At Hearing, Warren Slams Powell for Cozying-Up to Big Banks and Inaction on Executive Compensation Reform, Calls for Rulemaking that Protects Stability of the American Economy
Warren: “Chair Powell, the law does not say: Jerome Powell in his infinite wisdom should decide if we have a problem with executive compensation. The law…says: executive pay is a problem that threatens the stability of our economy, so write the rules to rein them in.”
Washington, D.C. — At a hearing of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, U.S. Senator Elizabeth Warren (D-Mass.) slammed Federal Reserve (Fed) Chair Jerome Powell for his inaction on executive compensation reform, allowing executives of the country’s largest banks to gamble with their bank’s finances and risk the stability of the American economy.
In 2010, Congress passed the Dodd-Frank Act, which mandated new regulations or guidelines on incentive-based compensation at large financial institutions. Since then, 14 years later, the Fed has refused to join other financial regulators in finalizing a rule, meaning there are still no meaningful rules to stop banks from rewarding executives’ risky behavior.
In a heated exchange, Senator Warren grilled Chair Powell for insisting in 2018 that “(big) banks will have in place compensation plans that do not provide incentives for excessive risk taking.” When Senator Warren asked how many of the ten largest banks had put meaningful executive compensation reforms in place, Chair Powell could not answer and incorrectly guessed that all ten had. Senator Warren confirmed to Chair Powell that in fact, zero of the ten largest banks had done this. Senator Warren concluded by urging Chair Powell to “do his job” and join other financial regulators in issuing rules to tackle executive compensation.
Transcript: Semiannual Monetary Policy Report to Congress
U.S. Senate Committee on Banking, Housing, and Urban Affairs
July 9, 2024
Senator Warren: Thank you, Mr. Chairman.
When the CEOs of giant banks can boost their bonuses by getting the banks to take on more risk, they run the risk that they will end up running their banks into the ground. It happened in 2008, and it happened again in 2023.
Back in 2010, though, Congress passed the Dodd-Frank Act. Section 956 told financial regulators: Solve this problem. Two months ago, regulators put forward a proposal, but the Fed refused to join.
Now, in 2018, you told this committee, Mr. Chairman, that you, quote, “expect that banks will have in place compensation plans that do not provide incentives for excessive risk taking.” In other words, you trusted the banks to write their own rules. So, let's see if they actually have.
One thing the proposal would do is require big banks to delay bonuses for a broad group of critical employees who are able to gamble with the bank's finances, like the head of a trading desk, for example,
Chair Powell, in the six-and-a-half years since you said trust the banks to regulate themselves, how many of the 10 biggest banks have put policies in place to delay annual bonuses for this broader group of critical employees whose risk taking could endanger the bank?
Chair Powell: I don't know specifically, my guess is all of them since the financial crisis.
Senator Warren: So, you're the regulator who said trust the banks to self-regulate so we can avoid another financial meltdown or another bailout, and you don't know if they did or didn't do that?
Chair Powell: Well, you make— that’s a very, very specific, narrow question you're asking.
Senator Warren: No, it is a very specific thing because it’s something a regulator should do. You think the answer is 10-out-of-10? The answer is zero out-of-ten.
Chair Powell: Yeah, I doubt that.
Senator Warren: Well, go back and look, because we've looked at their statements on this.
Another thing the proposed rule would do is require the banks to consider flat out banning bonuses and bonus pay for executives who took risks that threatened the stability of the bank. So, let me ask you this one. Chair Powell, in six-and-a-half years said trust the banks to regulate themselves, how many of the 10 biggest banks now have policies that would require them to flat out deny bonuses to executives that have engaged in inappropriate risk taking?
Chair Powell: I don't know the answer to that. By the way, I never said, trust the banks to regulate themselves.
Senator Warren: I'm sorry? Do you want me to go back and quote you again, exactly?
Chair Powell: “Trust the banks to regulate themselves?”
Senator Warren: When you say, “I expect that the banks will have in place compensation plans that do not provide incentives for excessive risk taking,” I take that as—
Chair Powell: Right, pursuant, to the pursuit, to the guidance that we issued in 2010, which is quite detailed.
Senator Warren: And you have not issued a guidance since you made these comments, since you became chair. And how many banks have actually put in place the regulations that you said, “I expect the banks will have in place?” The answer is, out-of-ten, zero.
Chair Powell: It was covered in 2010 guidance, actually.
Senator Warren: No, you said in 2018 that they would put these in place.
Chair Powell: I said, “they would have in place.”
Senator Warren: No, that is not what you said.
So look, Chair Powell, the last guidance on this subject, as you say, was in 2010 which is before you were at the Fed. The Fed has now refused to join the other financial regulators in finalizing a rule implementing section 956, as Congress directed.
So, my question has been, how many of the ten biggest banks have done this, and the answer is zero.
Dodd-Frank was passed 14 years ago. There are still no rules to stop banks from rewarding executives' risky behavior. When you were asked about these Section 956 rules — or lack of rules — in March of this year, you said, quote, that you wanted to “understand the problem we're solving before proposing a rule.”
Chair Powell, the law does not say: Jerome Powell, in his infinite wisdom, should decide if we have a problem with executive compensation. The law, passed 14 years ago, says executive pay is a problem that threatens the stability of our economy, so write the rules to rein them in.
Finally, finally, the other financial regulators have proposed such a rule, but the Fed has not joined.
Chair Powell, I understand why the ten biggest banks in the country like your approach. You let them do whatever they want, but you don't work for the giant banks. You work for the American people. I urge you to do your job.
Thank you, Mr. Chairman.
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