Banks and other large financial companies that could be seized and liquidated by the U.S. government are balking at a proposed plan they argue gives regulators too much power to snatch back executives' pay if their institutions fail.

The plan is part of a broader proposal first issued earlier this year. A final rule is expected to be adopted on Wednesday by the Federal Deposit Insurance Corp.

The 2010 Dodd-Frank financial oversight law gives regulators the ability to recoup up to two years of pay from executives considered substantially responsible for a company's failure as part of regulators' power to seize large financial firms on the brink of failure.

Banking groups are complaining that the regulators are going too far in interpreting who is substantially responsible and are not setting clear standards for when executive pay should be recouped.

Vague and arguably unfair provisions would create powerful incentives for senior executives and directors with the best options to head for the exits at the first sign of trouble, lest a substantial portion of their compensation be at risk, top banking groups including the American Bankers Association, The Clearing House and the Financial Services Roundtable wrote regulators in May.

The groups argue that an institution's failure could be due to market conditions outside of a company's control and that should be reflected more in the rule.

The clawback provision was inserted into the law in response to public anger that banking and Wall Street executives at firms such as American International Group were being paid handsomely despite mistakes that helped bring about the 2007-2009 financial crisis.

There is some sympathy among regulators for the banks' complaints.

Acting Comptroller of the Currency John Walsh and acting Office of Thrift Supervision Director John Bowman, both FDIC board members, expressed concern when the rule was first released that the clawback provision may be too broad.

Walsh said he was concerned the provision was tied too tightly to job titles as opposed to what actions specific executives took.

But regulators and politicians, for the most part, have had little sympathy for complaints about executive pay restrictions at a time when unemployment is high and the economy is still weak. The final rule is not expected to be much different from the proposal released in March.

The pay provision is part of a broader rule governing the pecking order of which creditors will be paid first during a liquidation, which the FDIC would run.

Banks with more than $50 billion in assets and large non-bank financial firms that the government designates as being important to the smooth running of financial markets are subject to the new liquidation regime. Goldman Sachs , JPMorgan Chase and Morgan Stanley are among the big financial houses expected to fall under the regime.

Also on Wednesday, the FDIC is expected to discuss a proposal for how large financial firms should draft living wills, which are intended to provide a roadmap for how they can be broken up if they fail.

The rule governing these plans is being written by the FDIC and the Federal Reserve.

Last week, FDIC Chairman Sheila Bair told reporters that a final rule may not be ready for a vote on Wednesday as regulators iron out differences. An initial proposal was released in April.

Bair is stepping down as FDIC chairman on Friday after five years heading the agency.

(Reporting by Dave Clarke; Editing by Tim Dobbyn)