Biden calls on Congress to tighten laws to claw back executive pay, levy penalties in bank failures

Biden calls on Congress to tighten laws to claw back executive pay, levy penalties in bank failures

President Joe Biden called on Congress to give regulators more powers to claw back salaries and punish executives of troubled banks “whose mismanagement has contributed to the failure of their institutions.”

“No one is above the law — and strengthening accountability is an important deterrent to prevent future mismanagement,” Biden said in a statement Friday, days after federal bank regulators stepped in to guarantee deposits at two banks that closed over the weekend were broke. “When banks fail due to mismanagement and excessive risk-taking, it should be easier for regulators to recover executive compensation, impose civil penalties and again ban executives from working in the banking industry.”

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Biden noted that his powers to hold executives accountable were limited by the law and called on Congress to step in.

“Congress must act to impose tougher penalties on senior bank executives whose mismanagement has contributed to the failure of their institutions,” Biden said.

The President is asking Congress to expand the Federal Deposit Insurance Corporation’s ability to recover compensation, including from the sale of stock, from executives of failed banks. The White House said SVB’s CEO sold more than $3 million worth of stock just days before it was acquired by the FDIC. Under the current Dodd-Frank legislation, the FDIC only has the ability to recoup those funds from the nation’s largest financial institutions, not from large and mid-sized banks like the ones that went bust over the weekend.

Biden also asked Congress to expand the powers of the FDIC to bar executives whose banks are in receivership from working in the banking sector and to fine executives of failed banks. All three White House proposals aim to punish bank managers for the risky behavior that led to bank failures.

The nation’s top banking regulators announced Sunday that the FDIC and Federal Reserve would fully cover deposits at both failed banks, Silicon Valley Bank and Signature Bank, including those exceeding the $250,000 limit raised by covered by traditional FDIC insurance. The agencies noted that Wall Street and big financial institutions — not taxpayers — have to foot the bill through a special fee levied on federally insured lenders.

A majority of SVB’s clients were small technology companies, venture capital firms and entrepreneurs who used the bank for day-to-day cash management to run their businesses. These customers had $175 billion in deposits with tens of millions in individual accounts. That left the SVB with one of the highest proportions of uninsured deposits in the country when it collapsed, with 94% of its deposits ending up above the FDIC’s $250,000 insurance limit, according to 2022 S&P Global Market Intelligence data.

The SVB’s failure was the nation’s largest financial institution meltdown since Washington Mutual’s bankruptcy in 2008. Signature Bank in New York, which closed on Sunday amid similar fears that its failure could drag other institutions down, was a popular one Funding source for cryptocurrency companies.

The Federal Reserve also relaxed its borrowing standards for banks seeking short-term funding through its so-called discount window. A separate unlimited facility was also set up to offer one-year loans on looser terms than usual to protect troubled banks from a surge in cash withdrawals. Both programs are paid for by industry fees, not taxpayers.

The President stressed that the measures taken over the weekend were necessary to prevent further economic consequences, but did not use taxpayers’ money.

“Our banking system is more resilient and stable today because of the actions we have taken,” Biden said. “On Monday morning, I told the American people and American companies to have confidence that their deposits will be there when they need them. That is still the case.”

Treasury Secretary Janet Yellen on Thursday answered questions from members of the Senate Banking Committee on the actions taken so far to contain the damage. She explained that not all depositors are protected beyond the FDIC insurance limits of $250,000 per account, as was the case for customers of the two failed banks.

Congressmen are currently considering a series of legislative proposals that should prevent the next failure of the Silicon Valley bank.

One is an increase in the FDIC’s $250,000 insurance limit, which several top Democratic lawmakers have been calling for following the collapse of the SVB. After the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000 and approved a plan under which large banks would contribute more to the insurance fund than smaller lenders.

Like the White House, Congress has limited powers to punish individual executives of failed banks, since courts are where the law imposes penalties on those found guilty of wrongdoing.

In response to the SVB bankruptcy, a bill has already been introduced in the Senate aimed at reclaiming two forms of compensation from top managers of failed banks: bonuses and profits from share sales.

On Tuesday, Sen. Richard Blumenthal, D-Conn. introduced a bill, p. 800, that would amend the IRS rules to levy a higher tax rate on bonuses and gains from the sale of executive stock options at banks adopted by the FDIC.

As of Friday morning, the bill had picked up an influential co-sponsor: Sen. Kyrsten Sinema, I-Ariz. As a swing vote within the Democratic faction, Sinema’s support is seen as important to getting legislation passed in the Senate when Republicans oppose it.

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2023-03-17 20:32:17