In an effort to improve accountability at big banks and ensure managers of failed banks don’t profit from their mismanagement and negligence, U.S. Senators Jack Reed (D-RI) and Chuck Grassley (R-IA) introduced the Bank Management Accountability Act (S. 1181). This bipartisan bill would make it easier for banking regulators to claw back compensation from negligent bank directors and senior executives at failed systemically important banks and to ban those directors and executives from future participation in the financial industry.
The legislation is needed in the wake of the failures of Silicon Valley Bank in California and Signature Bank in New York, two systemically important banks each with assets exceeding $100 billion. Executives at these banks received exorbitant compensation as the banks took on excessive risks. The CEO of Silicon Valley Bank received $10 million in compensation in 2022 and sold $3.5 million of company stock in the days before the failure. The CEO of Signature Bank received $8.7 million in compensation in 2022 and sold millions of dollars’ worth of company stock in the weeks and months before the failure.
The government declared the failures of Silicon Valley Bank and Signature Bank a “systemic risk” to the economy and stepped in with extraordinary backstops and emergency assistance, including protecting uninsured depositors. While these actions prevented contagion from spreading throughout the financial system, these two failures are expected to cost the Federal Deposit Insurance Corporation’s (FDIC’s) deposit insurance fund over $20 billion and have required the Federal Reserve to extend over $143 billion in credit to their successor banks.
“Regulators need stronger tools to prevent bank directors and senior executives who mismanage these institutions into the ground from enriching themselves when their risky bets destabilize the financial sector and saddle the American people with the costs,” said Senator Reed, a senior member of the Banking Committee. “This bipartisan bill aims to update the FDIC’s outdated compensation clawback authority and weak financial industry ban authority. This bill will make bank directors and senior executives think twice before engaging in risky activities by allowing the FDIC to claw back the prior two years of their compensation if their bank fails and prohibit them at working at another financial company for at least two years. It would ensure those most responsible for the mess at Silicon Valley Bank, Signature Bank, and other failed big banks are the ones who help pay to clean it up and that they can’t return to another bank and put depositors’ money at risk.”
“Bank executives shouldn’t be able to skate unscathed from a bank failure of their own doing, and they certainly shouldn’t be able to profit from their poor management when taxpayers and depositors are left shouldering the burden of losses. This bill provides additional accountability for bank managers whose poor decisions lead to the failures of systemically important banks that need to be bailed out,” Grassley said.
Under existing law, high standards of liability significantly interfere with regulators’ ability to seek restitution from directors and officers of failed banks and bar them from the industry.
After the 2008 financial crisis, Congress established clawback authority when the largest banks are unwound using a special process. But regulators have never used this process—even for the failures of Silicon Valley Bank and Signature Bank. That’s why directors and senior executives at large banks are rarely subject to compensation clawbacks and financial industry bans, even if they are negligent in running their bank and the government ultimately needs to step in with extraordinary backstops and emergency assistance.
The Reed-Grassley bill would expand existing rules for clawing back compensation from this special “orderly liquidation authority” to banks such as Silicon Valley Bank and Signature Bank. It would also specify that recouped funds may not be paid out of director’s and officer’s liability insurance coverage to make sure that they have true personal liability and skin in the game. Finally, it would lower the standard for barring directors and senior executives at failed systemically important banks from the financial industry.
The Bank Management Accountability Act would enhance the banking regulators’ ability to recover funds for the benefit of taxpayers, to protect depositors from directors and senior executives who have already driven a bank into failure, and to provide powerful disincentives against excessive risk taking.
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