concerns about how the information submitted to regulators will be kept confidential and protected from such things as Freedom of Information Act requests.
Acting Office of Thrift Supervision Director John Bowman, a member of the FDIC board, said the protection of proprietary information from being discovered via legal avenues may need to be addressed by Congress. (Reporting by Dave Clarke, Editing by Tim Dobbyn)