Heads of failed banks questioned on executive pay, how they handled risk at Senate hearing

NEW YORK (AP) — Executives from two large U.S. banks that failed dramatically in March are appearing in front of the Senate Banking Committee on Tuesday (May 16, 2023) to respond to questions about why their banks went under and what regulators could have done to avoid the calamities. Along with questions about how these banks failed, senators used the hearing to also address executive pay and whether senior executives in the U.S. are being rewarded more for short-term gains — like rising stock prices — than for ensuring their companies’ long-term health.

NEW YORK (AP) — Executives from two large U.S. banks that failed dramatically in March appeared in front of the Senate Banking Committee on Tuesday (May 16, 2023) to respond to questions about why their banks went under and what regulators could have done to avoid the calamities.

Along with questions about how these banks failed, senators used the hearing to also address executive pay and whether senior executives in the U.S. are being rewarded more for short-term gains — like rising stock prices — than for ensuring their companies’ long-term health.

Executives at Silicon Valley Bank and Signature Bank and were paid millions of dollars over their tenures up until their banks failed, the bulk of the compensation coming in the form company stock. That stock is now largely worthless but the CEOs still pocketed millions from the planned sales of their shares before the banks’ collapse.

Sen. Sherrod Brown, the Democratic chair of the Senate Banking Committee, took aim at executive compensation to open the hearing.

“You were paying out bonuses until literally hours before regulators seized your assets. To people in Ohio and around the country, this feels sickeningly familiar,” Brown said. “To most Americans, a lack of Wall Street accountability tracks with their entire experience with our economy. Workers face consequences; executives ride off into the sunset.”

Silicon Valley Bank’s former CEO Greg Becker received compensation valued at roughly $9.9 million in 2022, and also sold stock in the company only a few weeks before it failed. Joseph DePaolo, CEO of Signature Bank, also sold stock in the company in the years leading up to its collapse.

DePaolo did not appear in front of the Senate on Tuesday due to health concerns; instead Signature’s co-founder and the bank’s president agreed to testify.

Becker used his testimony and answers to senators’ questions to say that Silicon Valley Bank was a victim of a confluence of factors, including a social media-driven bank run. His arguments seemed to make little headway with politicians on both sides of the aisle, who focused their questions on failures by the bank’s management to understand how rising interest rates could negatively impact their balance sheet.

“You say you took risk management seriously. I find it hard to believe that comment,” said Sen. Tim Scott, the ranking Republican on the committee.

Sen. John Kennedy, R-Louisiana, called the bank’s interest rate management “bone deep, to the marrow, stupid.”

The anger over CEO pay echoes that of roughly 15 years ago, when the 2008 financial crisis led to taxpayer-funded bailouts of major banks. The CEOs and high-level bankers still received millions in pay and bonuses, most notably at nearly failed insurance conglomerate American International Group.

“The recent bank failures prove yet again that banker compensation is at the core of causing banks to take too much risk, act irresponsibly if not recklessly, and blow themselves up,” said Dennis Kelleher, co-founder of Better Markets, which was founded after the Great Recession focused on financial industry reform.

Clawing back CEO pay has gained bipartisan attention despite the fierce divisions between the two political parties.

Four senators — two Democrats and two Republicans — have introduced legislation that would give the Federal Deposit Insurance Corporation authority to claw back any pay made to executives in the five years leading up to a bank’s failure.

The bill is sponsored by Elizabeth Warren, D-Ma., Josh Hawley, R-Mo., Catherine Cortez Masto, D-Nev. and Mike Braun, R-Ind. The White House, while not endorsing the specific bill, has called on Congress to pass laws to reform how bank CEOs are paid in the event of a failure.

Warren asked both Becker and Shay if they planned to return any of the compensation they received over the past few years to help cover some of the estimated $22.5 billion their banks’ failures cost the FDIC. Shay say he did not. Becker did not directly answer the question, and Warren responded she would “take that as a ‘no.’”

Warren called the responses “just plain wrong,” adding “if we don’t fix it, every CEO for these multibillion dollar banks will keep right on loading up on risks and blowing up banks and everybody else is going to have to pay for it.”

Executives at big companies also tend get most of their pay each year in company stock. That means CEOs and other insiders have much to gain if the company’s stock rises. And shareholders typically like it this way. The thought is that by tying a CEO’s compensation to the stock price, it better aligns their interests with shareholders.

But the executives also have a lot to gain if they can sell their stock before the share price takes a steep dive.

Since 2000, the Securities and Exchange Commission has given CEOs and other corporate insiders a way to defend themselves against charges that they bought or sold stock using information unavailable to others, an illegal practice known as insider trading.

The method, known as the 10b5-1 rule, lets insiders enter into written plans to buy and sell stock in the future. The goal was to let insiders make trades, but not when they have their hands on material information not available to the public.

Over the years, complaints have risen about insiders abusing some loopholes in the 10b5-1 rule. In December, the SEC announced amendments to close the loopholes.

In March, the Justice Department announced the first insider trading prosecution based exclusively on the use of 10b5-1 trading plans. It charged the CEO of a health care company in California with securities fraud for allegedly avoiding more than $12.5 million in losses by entering into two 10b5-1 trading plans while knowing the company’s then-largest customer might be terminating its contract.

