Thu 05/04/2023 15:20 PM
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Hearing Notice

The Senate Banking Committee today examined available regulatory tools to hold Silicon Valley Bank, Signature and First Republic Bank executives accountable for recent failures.

Committee Chair Sen. Sherrod Brown, D-Ohio, called for legislation that would strengthen the regulator’s abilities to claw back executive compensation, impose fines and prohibit executives of failed banks from working in the banking industry. He said legislation is needed to make it easier for agencies to bring actions against bank managers and to clarify the Federal Deposit Insurance Corp.’s authority to claw back executive compensation.

The Federal Reserve Board noted in last week’s report on SVB that the bank’s “incentive compensation arrangements and practices” had “encouraged excessive risk taking to maximize short-term financial metrics” and “did not adequately reflect longer-term performance, nonfinancial risks, or unaddressed audit or supervisory issues.”

At a hearing in March, FDIC Chairman Martin Gruenberg said that the FDIC did not have “explicit clawback authority” under existing law with respect to executives from the SVB, but that the agency did have limited authority to impose civil money penalties.

Brown noted that executive compensation at SVB and Signature was tied directly to their banks’ return on equity, which may have prompted them to purchase riskier securities in pursuit of higher yields. The chairman further criticized SVB executives for “dumping” stock in the days prior to the bank’s collapse.

Ranking member Sen. Tim Scott, R-S.C., agreed that Congress should consider providing banking regulators with the authority to “claw back executives’ compensation if that individual acted in malpractice.” Senators should also “consider the lack of accountability at the executive and board of director level,” Scott said. SVB and Signature Bank were “the Las Vegas betting tables of banks that rolled the dice on falling interest rates when everything pointed in exactly the opposite direction,” Scott noted, adding that SVB operated without a chief risk officer for eight months in 2022.

Scott criticized reported bonus incentives for SVB executives “with so-called claw-back provisions that would [have allowed] the lender to recoup the pay if there was wrongdoing” but did not allow “the bank to claw-back the money if excessive risk-taking led to the losses.” He called for “appropriately targeted and calibrated” good-governance reforms but cautioned against an “overly prescriptive approach” that could “further siphon and divert talent away from the banking sector to non-bank sectors of the financial services industry.”

Scott added that regulators including the Federal Reserve, the FDIC and the California Department of Financial Protection and Innovation also bore responsibility for their lack of timely supervisory actions. Other Republicans on the committee also questioned the need for new laws given regulators failed to properly use the existing regulatory tools at their disposal.

Lawmakers at the hearing also explored the details of two recently introduced bills aimed at enhancing the FDIC’s authority to claw back executive compensation and bar management from the industry.

Sens. Elizabeth Warren, D-Mass., Josh Hawley, R-Mo., Catherine Cortez Masto, D-Nev., and Mike Braun, R-Ind., in March introduced the Failed Bank Executives Clawback Act, which would “require” the FDIC to claw back part or all of bank executives’ compensation in the five-year period preceding the bank’s failure. Additionally, the bill seeks to “ensure that, should an insured depository institution affiliated with a bank holding company fail, investors in that holding company should bear the losses of the insured depository institution.”

Meanwhile Sens. Jack Reed, D-R.I., and Chuck Grassley, R-Iowa, in April introduced the Bank Management Accountability Act that would “allow” the FDIC to claw back two years of compensation for failed bank executives and directors and prohibit them from working at another financial company for two years. The bill would also reform existing laws that make it difficult for regulators to seek restitution and ban directors and officers from working in the industry.

Both bills also seek to ensure that the FDIC’s clawback authorities apply to any bank in FDIC receivership rather than only those resolved under the “FDIC’s Orderly Liquidation Authority” as current law allows.

Brown indicated that the committee may hold a markup of the bills at a later date.

Tom Quaadman of the U.S. Chamber of Commerce criticized the bill introduced by Warren and Hawley, saying that providing a five-year clawback period would deter financial professionals from working at banks and that such clawback authority could potentially extend to outside advisors such as accounting firms and law firms. He added that while the Chamber of Commerce is “sympathetic” to the bill introduced by Reed and Grassley, more details are needed.

Brown said today that the Senate Banking Committee would hold a second round of hearings with regulators later this month following their recent reports on the banking crisis. He also previously announced that the committee would hear from former SVB and Signature executives at a hearing on May 16.

The House Financial Services Subcommittee on Financial Institutions and Monetary Policy on May 10 will hold a second hearing on the regulatory response to the recent bank failures. Ranking member of the full committee Rep. Maxine Waters, D-Calif., earlier today called on committee chairman Rep. Patrick McHenry, R-N.C., to hold a hearing with former SVB, Signature and First Republic executives.

In addition to the two bills discussed above, Democrats have also introduced the Secure Viable Banking, or SVB Act in the House and the Senate. The bill seeks to repeal Title IV of the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, which exempted midsized banks like SVB with under $250 billion in assets from enhanced stress testing and liquidity requirements. No Republican has cosponsored the SVB Act.

The Federal Reserve in last week’s report on SVB blamed the “tailoring approach” the 2018 law required for impeding effective supervision of SVB.
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