FEDERAL GOVERNMENT RELATIONS
Senate Bill Would Toughen Compensation Clawback Rules for Failed Banks
Senate Banking Committee leaders last week introduced a bipartisan bill that would strengthen actions regulators could take to claw back compensation from executives at banks with more than $10 billion in assets whose mismanagement – ranging from “grossly negligent, reckless or willful conduct” to not implementing proper controls – contributed to the institution’s failure. The bill by Chairman Sherrod Brown, D-Ohio, and Ranking Member Tim Scott, R-S.C., is separate from a much broader compensation clawback bill recently introduced by committee member Sen. Elizabeth Warren, D-Mass., which also has bipartisan cosponsors. Among other provisions, the Brown-Scott bill would require banks to adopt corporate governance and accountability standards that promote responsible management.
The Recovering Executive Compensation Obtained from Unaccountable Practices, or RECOUP, Act would give the Federal Deposit Insurance Corp. the authority to claw back certain compensation from senior executives at failed banks, including profits made by selling the bank’s stock, received two years before the failure. The legislation would also define “senior executive” to include a bank’s senior leadership and inside directors. It would not apply to employees who have been at the bank for less than a year or whose conduct did not contribute to the failure.
Read a summary of the legislation
Powell: FOMC May Slow Rate Increases Moving Forward
It may make sense for the Federal Open Market Committee to continue raising the federal funds rate to fight inflation, but at a more moderate pace than it has pursued over the past year, Federal Reserve Chairman Jerome Powell said Wednesday. Testifying before the House Financial Services Committee, Powell noted that the FOMC decided to leave the target range for the rate at 5-5.25% during its meeting earlier this month, marking the first pause since it began raising rates last year. But he also pointed out that nearly all participants forecasted that the committee would need to continue raising rates before inflation returns to the Federal Reserve’s 2% target, with a majority predicting at least two more rate hikes. “The level to which we raise rates is actually a separate question from the speed with which we moved earlier in the process,” Powell said.
“We were at 75 basis points [rate hikes] for several meetings, then we were at 50 basis points and at 25 basis points at three consecutive meetings,” he added. “Now we're monitoring that pace, much as you might do if you were driving 75 miles an hour on the highway, then 50 miles an hour on a local highway, and then as you get closer to your destination – as you try to find that destination – you slow down even further.”
Outside of discussions on monetary policy, committee Republicans pressed Powell on an agency review of capital requirements being led by Fed Vice Chairman for Supervision Michael Barr. “Uncertainty from the 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 the Federal Reserve injecting politics into policy,” committee Chairman Patrick McHenry, R-N.C., said. Powell said several regulatory proposals are currently under review, but they haven’t been finalized or brought before the Fed board, so he couldn’t comment.
Watch a recording of the hearing
Gruenberg: Bank Failures Guiding Scope of Proposed Basel Capital Requirements
The recent bank failures show that banks with more than $100 billion in assets can pose genuine financial stability risks, and federal regulators will take that into account as they craft new capital requirements, Federal Deposit Insurance Corp. Chairman Martin Gruenberg said Thursday. Speaking at an economic conference in Washington, D.C., Gruenberg said regulators will “shortly” propose rulemaking on a new framework finalizing the Basel III capital standards. Community banks, which are subject to different capital requirements, would not be affected, but regulators are still considering whether to apply the proposal to banks with more than $100 billion in assets.
The recent failures – all banks between $100 billion and $250 billion in size – and the resulting economic shocks erase any doubt that the failure of banks in that size category can have financial stability consequences, Gruenberg said. “The lesson to take away is that banks in this size category can pose genuine financial stability risks and the federal banking agencies need to review carefully the supervision of these institutions, particularly for interest rate risk in the current environment, and the prudential requirements that apply to them, including capital, liquidity and loss-absorbing resources for resolution.”
Gruenberg also disputed criticism that an increase in capital requirements would be a drag on bank lending and the U.S. economy. A finalized rule likely wouldn’t take effect until the middle of next year and would be phased in over several years, he said. Also, stronger capital improves the resilience of the largest banks and enhances their ability to lend through the economic cycle, he added.
“History has proven that insufficient capital can lead to harmful economic results when banks are unable to provide financial services to households and businesses, as occurred during the 2008 financial crisis," Gruenberg said. "Ensuring adequate amounts of bank capital provides a long-term benefit to the economy by enabling banks to play a counter-cyclical role during an economic downturn rather than a pro-cyclical one.”
DOJ’s Kanter Says Bank Antitrust Guidance Needs Updating
Federal regulators must reassess whether the prevailing approach to bank merger enforcement is a fit for modern market realities, given that the guidance they use to review proposed mergers was drafted nearly three decades ago, the Department of Justice’s top antitrust enforcement official said Tuesday.
In a speech at the Brookings Institution, Jonathan Kanter, assistant attorney general for the DOJ’s antitrust division, said the 1995 interagency guidance places great significance on market shares based on local deposits, using those deposits as a proxy for concentration and competition. Since then, the number of community banks that focus on lending in their local neighborhoods has dropped by more than half, and the six largest bank holding companies have as many assets as all other bank holding companies combined, he said. “Against this backdrop, there are good reasons – aside just from the passage of time – to question whether the 1995 guidance sufficiently reflects current market realities,” Kanter said.
The DOJ last year took public comments on possible updates to the guidance, and Kanter said the agency was still reviewing those comments. In the meantime, the antitrust division is modernizing its approach to the competitive factors reports it is required by law to provide to banking regulators, he said. First, the division will scope closely scrutinized mergers that increase the risk of coordination and multimarket contacts with other banks. It will also examine the extent to which a transaction threatens to entrench the power of the most dominant banks by excluding existing or potential disruptive threats or rivals, he said.
Second, the antitrust division will carefully consider how a proposed merger may affect competition in different customer segments, Kanter said. The modern banking system features a wide variety of types of banks that serve different customer needs, he added. “To protect competition, antitrust enforcers must ensure that customers retain a meaningful choice as to the type of bank with which they do business by recognizing that different segments of customers have different needs, and that substitution across different types of banks may be limited.”