At Hearing, Senator Warren Highlights Importance of Strong Clawback Legislation
Warren: “Congress needs to put tough rules in place to make sure that executives pay up when their actions lead directly to a bank failure.”
Washington, D.C. — At a hearing of the Senate Banking, Housing, and Urban Affairs (BHUA) Committee, U.S. Senator Elizabeth Warren (D-Mass.) highlighted the importance of passing strong legislation to provide the Federal Deposit Insurance Corporation (FDIC) with the necessary authority to claw back executive pay whenever banks collapse, regardless of the specific process the FDIC uses to pick up the pieces.
Following the recent collapse of First Republic Bank – the second-largest bank failure in the nation’s history – and the failures of Silicon Valley Bank and Signature Bank in March, Senator Warren underscored the need for legislation like her bipartisan Failed Bank Executives Clawback Act to give federal bank regulators the tools they need to hold executives of failed banks responsible for the costs those failures exact on the rest of the banking system and the economy. In response to her questions, the witnesses agreed on the importance of requiring regulators to claw back compensation from executives who are responsible for a bank’s failure, that this apply in all cases of bank failure, and that regulators have authority to claw back up to five years of compensation – all of which are achieved by Senator Warren’s bipartisan legislation.
Transcript: Holding Executives Accountable After Recent Bank Failures.
U.S. Senate Committee on Banking, Housing, and Urban Affairs
Thursday, May 4, 2023
Senator Elizabeth Warren: Thank you, Mr. Chairman.
In its post-mortem of the Silicon Valley Bank collapse, the Fed found that legislation passed out of this committee in 2018 led to weakened rules for big banks that were major contributors to SVB’s failure. The lessons, I think, are clear: 1) Regulators need to strengthen bank oversight and 2) Congress must reinstate stronger rules.
Here’s a place to start. SVB, Signature Bank, and First Republic all lobbied Congress to weaken the guardrails preventing them from making risky bets with depositors’ money. Then – surprise, surprise – these executives took risks to boost their short-term profits, gave themselves huge salaries and bonuses and stock options, and when they crashed their banks, they walked away with fortunes.
That’s why, Senators Cortez Masto, Senator Hawley, Senator Braun and I introduced a bipartisan bill to ensure that when executives crash their banks – and threaten the banking system – that those executives are forced to give up their fancy compensation packages.
Professor Lin, you’re an expert on corporate governance and financial regulation. If our Failed Bank Executives Clawback Act, which applies to failed banks no matter how they are dealt with by the FDIC, had been the law of the land when SVB failed, would it have applied to SVB executives?
Assistant Professor Da Lin, University of Richmond School of Law: Yes, I believe so Senator.
Senator Warren: Would it have applied to Signature executives?
Professor Lin: I believe so Senator.
Senator Warren: Would it have applied to First Republic executives?
Professor Lin: I believe so.
Senator Warren: Alright. SVB, Signature, and First Republic were resolved by the FDIC through different processes, using different statutory authorities. To make clawbacks effective, we have to give regulators broad authority to claw back executive pay whenever banks collapse, regardless of the specific process that the FDIC uses to pick up the pieces.
Now, unsurprisingly, bank executives hate “clawbacks.” They want to keep on taking risks with zero consequences.
Professor Lin, if our banking regulators had had the choice whether or not to claw back executive compensation after a bank failure, would you expect Wall Street to exert significant pressure on them not to use it?
Professor Lin: Yes, I think that’s a real possibility.
Senator Warren: It’s clear that giving regulators power to do something is not always enough – Congress needs to force regulators to use it – which is what Senators Cortez Masto, Hawley, and Braun and my bill does.
Now, in its review of the SVB collapse, the Government Accountability Office found that, “in the five years prior to 2023, regulators identified concerns with Silicon Valley Bank and Signature Bank, but both banks were slow to mitigate the problems the regulators identified.” Risk built up over time.
Professor Schooner, if regulators had had the authority they needed to claw back compensation from SVB executives, would it be reasonable in your view for them to consider the executives’ actions and pay since 2018, when the regulators first began warning SVB about its risky practices?
Professor Heidi Mandanis Schooner, Columbus School of Law, The Catholic University of America: Senator, I think that would be very reasonable. Incentive arrangements often rely on short term metrics that it takes the long term to determine whether those involve excessive risks. So I think giving regulators the opportunity to capture that kind of excessive risk-taking is reasonable.
Senator Warren: That’s very helpful, thank you. Congress needs to put in place tough rules that make sure that executives pay up when their actions lead directly to a bank failure. In order for us to do that, the regulation needs to do three things: 1) force regulators to clawback compensation from the executives who are responsible for the failure; 2) apply in all cases of bank failure, no matter how the particular form comes out; and 3) allow up to five years of compensation to be clawed back. My bill with Senators Cortez Masto, Hawley, and Braun achieves all three of those, and I hope that this committee will take action on it soon.
Thank you, Mr. Chairman.
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