Senators Introduces Bill to Claw Back Compensation | May 2023

May 2023 | Volume 14, Issue 10

Read the full article from CBS News.

According to the article, a bipartisan group of senators has introduced a bill to give regulators the authority to claw back executive compensation after some bank officials made millions and received bonuses in the days and months before the collapse of Silicon Valley Bank and Signature Bank. 

Democratic Senators Elizabeth Warren of Massachusetts and Catherine Cortez-Masto of Nevada teamed up with Republican Senators Josh Hawley of Missouri and Mike Braun of Indiana to propose the Failed Bank Executive Clawback Act. The bill would require federal regulators to claw back all or part of the compensation received by bank executives in the five years leading up to a bank's failure.

The bill may be one of the few pieces of proposed legislation to garner bipartisan support following the second-largest bank collapse in U.S. history.

Federal Reserve Vice Chair for Supervision Michael Barr told lawmakers at a Senate Banking Committee hearing on Tuesday that regulators began to issue warnings to Silicon Valley Bank as early as 2021, but the bank failed to address them promptly. Barr called the failure a "textbook case of mismanagement."

Records show Greg Becker, the CEO of SVB Financial Group, received nearly $10 million in compensation last year, including a $1.5 million cash bonus. Regulatory filings show Becker sold $3.6 million in SVB shares at the end of last month alone. Five other executives received nearly $17 million in compensation in 2022. 

"Americans are sick and tired of fat cat bankers paying themselves handsomely while risking other people's hard-earned money," Warren said. "It'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."

The legislation would amend the Federal Deposit Insurance Act to clarify that the FDIC and other regulators must claw back compensation that could include executive salaries, bonuses, profits realized from buying or selling securities and other awards.

The measure says enough compensation should be clawed back to make sure the executives are not unjustly enriched and that they bear losses "consistent with the responsibility of the party."

"Bank executives who make risky investments with customers' money shouldn't be permitted to profit in the good times, and then avoid financial consequences when things go south," said Hawley. "This legislation puts the executives' own profits on the line, and that's exactly as it should be."

The bill also extends clawback authorities in the Dodd-Frank Act to apply to any bank entering an FDIC receivership, as Silicon Valley Bank and Signature Bank did earlier this month. The senators said the legislation would also ensure that, should an insured depository institution affiliated with a bank holding company fail, investors in the holding company should bear the losses of the insured depository institution.

The bill follows a recent call from President Biden for lawmakers to give regulators the authority to claw back executive compensation. 

"When banks fail due to mismanagement and excessive risk-taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again," Mr. Biden said in a statement on March 17. "Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing."

The Federal Deposit Insurance Corporation (FDIC) is investigating the conduct of bank officials. The Federal Reserve is also reviewing what went wrong including oversight failures. Its findings will be released on May 1. 

In the recent hearing before the Senate Banking Committee, FDIC Chair Martin Gruenberg told senators that the FDIC, depending on its findings, has substantial authority under current law to impose financial penalties, restitution, and ban individuals from the banking industry. He also signaled a need for legislation to claw back compensation. 

"We do not have under the Federal Deposit Insurance Act explicit authority for clawback of compensation," he said in response to a question by Cortez-Masto. "We can get to some of that with our other authorities. We have that specific authority under Title II of the Dodd-Frank Act. If you were looking for an additional authority, specific authority under the FDI Act for clawbacks, it would probably have some value there."

Cortez-Masto said the legislation would make sure lawmakers hold individuals accountable.

Following the collapse of Silicon Valley Bank and Signature Bank, federal officials took action to make sure all depositors at the banks would be protected, including those with deposits beyond the $250,000 limit. The Deposit Insurance Fund (DIF) would make those depositors whole. The FDIC estimates it could cost the DIF $20 billion to cover the collapse of Silicon Valley Bank and about $2.5 billion for Signature Banks which would have to be replenished through special assessments on banks.

Discussion Questions

1. Explain what is meant by a “clawback” of executive compensation.
   A clawback of executive compensation involves recovering pay received by an executive whose company has failed either directly or indirectly due to the executive’s mis-, mal-, or nonfeasance of duties. In terms of the subject article, the legislation (the Failed Bank Executive Clawback Act) proposed by Senators Warren, Cortez-Masto, Hawley, and Braun would require federal regulators to claw back all or part of the compensation received by bank executives in the five years leading up to a bank's failure.
2. As the article indicates, the “clawback” bill that is the subject of this article has bipartisan sponsorship and support. Considering all the political divisiveness in the U.S. (federal) government, are you surprised that this bill has bipartisan sponsorship and support? Explain your response.
   This is an opinion question, so student responses may vary. In your author’s opinion, the bipartisan support is somewhat surprising given the intransigence of the U.S. Congress in recent years. The development is encouraging, however, in the sense that it indicates the potential for “common ground” regardless of political affiliation. In your author’s opinion, this legislation is easy to support from a political perspective since the public, regardless of political affiliation, generally favors executive accountability.
3. As mentioned in the article, the subject bill would require federal regulators to claw back all or part of the compensation received by bank executives in the five years leading up to a bank's failure. In your reasoned opinion, is this regulation “fair” to bank executives? Why or why not?
   This is an opinion question, so student responses may vary. In your author’s opinion, the subject regulation is fair to bank executives, since executive compensation should be predominantly based on organizational performance, and nothing indicates a lack of organizational performance more than organizational collapse.