Senate Banking Committee Considers Legislative Fixes to Hold Bank Execs Accountable

The Senate Banking Committee considered testimony on legislative options for holding bank executives and regulators accountable following the failures of Silicon Valley Bank and Signature Bank.

In remarks at a Senate Banking, Housing, and Urban Affairs Committee hearing, Committee Chair Sherrod Brown (D-OH) stated that bank executives "cannot operate a bank in a manner where risk management is optional." He called for legislation that (i) expands banking regulators’ authority to ban or bring action against executives, (ii) expands the FDIC’s authority to clawback compensation, (iii) increases penalties against bad actors and (iv) requires banking regulators to finalize the Dodd-Frank Section 956 rule on incentive-based compensation. Senate Banking Committee Ranking Member Tim Scott (R-SC) said that while Congress should examine the "lack of accountability" in bank management, he also underscored the importance of holding regulators accountable.

Witnesses included:

• Ms. Heidi Mandanis Schooner, Professor of Law, Columbus School of Law, The Catholic University of America. Ms. Schooner urged legislation to increase accountability for managers of failed banks and incorporate measures that would strengthen existing administrative enforcement powers in order to (i) prevent "needless bank failures" caused by bank mismanagement and (ii) level the competitive field between large and small banks. In addition, Schooner recommended strengthening cease and desist authority by "allowing for remedies based on negligent, grossly negligent behavior and failure of oversight," including clawbacks of executive compensation.
• Mr. Thomas Quaadman, Executive Vice President, Center for Capital Markets Competitiveness, U.S. Chamber of Commerce. Mr. Quaadam argued that executive compensation packages should not "create perverse incentives" but that legislative reform to bank managements’ compensation should not be so prescriptive that it causes professionals to "flee covered businesses" in favor of other financial firms or jurisdictions. He warned that such reform may undermine regulators' intended goals by dissuading prospective executives that are the "most capable" of preventing bank failures from entering the industry.
• Ms. Da Lin, Associate Professor of Law, University of Richmond School of Law. Ms. Lin stated that Federal Deposit Insurance Act Section 1818(e) ("Removal and Prohibition Authority") is not "well designed" for regulators’ use because of the "overly demanding" culpability requirement to show proof of a banking executive’s "personal dishonesty" or "willful or continuing disregard" for the safety or soundness of an institution. She recommended that Congress clarify that Section 1818(e) is an "enforcement tool" available to banking regulators that can be modified, with written consent.