BY MICHELE ALT
In the Fed report analyzing the dramatic collapse of Silicon Valley Bank (SVB), Michael Barr, the Fed’s vice chair for supervision, said, “Stronger or more specific supervisory guidance or rules on incentive compensation for firms of SVBFG’s size, complexity, and risk profile—or more rigorous enforcement of existing guidance and rules—may have mitigated these risks."
In a rare showing of bipartisanship, Republican Senator Tim Scott signaled support for tougher penalties for executives’ excessive risk-taking at failed lenders, which President Biden has been advocating for in the wake of recent bank runs. While it’s refreshing to see Democrats and Republicans agree on anything, it’s worth pausing on why we lack stronger rules on incentive compensation.
In the wake of the last banking crisis, the Dodd-Frank Act sent the regulators back to the drawing table. Section 956 required the banking agencies – along with the National Credit Union Administration, Securities and Exchange Commission, and Federal Housing Finance Agency – to prohibit incentive-based compensation arrangements that encourage inappropriate risk-taking by financial institutions.
In 2011 and again in 2016, the regulators proposed rules to implement Section 956. In my previous life as an OCC lawyer, I played a lead role in the first proposal and in the run-up to the second. A lot of agency staff worked hard on those efforts. Ultimately, however, their leadership could not reach agreement. Neither rule became final.
Section 956 remains on the books. Recent events show how important it is for the regulators to finish what they started. Let’s hope they heed the call this time.
You can read more about the failed regulatory efforts that would’ve made this bipartisan effort unnecessary in this article I wrote for American Banker. If you want to talk further about the bank capital challenges we’re seeing, how incentive compensation should be structured, and the role regulators could and should play, shoot us a note at hello@klaros.com.