Biden Seeks Tougher Penalties on Executives of Failed Banks

© Bloomberg. MONTEREY PARK, CALIFORNIA - MARCH 14: President Joe Biden delivers remarks on reducing gun violence at the Boys and Girls Club of West San Gabriel Valley on March 14, 2023 in Monterey Park, California. Monterey Park was the scene of a mass shooting where 11 people celebrating Lunar New Year in a dance studio were killed. Biden made remarks after issuing an executive order aiming to increase background checks for those who purchase guns. Biden also met with families of the shooting victims. (Photo by Mario Tama/Getty Images)

(Bloomberg) -- President Joe Biden urged Congress to approve measures enacting tougher punishments on banking executives if mismanagement contributed to their institutions failing, following the recent collapse of three regional banks.

“I’m firmly committed to accountability for those responsible for this mess. No one is above the law – and strengthening accountability is an important deterrent to prevent mismanagement in the future,” Biden said in a statement on Friday. “Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.”

The failures of Silvergate Capital (NYSE:SI) Corp., Silicon Valley Bank and Signature Bank (NASDAQ:SBNY) have raised fresh concerns about the US financial system, rattling markets in recent days, along with worries about the health of Credit Suisse Group AG in Europe.

Biden said laws on the books currently limit the administration’s ability to hold executives accountable.

“When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again,” he said.

The Biden administration has moved to shore up confidence in the nation’s banks, with the Federal Reserve offering them a new backstop. Banks have borrowed a combined $164.8 billion from two Federal Reserve backstop facilities in the most recent week.

The US Treasury and the Federal Deposit Insurance Corp. have also intervened to protect all depositors of both SVB and Signature. 

Companies often have their own policies around recovering executives’ pay, and most large public companies have adopted clawback policies which typically cover cases of misconduct or fraud, according to law firm Davis Polk. Still, executive compensation experts have criticized such policies because they are difficult to enforce.

In late 2022, the Securities and Exchange Commission approved rules requiring corporate executives to pay back bonuses based on mistakes in their businesses’ financial reporting. The long-delayed regulation was required by the 2010 Dodd-Frank Act.

Still, there’s a lag between the adoption of the rule and when those rules will go into effect because of bureaucratic steps that need to take place. Companies will likely be required to implement clawback policies by the end of 2023 or early 2024, according to Davis Polk.

Warren Proposal

Democrats have pointed to what they say has been lax oversight of the nation’s banks as the cause of the current crisis.

A proposal led by Senator Elizabeth Warren and Representative Katie Porter that would strengthen banking regulations which were weakened in a 2018 rollback of the Dodd-Frank rules under then-President Donald Trump, is gaining support among their fellow Democratic lawmakers. The bill would put banks with at least $50 billion in assets under strict oversight down from a $250 billion threshold. 

White House Press Secretary Karine Jean-Pierre on Thursday said the White House was encouraged to see the Warren-Porter bill.

“Unfortunately, Trump and Republicans put bank executives interests ahead of workers and consumers, and we need to repeal that law,” Congressman Mike Levin of California told Bloomberg News on Monday.

However, any effort to strengthen regulations on the banking sector would face sharp opposition from the Republican-controlled House.

A financial crisis would pose a serious challenge to Biden who is preparing to launch a reelection bid for 2024. Biden and Democrats are already bracing for a showdown with Republicans over raising the nation’s debt-limit, with GOP lawmakers saying they will only vote to do so if they get deep cuts to federal spending.

Biden has sought to reassure the public and addressed the turmoil in markets on Monday from the White House.

“Americans can have confidence that the banking system is safe. Your deposits will be there when you need them,” Biden said Monday about customers who had deposits at SVB and Signature. 

The White House has also taken pains to claim that the banking crisis in Europe with Credit Suisse is a distinct matter and unrelated to the turmoil facing US institutions. But there are indications in the markets that the danger in the US has not passed. 

Another regional institution, First Republic Bank (NYSE:FRC), has received a $30 billion lifeline from larger US banks. Depositers have also been moving cash away US banks.