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[Senate Hearing 118-441]
[From the U.S. Government Publishing Office]

                                

                                                        S. Hrg. 118-441

 
        HOLDING EXECUTIVES ACCOUNTABLE FOR RECENT BANK FAILURES

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                    ONE HUNDRED EIGHTEENTH CONGRESS

                             FIRST SESSION

                                   ON

   EXAMINING HOW EXECUTIVES ARE ACCOUNTABLE FOR RECENT BANK FAILURES

                               __________

                              MAY 4, 2023

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

                Available at: https: //www.govinfo.gov /
                
                
                
           
             U.S. GOVERNMENT PUBLISHING OFFICE 
 57-080 PDF          WASHINGTON : 2024     
                
                
                
                
                
                
                
                

            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

                       SHERROD BROWN, Ohio, Chair

JACK REED, Rhode Island              TIM SCOTT, South Carolina
ROBERT MENENDEZ, New Jersey          MIKE CRAPO, Idaho
JON TESTER, Montana                  MIKE ROUNDS, South Dakota
MARK R. WARNER, Virginia             THOM TILLIS, North Carolina
ELIZABETH WARREN, Massachusetts      JOHN KENNEDY, Louisiana
CHRIS VAN HOLLEN, Maryland           BILL HAGERTY, Tennessee
CATHERINE CORTEZ MASTO, Nevada       CYNTHIA M. LUMMIS, Wyoming
TINA SMITH, Minnesota                J.D. VANCE, Ohio
KYRSTEN SINEMA, Arizona              KATIE BOYD BRITT, Alabama
RAPHAEL G. WARNOCK, Georgia          KEVIN CRAMER, North Dakota
JOHN FETTERMAN, Pennsylvania         STEVE DAINES, Montana

                     Laura Swanson, Staff Director

               Lila Nieves-Lee, Republican Staff Director

                       Elisha Tuku, Chief Counsel

                  Amber Beck, Republican Chief Counsel

                      Cameron Ricker, Chief Clerk

                      Shelvin Simmons, IT Director

                       Pat Lally, Assistant Clerk

                                  (ii)

                            C O N T E N T S

                              ----------                              

                         THURSDAY, MAY 4, 2023

                                                                   Page

Opening statement of Chair Brown.................................     1
        Prepared statement.......................................    27

Opening statements, comments, or prepared statements of:
    Senator Scott................................................     4
        Prepared statement.......................................    28

                               WITNESSES

Da Lin, Assistant Professor of Law, University of Richmond School 
  of Law.........................................................     6
    Prepared statement...........................................    30
    Responses to written questions of:
        Chair Brown..............................................    49
        Senator Warnock..........................................    53
Thomas Quaadman, Executive Vice President, Center for Capital 
  Market Competitiveness, U.S. Chamber of Commerce...............     8
    Prepared statement...........................................    37
    Responses to written questions of:
        Senator Sinema...........................................    54
Heidi Mandanis Schooner, Professor of Law, Columbus School of 
  Law, The Catholic University of America........................     9
    Prepared statement...........................................    40
    Responses to written questions of:
        Chair Brown..............................................    56
        Senator Sinema...........................................    59
        Senator Warnock..........................................    59

                                 (iii)

        HOLDING EXECUTIVES ACCOUNTABLE FOR RECENT BANK FAILURES

                              ----------                              

                         THURSDAY, MAY 4, 2023

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10 a.m., in room 538, Dirksen Senate 
Office Building, Hon. Sherrod Brown, Chair of the Committee, 
presiding.

