Senate bill proposes seizing bank executive pay for failures.

The Senate Banking Committee is set to consider an exciting bipartisan bill that would hold executives accountable for bank failures by allowing government regulators to seize their compensation.

Sen. Sherrod Brown (D-Ohio), the committee’s chairman, and Sen. Tim Scott (R-S.C.), the panel’s ranking Republican, reached a deal on June 16 after a series of regional bank failures rocked the financial services industry.

The recent collapse of three U.S. banks has sparked a call for tougher penalties for executives at failed financial institutions, gaining support from both the Biden administration and Congress.

Now, in the wake of the 2023 bank crisis, lawmakers are expanding their efforts to address issues within the larger institutions.

2023 Bank Crisis Sparks Calls for Reform

The crisis began when federal regulators shut down Silicon Valley Bank (SVB) in March due to concerns about its solvency.

The Federal Deposit Insurance Corp. (FDIC) labeled this collapse as the largest bank failure since 2008, following the collapse of Washington Mutual.

This event triggered a massive bank sell-off and stock market decline, raising concerns about the stability of other regional banks.

Within days, Signature Bank also collapsed, becoming the third-largest bank failure in U.S. history. Depositors withdrew billions from smaller institutions after the FDIC seized SVB.

In May, the Senate committee held a hearing with executives from Signature and SVB, subjecting them to intense questioning about their mismanagement that led to the banks’ shutdown.

SVB’s former CEO, Greg Becker, sold $3.6 million of shares in his bank just days before the bank disclosed a $1.8 billion loss, triggering a fatal bank run on March 9.

The bank was seized by regulators the next day, and the Federal Reserve is currently investigating bonuses paid to SVB employees prior to the collapse.

Becker defended his compensation bonus last month, stating that SVB’s board believed it was fair and accurate.

To address these issues, the proposed bill would require banks to adopt corporate governance and accountability standards to enhance responsiveness to federal banking supervisors.

Before its failure, SVB had 31 open supervisory findings, with the Fed acknowledging that the bank received three times the average number of warnings compared to its peers.

Senate Bill to Allow Regulators to Seize Bonuses From Executives for Bank Failures

Senators Brown and Scott, with the latter running for the 2024 GOP presidential nomination, have 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 empower the FDIC to claw back two years’ worth of compensation paid to executives after a bank failure and strengthen their ability to impose civil penalties on those who fail to manage their banks’ operations adequately.

This includes seizing bonuses, earnings from the sale of securities received by senior executives within 24 months before their bank’s failure, and other performance-based compensation.

The bill would also mandate that banks include responsible bank management in their bylaws standards.

The proposed bonus clawbacks in the bill would not apply to thousands of community banks with less than $10 billion in assets. Additionally, executives who were at a failed bank for less than a year must prove that they did not contribute to the lender’s failure.

Clawbacks of executive bonuses in the financial sector have been implemented in the past. For instance, in 2012, UBS revoked share-based payouts for investment-bank employees who were due to receive bonuses of over $2 million following a rogue-trading scandal.

Proposed Legislation May Face Opposition From House Republicans

The bipartisan support from senior members on the Senate committee positions this legislation as one of the best opportunities for Congress to enact new laws in response to bank crises.

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