Executives deemed responsible for the collapse of a large bank would have to hand over bonuses and other pay under new legislation to be introduced Wednesday, a move to boost accountability when bank failures saddle the financial system with billions of dollars in losses.
Bipartisan backing for the plan, introduced by Sens. Elizabeth Warren (D-Massachusetts) and Josh Hawley (R-Missouri), shows how members of both parties want to signal a tougher approach to Wall Street, according to an early draft of the bill, reviewed by The Washington Post. Notably, the bill comes three years after the collapse of Silicon Valley Bank, whose 2023 failure sparked calls for tougher punishments for executives at failed institutions, penalties that policymakers are still debating.
If enacted, the bill would ensure the Federal Deposit Insurance Corp. has the power and obligation to seize bonuses and other forms of compensation, such as the proceeds from recent stock sales, that senior executives received in the lead-up to their bank’s failure.
“When big banks fail, weak regulators too often let the failed bank’s wealthy executives slip away into the night while American taxpayers foot the bill,” Warren said in a statement.
Two other Republicans, Alabama Sen. Katie Boyd Britt and North Dakota Sen. Kevin Cramer, are co-sponsoring the bill, along with 10 other Democrats, including Sens. Catherine Cortez Masto of Nevada and Ruben Gallego of Arizona.
At present, regulators rarely if ever claw back executive pay. Wednesday’s bill would mandate at least some compensation is clawed back.
The FDIC oversees about 4,300 banks around the country, most of them small, and insures trillions of dollars in bank deposits. It also plays a key role in winding down failing banks.
Silicon Valley Bank imploded thanks to its failure to manage risks associated with rapidly rising interest rates, coupled with an inability of regulators to move decisively to fix problems they repeatedly flagged to the lender. At the time of its collapse, SVB was the second-largest bank to fail in U.S. history. Two additional large banks failed in relatively quick succession that year, Signature Bank and First Republic.
Postmortem analyses of SVB found that compensation practices incentivized risk-taking over prudent financial management.
“Compensation packages of senior management through 2022 were tied to short-term earnings and equity returns and did not include risk metrics,” Fed governor Michael Barr wrote in a review of SVB’s failure. “As such, managers had a financial incentive to focus on short term profit over sound risk management.”
Congressional critics have highlighted the outsize pay package of Greg Becker, the former SVB chief executive, who collected nearly $40 million in compensation between 2019 and 2023, even as the bank accumulated 31 unresolved supervisory issues flagged by its regulators at the time of its collapse. According to company filings, a trust owned by Becker also sold $3.6 million of shares in his bank days before the lender disclosed a $1.8 billion loss that triggered a fatal run on the bank on March 9. Regulators seized the bank the next day.
Becker has publicly defended his pay package, telling lawmakers it was reasonable. “From the standpoint of that compensation, that’s determined by the board of directors,” Becker said during a May 2023 Senate hearing. “And so I know they believed it is fair, and I believe that they were accurate.”
Past attempts to bolster existing clawback powers have failed to gain traction in Congress, despite support from the Biden administration three years ago as well as multiple related bills introduced in the Senate in the months after SVB imploded. But in another sign that the episode continues to occupy officials’ attention, Michelle Bowman, the Federal Reserve’s point person on banking supervision, recently tapped an outside firm to review the 2023 bank failures.
Beyond punishing executives for their firms’ failures, proponents of clawing back pay say executives would have more incentive to work for companies’ long-term interests if they have a bigger personal stake.
Banks generally say that they have already tightened compensation requirements since the financial crisis of 2008, when an uproar over bonuses at American International Group, a large insurer that received over $180 billion in federal bailout funds, became a political lightning rod.
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