The SEC also charged the CEO with insider trading after avoiding the 44% drop in the company’s stock price when it announced the customer had terminated the contract.

WASHINGTON (AP) — Silicon Valley Bank failed due to a combination of extremely poor bank management, weakened regulations and lax government supervision, the Federal Reserve says in a highly-anticipated review of how the central bank failed to properly supervise the bank before it collapsed early last month. The report issued Friday (April 28, 2023) takes a critical look at what the Fed missed as Silicon Valley Bank grew quickly in size in the years leading up to its collapse. The Fed finds that while poor management ultimately doomed Silicon Valley Bank, watered down regulations and social media’s ability to rapidly hasten a bank run also contributed.

WASHINGTON (AP) — The Federal Reserve blamed last month’s collapse of Silicon Valley Bank on poor management, watered-down regulations and lax oversight by its own staffers, and said the industry needs stricter policing on multiple fronts to prevent future bank failures.

The Fed was highly critical of its own role in the bank’s failure in a report released Friday (April 28, 2023). The report, compiled by Michael Barr, the Fed’s top regulator, says bank supervisors were slow to recognize blossoming problems at Silicon Valley Bank as it quickly grew in size in the years leading up to its collapse. The report also points out underlying cultural issues at the Fed, where supervisors were unwilling to be hard on bank management when they saw growing problems.

Those cultural issues stemmed from legislation passed in 2018 that sought to lighten regulation for banks with less than $250 billion in assets, the report concluded. The Fed also weakened its own rules the following year, which exempted banks below that threshold from stress tests and other regulations. Both Silicon Valley Bank and New York-based Signature Bank, which also failed last month, had assets below that level.

The changes increased the burden on regulators to justify the need for supervisory action, the report said. “In some cases, the changes also led to slower action by supervisory staff and a reluctance to escalate issues.”

Separate reports also released Friday by the Federal Deposit Insurance Corp. and the Government Accountability Office, the investigative arm of Congress, also faulted the Fed and other regulators for a lack of urgency regarding Silicon Valley’s deficiencies. About 95% of its deposits exceeded the FDIC’s insurance cap and its deposits were concentrated in the technology industry, making the bank vulnerable to a panic.

The Fed also said it plans to reexamine how it regulates larger regional banks such as Silicon Valley Bank, which had more than $200 billion in assets when it failed, although less than the $250 billion threshold for greater regulation.

“While higher supervisory and regulatory requirements may not have prevented the firm’s failure, they would likely have bolstered the resilience of Silicon Valley Bank,” the report said.

Banking policy analysts said the trio of critical reports make it more likely regulation will be tightened, though the Fed acknowledged it could take years for proposals to be implemented.

The reports “provide a clear path for a tougher and more costly regulatory regime for banks with at least $100 billion of assets,” said Jaret Seiberg, an analyst at TD Cowen. “We would expect the Fed to advance proposals in the coming months.”

Alexa Philo, a former bank examiner for the Federal Reserve Bank of New York and senior policy analyst at Americans for Financial Reform, said the Fed could adopt stricter rules on its own, without relying on Congress.

“It is long past time to roll back the dangerous deregulation under the last administration to the greatest extent possible, and pay close attention to the largest banks so this crisis does not worsen,” she said.

The Fed also criticized Silicon Valley Bank for tying executive compensation too closely to short-term profits and the company’s stock price. From 2018 to 2021, profit at SVB Financial, Silicon Valley Bank’s parent, doubled and the stock nearly tripled.

The report also points out that there were no pay incentives tied to risk management. Silicon Valley Bank notably had no chief risk officer at the firm for roughly a year, during a time when the bank was growing quickly.

The Fed’s report, which includes the release of internal reports and Fed communications, is a rare look into how the central bank supervises individual banks as one of the nation’s bank regulators. Typically such processes are confidential, and rarely seen by the public, but the Fed chose to release these reports to show how the bank was managed up to its failure.

Bartlett Collins Naylor, financial policy advocate at Congress Watch, a division of Public Citizen, was surprised at the degree to which the Fed blamed itself for the bank failure.

“I don’t know that I expected the Fed to say ‘mea culpa’ — but I find that adds a lot of credibility,” to Federal Reserve leadership, Naylor said.

Silicon Valley Bank was the go-to bank for venture capital firms and technology start-ups for years, but failed spectacularly in March, setting off a crisis of confidence for the banking industry. Federal regulators seized Silicon Valley Bank on March 10 after customers withdrew tens of billions of dollars in deposits in a matter of hours.

Two days later, they seized Signature Bank. Although regulators guaranteed all the banks’ deposits, customers at other midsize regional banks rushed to pull out their money — often with a few taps on a mobile device — and move it to the perceived safety of big money center banks such as JPMorgan Chase.

The report also looks at the role social media and technology played in the bank’s last days. While the bank’s management was poor and ultimately that was the reason the bank failed, the report also notes that social media caused a bank run that happened in just hours, compared to days for earlier bank runs like those seen in 2008.

Although the withdrawals have abated at many banks, First Republic Bank in San Francisco appears to be in peril, even after receiving a $30 billion infusion of deposits from 11 major banks in March. The bank’s shares have plunged 70% this week after it revealed the extent to which customers pulled their deposits in the days after Silicon Valley Bank failed.