Curbing Bad Behavior of Bank CEOs Isn't as Hard as They Make It Seem

Greg Becker, the deposed chief executive of Silicon Valley Bank, is facing growing demands to cough up the millions of dollars he raked in from stock sales soon before the bank’s sudden demise.

On March 17, the White House called on Congress to pass legislation to claw back compensation, including gains from stock sales, from Becker and other executives at SVB, as well as at Signature Bank SBNY.

Greg Becker, the deposed chief executive of SVB, is facing growing demands to cough up the millions of dollars he raked in from stock sales soon before the bank’s sudden demise.

On March 17, the White House called on Congress to pass legislation to claw back compensation, including gains from stock sales, from Becker and other executives at SVB, as well as at Signature Bank SBNY .

President Joe Biden’s statement came on top of demands by Sen. Elizabeth Warren, Rep. Ro Khanna, and other officials that the disgraced SVB CEO voluntarily fork over compensation pocketed before the bank’s collapse, particularly the $3.6 million he garnered from a stock sale in late February.

For Becker, digging into his own pockets to help cover the costs of his disastrous mismanagement would be the moral thing to do. But under current law, he faces no such legal obligation.

The 2002 Sarbanes-Oxley act, adopted in response to the Enron collapse, allows clawbacks of executive bonuses if a company is caught cooking its books. The 2010 Dodd-Frank financial reform law goes a bit further to require repayment of bonuses at the largest banks when they are based on erroneous financial statements.

Since neither of these existing clawback law seems to apply to SVB’s case, Becker could get off scot-free while shareholders are wiped out and the federal government backstops $175 billion in deposits.

It didn’t have to be this way. Dodd-Frank includes Wall Street pay restrictions that could’ve held Becker accountable for his dangerous short-sightedness — and might have even helped prevent the bank’s collapse. But regulators consistently fail to implement this part of the law.

How might these restrictions have altered the Silicon Valley Bank story?

The relevant provisions in Dodd-Frank, Section 956, prohibit Wall Street pay that encourages “inappropriate risk.” As I and others have argued for many years, regulators tasked with implementing this law could require Wall Street executives to set aside a significant portion of their compensation for 10 years to cover the costs of any misconduct fines against their bank — or the costs of a solvency crisis like SVB’s.

Former New York Federal Reserve Bank President William Dudley first proposed such collective funds in 2014, arguing they would help change Wall Street’s dangerously risky culture by making executives pay personally for the costs of their own recklessness.

Had such rules been enforced, this past week Becker would’ve had no choice but to forfeit a large chunk of the compensation he accumulated over the past decade.

Regulators also could use the Dodd-Frank provisions to crack down on forms of executive compensation that encourage recklessness, including stock options and stock grants tied to return on equity.

According to the bipartisan 2011 Financial Crisis Inquiry Commission, these pay structures create “incentives to increase both risk and leverage, which could lead to larger jumps in a company’s stock price.”

With regulators failing to do their job, that’s exactly how it turned out at SVB. The board loaded up Becker’s compensation packages with stock-based pay and he pursued risky strategies, overly relying on a single, volatile industry — technology — and then locking up cash from largely uninsured deposits in long-term bonds, without preparing for interest rate hikes.

Becker’s strategies drove SVB’s stock price into the stratosphere in the years leading up to the collapse, and he cashed in while the going was good. Between 2019 and 2022, according to company proxy statements, Becker pocketed $58 million just in payouts from options and stock grants — not including salary and cash bonuses.

His largest payday came in 2021 when SVB stock was trading as high as $700 per share. That year Becker cashed in $19 million in options and $6.7 million in stock grants he’d received in the mid-2010s when the stock was only worth about $100 per share.

The failures of SVB and Signature Bank are far from the only examples of excessive financial risk-taking since the 2008 crash, as Public Citizen has extensively documented.

New Wall Street accountability legislation covering a broad range of reforms, from higher capital standards to more equitable deposit insurance, should be a no-brainer. Will this divided Congress take it on? Unlikely.

But financial regulators don’t have to wait for Capitol Hill to enforce pay restrictions that have been in the law since 2010. The Biden administration should seize this moment to change the incentives for banking executives. For too long, Wall Street recklessness has generated huge windfalls for the rich and huge costs for the rest of us.