(Finance) – TheUS administration has asked Congress to elaborate one more stringent and severe legislation towards the top management of failing banks or go into administration by the Federal Deposit Insurance Corporation (FDIC). Specifically, when banks fail due to mismanagement and excessive risk-taking, it should be easier for regulators to recover compensation from executives, impose civil penalties, and ban executives again from working in the banking sector.
Exactly one week ago, on Friday March 10, 2023, California regulators shut down the Silicon Valley Bank and appointed the Federal Deposit Insurance Corporation (FDIC) as receiver to assume control of its parent company (SVB Financial Group). Then came the bankruptcy of the weekend Signature Bank and the intervention of the Treasury, the Fed and the FDIC to create a unique safety net of deposits and provide a new line of credit – dubbed the Bank Term Funding Program (BTFP) – available to any institution that needs it.
“This week we embarked decisive action to stabilize the banking system without putting taxpayers’ dollars at risk – the US president commented today Joe Biden – That action was necessary to protect jobs and small businesses, and no losses will be borne by taxpayers. Our banking system is more resilient and stable today thanks to the actions we have taken. On Monday morning, I told the American people and American businesses that they should be confident that their deposits will be there if and when they need them. Continue to be like this.”
“I also said that I am firmly committed to the responsibility of those responsible for this mess – he added – No one is above the law and the Reinforcement of accountability is an important deterrent to prevent mismanagement in the future. The law limits the government’s power to hold executives accountable. When banks fail due to mismanagement and excessive risk-taking, it should be easier for regulators to recover executive compensation, impose civil penalties, and ban executives again from working in the banking sector. The Congress must act to impose tougher penalties for senior leaders of banks whose mismanagement contributed to the failure of their institutions.
Regarding the possibility of tightening the rules to recover the compensation of managers, the US administration gave the following example: the Silicon Valley Bank CEO has sold shares worth more than $3 million just days before the bank went into FDIC receivership. Biden then urged Congress to expand the FDIC’s authority “for explicitly cover cases like this“.
Additionally, under applicable law, the FDIC may prevent executives from work at other banks if they engage in “willful or continuing disregard for the safety and soundness” of their bank. According to Biden, Congress should “strengthen this tool lowering the legal standard for enforcing this ban when a bank is placed into FDIC receivership.”
Finally, also under current law, the FDIC can seek financial penalties from bank executives who “recklessly” engage in a pattern of “unsafe or unhealthy” practices, whether or not that bank goes into receivership. To help the agency fully address executive misconduct, Congress “should expand the FDIC’s authority to seek fines from negligent executives of failed banks when their actions contribute to the failure of their companies”.