President Joe Biden’s call for legislation that would allow regulators to claw back executive bonuses and stock sale proceeds in the lead up to the Silicon Valley Bank collapse has found a receptive audience on Capitol Hill.
Democrats and Republicans are unlikely to come together to tighten bank regulations following the collapse of SVB of Santa Clara, Calif., and Signature Bank of New York City, but members of both parties say they’re open to legislation that would punish executives for their role in the bank failures.
Democrats are toying with ideas that would retroactively apply to SVB and Signature executives, and Republicans say any legislation would have to be narrowly tailored, even to the point of applying only to the two failed banks.
“As far as clawbacks, there are provisions under law that apply to other sectors of the world of finance that perhaps should be applied here. We’re going to take a look at that,” House Financial Services Chairman Patrick T. McHenry, R-N.C., said at House Republicans’ policy retreat in Orlando, Fla., last week.
SVB CEO Greg Becker is reported to have sold $3.6 million in company stock before the failure, and bank employees received bonuses hours before the FDIC took over the bank.
Bartlett Naylor, financial policy advocate for Public Citizen, said passage of clawback legislation is far from a sure thing, but may have a chance if bank lobbyists make the calculation that it’s the least objectionable policy response to the failures.
“The banking side may well want to say, ‘Okay, we’ll do this. We’re not going to do increased capital. We’re not going to increase deposit insurance fees,’” he said. “‘But okay, clawbacks, we’re not going to defend that, so, see, we’re reasonable. We, the banking industry, we’re open minded.’”
The idea was last in vogue after the 2008 financial crisis when some advocates saw confiscating executive pay as a way to quell populist backlash against the taxpayer-funded bailout of financial institutions. The House in 2009 passed bipartisan legislation to seize executive pay following the bailouts, but it stumbled in the Senate.
The pay-related provisions that ended up in the Dodd-Frank Act, the 2010 financial overhaul law, largely limited executive compensation if it incentivized risky behavior. The law improved pay transparency but didn’t provide for blanket clawbacks of bonuses or other pay following a bank failure.
The White House this month called on Congress to pass legislation that would allow the Federal Deposit Insurance Corporation to confiscate bonuses and stock sale profits for bank executives in the lead up to the two failures.
The 2010 law gave the FDIC authority to recover executive compensation when the regulator must take over and liquidate a big, complex financial institution that’s failing, but the authority doesn’t extend to banks the size of Signature and SVB. The White House asked Congress to ensure that it does.
Publicly available information about the two banks leaves it unclear whether regulators have other mechanisms to recover executive bonuses and stock sale proceeds, but the consensus among lawmakers is that the most certain, straightforward path is through new legislation explicitly granting regulators clawback authority in bank failures.
Democrats say they’re preparing legislation that would confiscate executive compensation when a bank fails through several mechanisms, including an extension of the FDIC’s current clawback authority for major financial institutions, a retroactive tax on executive pay, and possibly a broader suite of policies targeting executive compensation incentives.
Sen. Chris Van Hollen, D-Md., a member of the Senate Banking Committee, raised the issue with Treasury Secretary Janet L. Yellen at a Senate Financial Services Appropriations Subcommittee hearing last week. Van Hollen, who chairs the subcommittee, said he’s working on legislation that would extend the FDIC’s clawback authority to banks, including SVB, a move that would match the White House request.
“Hopefully we can get it passed on a bipartisan basis and support accountability in the system,” Van Hollen said. “I think American consumers are looking at the situation here where those who are clearly responsible for the failures in their banks are running away with major profits. That doesn’t seem right at a time when, as you said, we’re asking other banks to help support those depositors.”
Yellen agreed to work with Van Hollen on the legislation.
Sen. Elizabeth Warren, D-Mass., another Senate Banking member, said she’s also working on a clawback bill, but described what seemed to be a broader approach to incentives created by executive pay.
“It’s about making certain that we align the incentives of the executives, who take on the risk and crash these banks, with their own personal livelihood, understanding they can’t take these big bonuses, and, if they crash the banks, they just walk away rich,” she said in an interview. “The details on which banks it applies to and what kinds of bank failures trigger it are still in negotiation.”
At least one bill that would tackle the clawback issue has already been introduced by Sen. Richard Blumenthal, D-Conn., in the Senate and Rep. Adam B. Schiff, D-Calif., in the House. Their bills would recover executive bonuses and stock sale profits through a tax paid into the FDIC’s deposit insurance fund.
