We all know what road is paved with good intentions, and it passes through Washington, D.C.
There is an old saying that Congress does two things well: nothing and overreact. After Silicon Valley Bank's collapse in March, Congress chose the latter. Last month, the Senate Banking Committee advanced legislation to empower federal financial regulators to claw back the compensation of banking executives. The RECOUP Act, as the bill is known, passed 21 to 2, and it could come before the Senate for a vote as early as this summer.
It was a good headline. But it buried the lede that regulators already have the power to do this.
SVB's collapse was not the result of too little regulation. It was the result of a failure of supervision. Banking regulators had more than enough rules on the books to ensure that SVB and other recently failed banks were managing interest rate risk properly. They just didn't use them.
Instead of giving regulators additional authorities, Congress needs to hold the Federal Reserve Bank of San Francisco accountable for failing to address SVB's underlying issues long before the bank's collapse. Regulators should have expected a liquidity crunch after the fastest rate hikes in 40 years — especially for a bank with SVB's balance sheet. They failed to see the obvious.
My colleagues on both sides of the aisle who support the RECOUP Act are well intentioned, and the idea of holding executives of failed banks accountable makes good sense. But we need to make substantive changes to the bill before it hits the Senate floor.
Regulators already have the authority to claw back compensation. They even have the authority to replace executives at failed banks. But the RECOUP Act would expand this authority to let regulators remove executives even at perfectly healthy banks. It's the left's dream come true.
Cincinnati-based Fifth Third Securities is the seventh firm charged by the Commission for failing to comply with the appropriate disclosures in connection with the limited offering exemption.
Specifically, the bill grants this authority if the executives fail to "appropriately implement financial, risk, or supervisory reporting or information system (sic) or controls." This is vague even by the standards of today's progressives in Congress. Vague laws ultimately mean more power for regulators and a greater ability to enforce the rules inconsistently.
To make matters worse, the present administration is playing word games with the definition of "risk," expanding it beyond financial factors to include trendy environmental, social and governance (ESG) concerns like climate. If the present version of the RECOUP Act became law, Joe Biden's appointees could effectively take over any bank in America and push out its directors and executives who refuse to implement their preferred "climate risk" standards. As written, the bill includes no safeguards to prevent this from happening, and banks of all sizes and levels of financial health would be impacted — even well-capitalized healthy institutions.
It's not impossible to imagine a liberal administration trying to do this. Just think back 10 years ago to Operation Choke Point: Regulators pressured banks to end their business relationships with perfectly legal businesses like gun manufacturers and payday lenders that were out of favor with the Obama administration.
The Biden administration has been perfectly open about its goal of redirecting trillions of dollars in investments toward ESG-friendly priorities and away from unfashionable industries like fossil fuels. The current draft of the RECOUP Act would empower Joe Biden's regulators — the regulators partially responsible for the largest bank failure since the Great Recession — in a way that would make Operation Choke Point look like child's play. This would be another step toward turning banks into mere utilities under tight government control.
Instead of giving bank regulators even more authority, we just need to ensure they do their jobs. And instead of letting them inject ESG and left-wing politics and preferences into the financial world, we need them to get back to the basics of their congressional mandate of ensuring safety and soundness.
The unrestricted ability to remove directors and executives on a whim is not a power any government agency or official should have in our country. That is a risk we cannot afford to take.
