The Senate Banking Committee will consider a bipartisan bill that would allow government regulators to seize compensation from executives deemed responsible for a bank failure.
The committee’s chairman, Sen. Sherrod Brown (D-Ohio), and Sen Tim Scott (R-S.C.), the panel’s ranking Republican, came to a deal on June 16 after a wave of regional bank failures this year shook the financial services industry.
The collapse of three U.S. banks within months of each other led to calls from the Biden administration and Congress for tougher penalties for executives at failed financial institutions.
2023 Bank Crisis Sparks Calls for Reform
The crisis began after federal regulators shut down Silicon Valley Bank (SVB) in March over concerns about its solvency.
The Federal Deposit Insurance Corp. (FDIC) called the collapse the largest bank failure since 2008, after the collapse of Washington Mutual.
The event prompted a massive bank and sell-off in stocks across the board, sparking fears that other regional banks were at risk of failure.Within days, Signature Bank also collapsed, becoming the third-largest bank failure in U.S. history, after depositors withdrew billions in deposits from smaller institutions, after the seizure of SVB by the FDIC.
In May, the Senate committee held a hearing with executives of Signature and SVB, who were grilled by senators for how their failure to manage their banks, led to them being shut down.SVB’s former CEO Greg Becker sold $3.6 million of shares in his bank only days before the lender disclosed the $1.8 billion loss that triggered a fatal bank run on March 9.
Regulators seized the bank the next day, on March 10, and the Federal Reserve has said it is investigating bonuses paid to SVB employees just before the collapse.
The trades by the former bank CEO were scheduled on Jan. 26 via an SEC rule that allows executives to schedule sales ahead of time to allay suspicions of trading on insider information.
Becker has defended his compensation bonus last month and told Senate lawmakers that SVB’s board “believed it was fair and I believe that they were accurate.”
The bill would now require banks to adopt corporate governance and accountability standards to boost responsiveness to federal banking supervisors.
SVB had 31 open supervisory findings before it failed, with the Fed admitting that the bank had three times the number of average warnings from regulators compared to its peers.
Senate Bill to Allow Regulators to Seize Bonuses From Executives for Bank Failures
Senators Brown and Scott, who is running for the 2024 GOP presidential nomination, announced that their committee will hold a vote on June 21 for the Recovering Executive Compensation Obtained from Unaccountable Practices Act (RECOUP Act) to advance the measure to the full Senate.The proposed bill would give the FDIC the ability to claw back two years’ worth of compensation paid out to executives after a bank failure and strengthen their ability to assess civil penalties on those who fail to adequately manage their banks’ operations.
This would include the seizure of bonuses, any earnings from the sale of securities that senior executives received in the 24 months before their bank failed, and other performance based compensation.
Thousands of community banks with less than $10 billion in assets would be exempt from the proposed bonus claw backs in the bill, which also does not apply to executives who are at a failed bank for less than a year
However, they must prove that they did not contribute to the failure of the lender.
Claw-backs of executive bonus in the financial sector have been made in the past.
In 2012, for example, UBS decided to revoke share-based payouts for investment-bank employees who were each due to receive bonuses of more than $2 million following a rogue-trading scandal.
Proposed Legislation May Face Opposition From House Republicans
The bipartisan backing of senior members on the Senate committee makes this legislation one of the best chances for Congress to enact a new law in response to bank crisis.Senators Elizabeth Warren (D-Mass.) and J.D. Vance (R-Ohio) introduced a related bill earlier this month with 11 co-sponsors.
Senators Jack Reed (D-R.I.) and Chuck Grassley (R-Iowa) have also introduced legislations that would give regulators greater authority to revoke executive pay at larger banks that fail.
If the bill passes the Senate, it is likely to face opposition from House Republicans, with some suggesting that the bill is unnecessary.
A spokeswoman for House Financial Services Committee chairman Patrick McHenry (R-N.C.) said “regulators already possess the necessary authorities to claw back executive compensation.”
The FDIC currently has the authority to pursue executives if a large bank fails through a special liquidation process, which the White House deems too limited.
Biden asked Congress in March to broaden the regulator’s authority so it can more easily pull executive compensation at smaller failed institutions subject to a more typical resolution process.
“Americans have watched executives take their money, run banks into the ground, and get away with it too many times before. It’s time for CEOs to face consequences for their actions, just like everyone else,” said Brown in a statement.Scott called the bill a “common-sense solution to address executive accountability that is tailored to protect the American taxpayer and limit government overreach.”
He said that this will be committee’s first markup on banking legislation since 2019 and that the bill represents a return to “regular order.
Scott added that he hopes the panel will also hold markups in the future “on housing reform and capital formation.”
Financial Regulators Already Planning Changes to the Rules
The Federal Reserve and the FDIC are already considering a revisal of their existing rules since the two banks failed in March, reported The Wall Street Journal.Regulators are expected to propose significantly increasing bank capital requirements and strengthen stress tests that assess an institution’s ability to weather a severe downturn.
They are also planning to revive a long-dormant proposal that would require larger banks to defer a portion of senior executives bonus incentives.
In 2016, they discussed a rule that would allow banks to claw back pay from their own executives.
Proponents of the bill also say that bank executives would have more incentive to work for companies’ long-term interests if they face a bigger personal risk during a failure.Banks argued that they have already tightened compensation requirements since the financial crisis of 2008–09 and that additional bonus restrictions would make it more difficult to find qualified candidates for top positions.