Their bills are modeled on one the House passed, 328-93, in 2009 that would heavily tax executive bonuses and stock profits paid at companies rescued by the government during the financial crisis. Eighty-five Republicans, nearly half the House conference, backed the measure, but the effort lost steam in the Senate.
The Blumenthal-Schiff legislation would impose a 90 percent tax on executive bonuses paid in the 60 days before a bank fails. Executives would also have to surrender all profits from bank stock sales made during that time.
“Our proposal is a tax proposal, which enables us to operate retroactively,” Blumenthal said in an interview. “There’s some question about whether you could claw back retroactively without a tax.”
House Financial Services ranking member Maxine Waters, D-Calif., has also said she’s working on clawback legislation.
‘Any and all kinds of consequences’
Republicans say they’re open to legislation that would seize pay as a mechanism to hold SVB bosses accountable. Many in the party have expressed concern that banks in their states would get stuck footing the bill for SVB and Signature Bank deposits through the fee levied on banks to replenish the FDIC’s deposit insurance fund.
“The management needs to be held accountable for that failing bank. I don’t want to see Montana banks having to pay for a failed bank,” Sen. Steve Daines, R-Mont., a member of the Senate Banking Committee, said in an interview. “I’m willing to look at any and all kinds of consequences for the failures of management.”
None of the Republicans interviewed rejected clawbacks outright, though several stressed that the efforts should be narrowly tailored.
“When you’re in a troubled bank where more often than not C-suite decisions are made to destroy the investors, sure, I’d be willing to talk about it,” said Sen. Thom Tillis, R-N.C., another Banking panel member. “But I also think it weaves into a broader priority that I don’t agree with, which is just having that as a regular tool for even banks that are not in trouble, so we’ve got to get it right.”
Sen. Kevin Cramer, R-N.D., also a member of the committee, said he would support clawing back bonuses and stock sale proceeds in the case of SVB’s executives, but is wary of a broader, permanent policy granting that authority to the FDIC.
“In the case of SVB, particularly the bonuses at the last minute, that just looked purely, purely sleazy,” Cramer said. “I don’t know whether it’s criminal or not, but I’d probably be supportive of something that would require that back. To more generally apply it, I’m not real sure, to be honest.”
‘Million dollar question’
Absent legislation, lawmakers aren’t sure whether there are other ways to recover executive compensation.
“I’ve been trying to get a clear answer,” Van Hollen said in an interview.”There are some people who think it already exists, but it doesn’t exist through Dodd-Frank.”
Blumenthal wouldn’t rule out existing authority but said new legislation would be the best way to guarantee executives return bonuses and stock profits.
“If they do, it is a much more time-consuming, costly and elaborate process than it should be, and fraught with uncertainty,” Blumenthal said. “I don’t want to rule out the idea that there may be some legal theory out there for them to be able to claw back bonuses or stock transactions under some exceptional circumstances, but my understanding is that this kind of statute is necessary to get them clear and unequivocal authority.”
Todd Phillips, a fellow at the Roosevelt Institute, a New York-based liberal think tank, agreed new legislation is the best option, but that regulators may have options to take action under existing law.
The FDIC can stop banks from paying bonuses and raises to executives if the agency finds the institution to be severely undercapitalized or otherwise unsound. That authority could allow for executive pay to be clawed back, but it’s unclear whether the FDIC could use it after a bank has already failed, Phillips said on Twitter, adding that it would only apply to Signature as the FDIC was its primary regulator.
Another path could be a Securities and Exchange Commission rule that requires public companies to have policies to recover incentive compensation paid to executives based on inaccurate disclosures. The FDIC, when it takes over a bank, essentially becomes company management and can enforce existing corporate policies, Phillips said in an interview.
“So if these banks had those policies in place, the FDIC could use them. I don’t know whether they did or not, but that is one avenue,” he said.
The strategy has its limits. The policies need to have been in place before the banks failed and the FDIC took over. It would also only apply to compensation paid to executives as a reward for performance, and only be triggered by a correction of a bank’s prior financial reports.
The FDIC could correct previous financial reports if it finds mistakes, but it’s not clear whether SVB’s Becker sold stock that was awarded as part of an incentive compensation package, Phillips said.
“What is currently permitted? That is the million dollar question,” he said. “There’s just so much that is unclear here because you need to have access to the bank’s private documents, and we in the public just don’t have that.”
Lindsey McPherson contributed to this report.
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