WASHINGTON — U.S. senators on a panel with jurisdiction over banking regulations on Wednesday approved a bipartisan bill that would allow government officials to “claw back” compensation from banking executives who fail to thwart massive failures like the historic run on Silicon Valley Bank earlier this year.
Members of the Senate Committee on Banking, Housing and Urban Affairs passed 21-2 the Recovering Executive Compensation Obtained from Unaccountable Practices, or RECOUP, Act.
The legislation, which would next be considered by the full Senate, aims to:
— Hold senior bank executives accountable.
— Require them to establish governance and accountability standards.
— Increase penalties for rule breaking.
— Empower regulators to recover executives’ bonuses or profits from the sale of securities in the two years preceding a bank’s failure.
Republican Sens. Thom Tillis of North Carolina and Bill Hagerty of Tennessee were the lone votes against the bill.
Committee Chairman Sherrod Brown, an Ohio Democrat, said executives in charge at California-based SVB and Signature Bank of New York “pushed an unsustainable business model because it increased short-term profits and their own compensation, they ignored directives and warnings from regulators, they took risky bets at the expense of their customers, and they paid themselves bonuses right up until the moment the (Federal Deposit Insurance Corporation) was forced to step in.”
“American workers and their families should not be forced to pay the price for executives’ risky bets that don’t pay off — whether they’re on Wall Street or in Silicon Valley,” Brown said during opening remarks.
Ranking member Tim Scott of South Carolina called the bill a “commonsense solution.”
“There is little disagreement that these banks’ executives were completely derelict in their duties,” Scott said.
“There was a lot of press about these executives selling their stocks and taking bonuses days before the failures. That can’t become the standard,” he said.
Costs to the FDIC for SVB’s collapse totaled $20 billion, and Signature’s clean-up totaled $2.5 billion, according to the agency.
Federal regulators swiftly decided in March to insure all deposits — even above the $250,000 limit — to prevent panic in the market. The FDIC maintains those costs will be repaid by a special assessment on banks.
Officials from the Federal Reserve, the FDIC and the Treasury Department appeared before the Banking Committee in late March and defended their quick joint decision.
Former SVB and Signature bank executives faced questions from the committee in May.
A bipartisan moment
The banks’ collapses brought together Democrats and Republicans on the committee as they witnessed a near economic crisis.
While the Democrats largely blamed regulation rollbacks in 2018 as the reason for the bank failures, and many in the GOP blamed the Biden administration for record inflation and pointed fingers at the Fed for not stepping in sooner as SVB more than tripled its assets in recent years, both sides prioritized holding hearings and began to craft legislation to prevent future bank runs.
Brown and Scott announced on June 15 their legislative agreement to target bank executives who reaped bonuses and profit as their depository institutions failed.
The agreement teed up the committee’s first markup since 2019.
During Wednesday’s markup, the committee also unanimously approved a sanctions and anti-money-laundering bill aimed at actors in the illicit fentanyl supply chain.
“I thank my staff for their hard work, their dedication, and certainly their willingness to take into consideration not Republicans or Democrats, but the American people,” Scott said.
Brown said both bills are “true collaborations.”
Whether that occurs in the GOP-led U.S. House remains unclear.
Historic bank failures
In a matter of hours on Thursday, March 9, SVB’s depositors pulled $42 billion out of the bank, causing the second-largest bank failure in U.S. history.
By March 10, bank executives anticipated outflows would reach $100 billion — an amount that the bank could not meet after the Fed’s aggressive interest rate hikes began tanking SVB’s investments in the bond market.
Federal regulators seized the California-based bank, the nation’s 16th largest, on March 10.
By March 12, U.S. financial agencies announced that state regulators had shut down Signature Bank, which operates in New York, Connecticut, California, Nevada and North Carolina.
Signature had already been under the scrutiny of regulators for its rocky role in cryptocurrency banking.
Financial regulators quickly took what was described as an extraordinary step before the markets opened on Monday, March 13, to ensure that depositors of SVB and Signature Bank of New York would be able to access their money that morning, even above the federally insured limit of $250,000.
The chaotic March weekend stoked fears, as the banks were the largest to fail since the 2008 financial crisis.