Jake Parentis
Associate Editor
Loyola University Chicago School of Law, JD 2024
On March 17, 2023, following the second-largest bank collapse in U.S. history, President Biden released a statement urging Congress to allow financial regulators to impose tougher penalties on the executives of failed banks. Encouragingly, on March 29–just twelve days later–the Senate proposed bipartisan legislation, dubbed the Failed Bank Executives Clawback Act (FBECA), which would grant the Federal Deposit Insurance Corporation (FDIC) clawback authority to confiscate all or part of the compensation received by bank executives in the five years leading up a bank’s failure.
SVB executives – playing with house money?
The executives clearly responsible for Silicon Valley Bank’s failures are absconding with major profits. In 2017, SVB embarked on a strategy to boost profitability by investing in riskier assets exposed to rising interest rates. Concurrently, and during the period leading up to the bank’s eventual collapse, executive salaries soared alongside higher returns. The jumps in pay for CEO Greg Becker and CFO Daniel Beck were a result of large, multi-year bonus awards pegged on to the bank’s return on equity. Becker’s cash bonus peaked at $3 million in 2021, more than double the amount he received four years earlier in 2017 when he joined the company, making his total pay packet $10 million. Moreover, in 2021, the cash bonus paid to Beck was $1.4 million, quadruple what he received four years earlier. Additional regulatory filings reveal Becker sold $3.6 million in SVB shares just days before the bank collapsed. Five other executives received nearly $17 million in compensation in 2022. CNBC even reported that SVB paid its employees their annual bonuses just hours before federal regulators shut down the bank on March 10. The American consumer deserves better.
Congress’ push for accountability – the FBECA and clawing back executive compensation
In response, Democratic Sens. Elizabeth Warren and Catherine Cortez-Masto teamed up with Republican Sens. Josh Hawley and Mike Braun to propose the FBECA. “Americans are sick and tired of fat cat bankers paying themselves handsomely while risking other people’s hard earned money,” Warren said in a statement released on March 29. She continued, “[i]t’s time for Congress to step up and strengthen the law so bank executives bear the cost of failure, not line their pockets and walk away scot-free.”
At a Senate Banking Committee (SBC) hearing on Tuesday, March 28, Michael Barr, the Federal Reserve Vice Chair of Supervision, told senators that its regulators began to issue warnings to SVB as early as 2021 but that the bank failed to address them properly. Barr called the failure a “textbook case of mismanagement.” He described the factors that led to its collapse, noting that when the tech sector boomed in the early pandemic, SVB tripled in asset size (between 2019 and 2022). SVB invested in longer-term securities for greater yield and profits, but it never developed “effective interest rate risk measurement tools, models, [or] metrics,” Barr concluded. As a result, SVB failed because its interest rate and liquidity risk were grossly mismanaged, and the bank suffered a devastating run by its uninsured depositors in a period of less than 24 hours.
During the aforementioned March 28 hearing before the SBC, Martin Gruenberg, Chairman of the FDIC, explained to senators that the FDIC, depending on its findings, does indeed have substantial authority under current law to impose financial penalties, restitution, and ban individuals from the banking industry. Gruenberg assured Senator Cortez Masto that the agency is swiftly pursuing these means in the aftermath of the SVB debacle. But most importantly, Gruenberg still signaled a strong need for legislation to claw back compensation as proposed by the FBECA. He explained, “[w]e do not have, under the [FDI Act], explicit authority for claw back compensation . . . [i]f you are looking for an additional authority, specific authority under the FDI Act, it would probably have some value there.” As described in Sen. Cortez Masto’s March 28 press release, current federal law grants regulators the authority to claw back executive pay outs in the face of criminal negligence in the lead up to a bank failure. However, and underscoring the need for change, Cortez Masto’s press release also described that, as it stands, such authority does not currently extend to gross mismanagement by bank executives. Change is necessary and hopefully imminent.
If enacted, the FBECA would amend the Federal Deposit Insurance (FDI) Act to clarify that the FDIC has the authority to claw back compensation that includes executive salaries, bonuses, profits realized from buying or selling securities, and other awards. The FBECA details that ample compensation ought to be clawed back to ensure the executives are not unjustly enriched and that they bear losses, “consistent with the responsibility of the party.” This legislation would hold bank executives accountable when they make risky investments with customers’ money. As it stands, those executives profit in the ‘good times’ while avoiding financial consequences and personal liability during ‘the bad.’ The FBECA would appropriately put the executives’ own profits on the line.
The proposed bill also extends clawback authorities in the Dodd-Frank Act to apply to any bank entering an FDIC receivership, as did SVB in early March 2023. The legislation further ensures that if an insured depository institution affiliated with a bank holding company fails, investors in the holding company would bear the losses of the insured depository institution.
In an increasingly hostile political climate, Americans should be encouraged that both Democrats and Republicans in Congress are receptive to President Biden’s call to action. When executives explode a bank, financial regulators should have the authority to claw back lavish pay and bonuses. Executives must be held accountable for irresponsibly risky behavior, a lesson America should have already learned in 2008. Congress is stepping up to the plate and strengthening the law. The FBECA would equip federal bank regulators with the necessary tools to hold executives accountable. Here’s to hoping Congress follows through.