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 power to claw back salaries and penalize troubled bank executives “whose mismanagement contributed to the failure of their institutions.”

“No one is above the law – and stronger accountability is an important deterrent to preventing mismanagement in the future,” Biden said in a statement Friday, days after banking regulators Feds stepped in to guarantee deposits at two banks that went bankrupt over the weekend. “When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back executive pay, impose civil penalties and rebar executives. to work in the banking sector.

Biden noted that his powers to hold leaders accountable were compelled by law and asked Congress to intervene.

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

The President asks Congress to expand the ability of the Federal Deposit Insurance Corporation to collect compensation, including from the sale of stock, from the executives of failed banks. The White House says the SVB CEO allegedly sold more than $3 million worth of stock just days before the FDIC took him down. Under current Dodd-Frank legislation, the FDIC only has the ability to recover these funds from the nation’s largest financial institutions, not large and medium-sized banks like the ones that went bankrupt over the weekend. end.

Biden also called on Congress to expand the FDIC’s authority to bar executives whose banks are in receivership from working in the banking industry and fine executives of failing banks. The three White House proposals seek to penalize bank executives for the risky behaviors that led to bank failures.

The country’s top banking regulators announced on Sunday that the FDIC and the Federal Reserve fully cover deposits, including those above the $250,000 limit covered by traditional FDIC insurance, at the two failed banks: Silicon Valley Bank and Signature Bank. The agencies noted that Wall Street and major financial institutions — not taxpayers — pay the bill through a special fees rated against federally insured lenders.

The majority of SVB’s clients were small technology companies, venture capitalists and entrepreneurs who used the bank for day-to-day cash management to run their businesses. These clients had $175 billion on deposit with tens of millions in individual accounts. That left SVB with one of the highest shares of uninsured deposits in the country when it collapsed, with 94% of its deposits exceeding the FDIC’s $250,000 insurance limit, according to S&P Global Market Intelligence Data from 2022.

SVB’s failure was the biggest financial institution meltdown in the country since the bankruptcy of Washington Mutual in 2008. Signature Bank in New York, which closed on Sunday over similar fears that its failure could drag other institutions down with it, had been a popular source of funding for cryptocurrency companies.

The Federal Reserve has also relaxed its borrowing guidelines for banks seeking short-term funding through its so-called discount window. It has also set up a separate unlimited facility to offer one-year loans on more flexible terms than usual to support struggling banks in the face of increased cash withdrawals. Both programs are funded by industry royalties, not taxpayers.

The president stressed that the measures taken over the weekend were necessary to avoid further economic fallout, but did not use taxpayers’ money.

“Our banking system is more resilient and stable today because of the actions we’ve taken,” Biden said. “Monday morning, I told the American people and American businesses that they should be sure that their deposits will be there if they need them and when they need them. That continues to be the case.”

Treasury Secretary Janet Yellen responded to questions from members of the Senate Banking Committee on Thursday about steps taken to date to contain the damage. She said not all depositors will be protected beyond the FDIC insurance limits of $250,000 per account as they did for customers of the two failed banks.

Members of Congress are currently weighing a number of legislative proposals intended to prevent the next Silicon Valley Bank-like failure.

One of them is an increase in the FDIC insurance limit of $250,000, which many seniors Democratic lawmakers asked following the collapse of SVB. Following the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000 and approved a plan under which larger banks contribute more to the insurance fund than smaller lenders.

Like the White House, Congress has limited power in what it can do to punish individual executives of failing banks, because the courts are where the law imposes penalties on those found guilty of wrongdoing.

A bill has already been introduced in the Senate, in response to the collapse of the SVB, which seeks to claw back two forms of compensation for senior executives of failed banks: bonuses and profits from stock sales.

On Tuesday, Sen. Richard Blumenthal, D-Conn. introduced a bill, S. 800, that would change IRS rules to impose a higher tax rate on bonuses and profits from the sale of stock options for executives banks that have been taken over by the FDIC.

By Friday morning, the bill had picked up an influential co-sponsor: Sen. Kyrsten Sinema, I-Ariz. As a swing vote within the Democratic caucus, Sinema’s support is seen as important to getting any bill through the Senate if Republicans oppose it.