Senate Banking Committee Advances Bill to Claw Back Bank Executive Pay

A food delivery worker enters Silicon Valley Bank in Santa Clara, Calif., on March 10, 2023. (The Canadian Press/AP-Jeff Chiu)

In the most significant bipartisan response since the banking turmoil this past spring, the Senate Banking Committee advanced a bill that would claw back compensation from bank executives after their financial institutions fail.

The Recovering Executive Compensation from Unaccountable Practices (RECOUP) Act reins in the banking industry by imposing new fines for misconduct, restricting failed executives from working in the financial sector, forcing banks to enhance corporate governance, and introducing many regulatory requirements on federal regulators.

But the most consequential component of the legislation is granting the Federal Deposit Insurance Corp. (FDIC) new powers to claw back compensation for executives.

Members voted 21–2 on June 21 to pass the measure out of committee and bring it to a floor vote. Sens. Bill Hagerty (R-Tenn.) and Thom Tillis (R-N.C.) voted no.

“Bank executives who take on too much risk and crash their banks shouldn’t get to land on their feet, they shouldn’t get to keep the profits they made by making bad bets with other people’s money, and they shouldn’t get to take their bad behavior to another bank,” Senate Committee Chair Sherrod Brown (D-Ohio) said in his opening remarks.

“We have bipartisan agreement on a comprehensive bill that cracks down on irresponsible executives who poorly manage their banks and put customers and workers and the entire economy at risk.”

Sen. Sherrod Brown (D-Ohio) delivers remarks during a hearing on Russian sanctions on Capitol Hill on Sept. 20, 2022. (Kevin Dietsch/Getty Images)

Ranking Member Sen. Tim Scott (R-S.C.) called it a “commonsense solution to address executive accountability” designed to protect U.S. taxpayers and limit government overreach.

But Hagerty argued that the legislation “will have the perverse effect of making the biggest banks even bigger,” which will hurt the smaller outfits.

“Second, it lets the government regulators and bureaucrats—whose supervisory failures led to SVB’s collapse—off scot-free,” he said in a statement. “In fact, it empowers government agencies even more. A serious attempt at accountability for the recent banking crisis cannot ignore a key culprit.”

Tillis disapproved of the bill because it was “too expansive.”

The Senate had been considering a similar bipartisan bill co-sponsored by Sens. Elizabeth Warren (D-Mass.) and J.D. Vance (R-Ohio). The proposal contained similar provisions but was far more reaching as it also targeted senior officials, including directors and controlling shareholders, and confiscated three years of compensation.

Meanwhile, the House Financial Services Committee hasn’t taken up a comparable legislative pursuit.

But political observers note that a specific provision in the RECOUP Act could entice many House Republicans to boost congressional oversight of the Federal Reserve.

Capital Requirements Debate

Despite that many leaders in Washington assert that the U.S. banking system is safe, sound, and resilient, the key debate on Capitol Hill is instituting more rules and regulations on the finance sector. One concept being discussed is increasing capital standards for midsized and large companies.

Michael S. Barr, Fed vice chair for supervision, has advocated for higher capital requirements, even before the failures of SVB, Signature, and First Republic.

“Larger, more complex banks pose the greatest risk and impose greater costs on society when they fail,” he said in December 2022 speech at the American Enterprise Institute. “Higher capital requirements help to ensure that larger, more complex banks internalize this greater risk and counterbalance the greater costs to society by making these firms more resilient.”

Appearing before the House Financial Services Committee on June 21, Fed Chair Jerome Powell explained that the process of implementing higher capital mandates is long and would likely only affect larger entities.

“Any increase in the capital for the large banks will need to be justified. I don’t know that there will be much of a capital increase proposed for banks other than the very large ones, but we’ll have to see,” he said.

Powell warned that it would force the federal government to face the consequences of lower economic growth.

Federal Reserve Board Chairman Jerome Powell testifies before a House Financial Services Committee hearing on the Federal Reserve's Semi-Annual Monetary Policy Report on Capitol Hill on June 21, 2023. (Stefani Reynolds/AFP via Getty Images)

“The benefit of it is to have stronger banks that can lend and maybe survive more kinds of crisis environments, but there are costs as well there,” he stated. “I think it’s going to be, as always, a question of weighing and balancing those costs.”

GOP lawmakers argued that such a measure is unnecessary in such a well-capitalized financial system.

“This would limit banks’ ability to lend money, exacerbating the looming credit crunch and starving families and small businesses of the capital they need,” Rep. McHenry said at the June 21 hearing.

“Uncertainty from Fed supervision and regulation is the last thing the well-capitalized banking system needs now. Following numerous supervisory failures, and a new vice chair for supervision at the Fed injecting politics into policy, it is becoming clear that Congress may need to examine separating supervision and regulation out of the Fed and gaining greater oversight and control.”

During Powell’s semi-annual monetary policy report to Congress, Rep. Mike Lawler (R-N.Y.) contended that greater capital standards would affect credit, resulting in lost jobs, lower incomes, fewer opportunities, and a higher cost of living.