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Biden demands stricter penalties for executives in bank failures

Holding companies for Silicon Valley Bank and Signature Bank have already borrowed about $143 billion from the Federal Reserve in the week since their failures rattled financial markets.

WASHINGTON (CN) — President Joe Biden called Friday for stiffer laws to hold bank executives accountable after the second-largest banking collapse in U.S. history, but some economists say regulations won’t stop a similar situation.

Saying Congress needs to strengthen the government's ability to respond when crises hit the financial sector, Biden lamented limitations on the executive branch’s ability to take action.

“When banks fail due to mismanagement and excessive risk taking, it should be easier for regulators to claw back compensation from executives, to impose civil penalties, and to ban executives from working in the banking industry again,” Biden said in a statement. “Congress must act to impose tougher penalties for senior bank executives whose mismanagement contributed to their institutions failing.”

After the California-based Silicon Valley Bank failed last Friday and New York-based Signature Bank quickly followed in its wake, the Federal Deposit Insurance Corporation, an invention of the Great Depression, quickly took control of the institutions to limit the fallout.

The $212 billion worth of assets reported by Silicon Valley Bank in the fourth quarter of 2022 make its collapse the second-largest in U.S. history, after Washington Mutual, which went under with $300 billion in assets at the height of the 2008 financial crisis. Signature Bank's failure is the third largest, and some remain on guard for a more widespread crisis. 

The White House said Friday that the FDIC, the Securities and Exchange Commission and the Justice Department are investigating the circumstances leading to the bank collapses. Meanwhile the administration wants stronger regulations for regulators to recoup compensation from executives, broader range to impose civil penalties and stronger authority to bar executives from returning to work in the industry.

“No one is above the law — and strengthening accountability is an important deterrent to prevent mismanagement in the future,” Biden said in the release.

Peter Summers, an economics professor at High Point University, said investors will “suffer heavy losses at minimum,” but the government is limited in its ability to recoup payments to executives.

“There isn’t a way to make the bank's managers repay their bonuses assuming they haven’t done anything illegal,” he said in a phone interview.

In a specific proposal, the administration wants to give the FDIC the power to take back gains from stock sales from failed bank executives. Over the past two years, Silicon Valley Bank CEO Greg Becker reportedly sold nearly $30 million of stock, including $3.6 million in shares days before the bank started to collapse.

“It’s definitely easy to believe that these executives at some stage realized this bank had a problem,” said David Sacco, an economics professor at the University of New Haven.

Sacco said the administration is hampered because it could go after the CEO for insider trading, but it doesn’t appear executives acted illegally in managing the bank.

“Incompetence is not a crime,” he said in a phone interview. “Making bad decisions is not a crime.”

According to a White House fact sheet, the FDIC only has clawback authority for the largest financial institutions. Officials want that authority expanded to a broader set of banks.

The FDIC can bar executives from holding jobs at other banks only if they engaged in “willful or continuing disregard for the safety and soundness” of their bank, the White House said. Biden wants Congress to lower the legal standard to any time a bank is placed under FDIC control.

“The President believes that if you’re responsible for the failure of one bank, you shouldn’t be able to just turn around and lead another,” the fact sheet says.

The government could strengthen its powers after a bank fails, but Sacco feels there’s not many ways to stop the causes of the bank collapse.

“I’m not necessarily sure they can put in regulations that would stop something like this from happening,” he said. “Even a bank that is fundamentally sound and profitable can still have a bank run.”

That banks don’t keep all their deposits in cash is not unusual; the money is instead used for investments.

At the start of the Covid-19 pandemic, when the Federal Reserve dropped interest rates to near zero, many banks loaded up on Treasury bonds, which are government backed and considered low risk.

Over the past year, however, the Federal reserve has raised rates from a range of 0.25% to 0.5% to 4.5% to 4.75%. The increasing rates have caused the value of existing bonds to plummet because newer ones pay more interest.

Silicon Valley Bank, a key lender for technology startups, announced in the middle of last week that it needed to shore up its balance sheet and so would sell a large amount of investments at a loss. This triggered a panic from venture capital firms, which reportedly advised companies to withdraw money from the bank, causing the company's stock to crater.

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