October 14, 2023
Washington Examiner recently published an article referencing Master Lecturer of Finance, Mark Williams, NPR interview discussing the root causes of the 2023 banking crisis, and Senator Sherrod Brown’s proposed RECOUP Act.
Spurred by three historic bank failures, regulators have sought greater influence over bank risk-taking behavior. Sen. Sherrod Brown proposed the RECOUP Act as one of the most sweeping efforts. The Act requires a compensation claw-back provision for executives of failed banks.
One of the most notable bank failures of 2023 was Silicon Valley Bank which Williams explains was doing a lot of things right, “It saw its deposits triple in just two years and put its money into United States government bonds. Yet it missed a fundamental duty, managing its interest rate risk. What Silicon Valley Bank did not anticipate was the 21-month-long march by the Federal Reserve to raise interest rates as part of an effort to fight inflation.”
Under the RECOUP Act, Silicon Valley Bank’s executives and directors could face compensation clawbacks and even banishment from the banking industry, an unfortunate result of acts they could neither anticipate nor control. Not only is this power explicitly granted in the RECOUP Act’s text, but it is also written so vaguely that regulators could determine who can or cannot hold bank executive positions with impunity. Some critics claim bank regulators will soon be able to effectively name the leaders of banks and bank holding companies, replacing bank shareholders as the people in control of nearly every American bank. Mark Williams strongly disagrees with this point and views clawbacks as a desirable way to curb bank excessive risk-taking, better safeguarding our banking system.