President Joe Biden called on Congress to give regulators more authority to repay and punish executives at distressed banks “whose mismanagement caused the institution to fail.”
“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 failed banks over the weekend. “When banks fail due to mismanagement and taking excessive risks, it should be easier for the regulator to claw back compensation from executives, to impose civil penalties, and prohibit executives from working in the banking industry again.”
Biden noted his executive powers are limited by law and urged Congress to step in.
“Congress must act to impose tougher penalties on senior bank executives whose mismanagement causes these institutions to fail,” Biden said.
The President asked Congress to expand the Federal Deposit Insurance Corporation’s ability to compensate, including from the sale of stock, executives at failed banks. The White House said SVB’s CEO reportedly sold more than $3 million in shares just days before the FDIC took over. Under the current Dodd-Frank rules, 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 failed over the weekend.
Biden also asked Congress to expand the FDIC’s authority to block executives whose banks are employed in the banking sector and to fine executives of failed banks. All three White House proposals seek to punish banking executives for the risky behavior that led to bank failures.
The nation’s top bank regulator announced Sunday that the FDIC and Federal Reserve will fully cover deposits, including those exceeding the $250,000 limit covered by traditional FDIC insurance, at two failed banks: Silicon Valley Bank and Signature Bank. The agency noted that Wall Street and large financial institutions — not taxpayers — footed the bill with special fees assessed to federally insured lenders.
The majority of SVB’s customers are small technology companies, venture capital firms and entrepreneurs who use the bank for day-to-day cash management to run their business. Those customers have $175 billion in deposits with tens of millions in individual accounts. That made SVB one of the top uninsured deposits in the country at the time of the collapse, with 94% of those 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 collapse of a financial institution since Washington Mutual in 2008. New York’s Signature Bank, which closed on Sunday amid fears its failure could attract other institutions, had been a popular source of funding. cryptocurrency company.
The Federal Reserve also loosened lending guidelines for banks seeking short-term funding through the so-called discount window. It also set up a separate unlimited facility to offer one-year loans on looser terms than usual to ease troubled banks facing a surge in cash withdrawals. Both programs are paid for through industry fees, not by taxpayers.
The president insisted the actions taken over the weekend were necessary to prevent further economic collapse but did not use taxpayer funds.
“Our banking system is more resilient and stable today because of the actions we took,” Biden said. “On Monday morning, I told the American people and American businesses that they need to be confident that the deposits will be there if and when they need them.
Treasury Secretary Janet Yellen took questions from members of the Senate Banking Committee on Thursday about the moves made so far to contain the damage. He said not all depositors would be protected through the FDIC’s $250,000 per account insurance limit as it was for customers of the two failed banks.
Members of Congress are currently considering several legislative proposals intended to prevent the next Silicon Valley Bank-type failure.
One is increasing the FDIC insurance limit to $250,000, which some senior Democratic lawmakers called for after SVB’s collapse. After the 2008 financial crisis, Congress raised the FDIC limit from $100,000 to $250,000, and approved a plan where large 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 failed banks, because the courts are where the law imposes punishment on those who do wrong.
A Bill has been introduced in the Senate, in response to the collapse of SVB, which seeks to claw back two forms of losses from top executives in failed banks: Bonuses and profits from the sale of Deposits.
On Tuesday, Sen. Richard Blumenthal, D-Conn. introduced the Bill, S. 800, which will amend the rules of the IRS to impose a higher tax rate on bonuses and profits from selling stock options to executives in banks that have been taken from the FDIC.
As of Friday morning, the bill picked up one influential sponsor: Sen. Kyrsten Sinema, I-Ariz. As a swing vote in the Democratic caucus, Sinema’s support appears crucial to getting the bill through the Senate if Republicans oppose it.