            OPENING STATEMENT OF CHAIR SHERROD BROWN

    Chair Brown. The Senate Committee on Banking, Housing, and 
Urban Affairs will come to order. Thank you for joining us. 
Thank you for the Members that are here, and there will be 
more.
    Most Americans who put their money in a bank should trust 
that it will be safe. They should not have to give it a second 
thought.
    That money is not just sitting in the bank vault collecting 
dust. Working Americans lend their hard-earned money to their 
banks, with the promise to get it back, with a little interest. 
They expect that their banker will not only keep their money 
safe, but that they will also take those customer deposits and 
put them to good use.
    And that is what many banks do. They make loans to small 
businesses, they issue mortgages to homebuyers, and they 
finance new apartment buildings so that our communities can 
continue to grow and prosper. This is Banking 101. It is pretty 
boring, as good banking should be.
    Because of the important role that banks play in our 
economy, that responsibility comes with a public safety net. 
American taxpayers subsidize this industry with Government 
guarantees, like deposit insurance and access to emergency 
loans.
    These are perks that most Americans do not get. Workers do 
not have access to special emergency loans when something goes 
wrong in their lives. Banks get special treatment because they 
are supposed to play a special role in our economy.
    But we have seen over and over that some bank executives do 
not hold up their end of the deal.
    Banks need to manage their risks, build capital, and be 
able to pay back their depositors when they need their money 
back.
    That is not what happened at two banks recently, at Silicon 
Valley Bank and Signature Bank. Their CEOs and executives led 
their banks off a cliff. They failed to manage the risks 
associated with their business models and investments. They 
lacked strong corporate governance and internal controls. They 
failed to respond to--and in some cases ignored--regulators' 
admonitions and concerns.
    And we ended up with a bank run.
    As their banks grew rapidly, more than doubling and 
tripling in size in just 3 years--think of that; that does not 
happen very often--their already-weak risk management could not 
keep up one of these two banks, and I know there is a third one 
too, but one of these two banks did not even have a chief risk 
officer.
    It is the Wall Street business model we see corporations 
follow over and over: executives put short-term profits above 
everything else. In this case, that meant taking on more and 
more risk. Fatter profit margins meant higher payouts for those 
at the top, and more risk for the small businesses with their 
money in the bank.
    At Silicon Valley Bank, executive bonuses were tied to the 
bank's return on equity, so they bought securities with higher 
yields to chase higher and higher profits. When those 
investments started to lose money, instead of changing course 
they doubled down.
    At Signature Bank, executives had incentive compensation 
plans that were tied to return on assets to ``reflect 
additional focus on profitability''--``additional focus on 
profitability,'' just hear those words.
    Then when the writing was on the wall, SVB executives 
dumped millions of dollars' worth of company stock.
    At First Republic, senior executives sold millions in their 
bank stock less than a week after SVB and Signature Bank 
failed, and that sparked further concerns at their own bank. 
For a lot of Americans, this all brought a sickening feeling of 
deja vu.
    Everyone remembers 2008. We all remember Wall Street 
wrecking our economy, setting off the worst recession since the 
Great Depression, that cost millions of Americans their jobs 
and their homes. Americans will never forget that, by and 
large, the Wall Street executives who caused all that pain did 
not face any consequences. Their profits and bonuses were not 
clawed back. They went up.
    Only in corporate boardrooms can you run your business into 
the ground, take the whole economy along with you, and still 
come out ahead. We cannot--we will not--let that happen again.
    Bank executives who take on too much risk and crash their 
banks because of their own hubris and greed should not get to 
ride off into the sunset with their ill-gotten gains. And they 
should not get to take their bad behavior to another bank, 
where they can continue to profit off an unsustainable business 
model and put more people's money at risk.
    When it comes to holding bank executives accountable for 
their recklessness, the wheels of justice typically move 
slowly, or not at all.
    We know that when workers make just one mistake, if they 
overdraft their bank account or miss a credit card payment, 
they get dinged with fees and penalties. But when big bank 
executives and giant Wall Street firms do something much worse, 
like run their bank into the ground or crash our whole economy, 
they are almost never held accountable.
    The big banks have more money and resources to fight tooth 
and nail. They have layers of complex management and 
bureaucracy to shield them, and that makes it harder and takes 
longer to enforce the law.
    Remember this. Just a few days after the SVB and Signature 
Bank failures, Carrie Tolstedt, whom we have certainly talked 
about in this Committee, the former Wells Fargo executive who 
led the bank's years-long fake account scandal that was 
uncovered in 2016, was finally banned from the industry and 
fined $17 million.
    Only now, a decade later, is the executive responsible for 
the massive scandal that hurt hundreds of thousands of 
Americans. Only now, a decade later, is Ms. Tolstedt held to 
account.
    We need to strengthen our financial watchdogs' ability to 
impose fines, ban bad actors from the banking industry, and 
claw back compensation, so that accountability does not just 
apply to the teller who miscounts the cash box or the community 
bank director who makes a bad judgment on a loan.
    We must modernize our enforcement rules to match the size 
and complexity of banks with billions of dollars in assets and 
multiple business lines, banks like Silicon Valley and Wells 
Fargo.
    We need legislation to expand the banking agencies' 
authority to ban a bank executive or manager from the industry 
for failing to properly oversee the bank's operations. We need 
legislation to make it easier for agencies to bring actions 
against bank executives and managers who are asleep at the 
switch, so we can disincentivize the lax oversight that leads 
to bank failures. We need legislation to clarify and expand the 
FDIC's authority to claw back compensation. We need legislation 
to increase penalties and make it easier to impose fines 
against these bad actors. And we need legislation to require 
the agencies to finally finish the Dodd-Frank Section 956 rule 
on incentive-based compensation.
    I have been talking to many of my colleagues about this, 
including the Ranking Member, and I know there is bipartisan 
interest on many of these issues. Two of the Members on this 
Committee have bipartisan bills. I hope we can work together to 
get this done.
    As we have seen over the past few months, we need a system 
that deters excessive risk-taking and imposes real, financial 
consequences on individuals for failing to oversee and manage 
those risks. Bank executives cannot continue to operate under 
the assumption that basic risk management is optional and 
always, always, always secondary to making profits.
    Let me say that again. Bank executives cannot operate a 
bank in a manner where risk management is optional.
    And that is exactly what happened here, and it is 
underscored by the reports the regulators and GAO put out last 
week. Executives failed to manage these banks.
    Later this month, in closing, I will say we will hear from 
the regulators about what they can do to strengthen their 
oversight and supervision and how we can make the banks and our 
financial system more resilient. And then we will hear directly 
from the failed bank executives, who must answer for their 
banks' downfalls.
    But today our focus is on how to improve the tools we have 
to hold them accountable and prevent these failures from 
happening in the first place.
    Ultimately, bank executives are responsible for the success 
or failure of their institution. They are responsible for 
keeping their depositors' money safe. They know when they sign 
up for the job that banking is built on trust. They are 
responsible for holding up their end of the deal.
    Senator Scott.

             OPENING STATEMENT OF SENATOR TIM SCOTT

    Senator Scott. Thank you, Mr. Chairman.
    Today we are supposed to be talking about ``Holding 
Executives Accountable After Recent Bank Failures''. But from 
where I sit, all I see is finger pointing. I do not see 
anyone--from the bank executives to the regulators to the Biden 
administration--taking meaningful accountability for their 
actions that played a role in the recent bank failures.
    We should, 100 percent, discuss certain authorities 
regulators have to claw back executives' compensation if that 
individual acted in malpractice. And we should discuss the lack 
of accountability at the executive and board of director level, 
as well. But we should not forget that the regulators should 
also be held accountable.
    So like I have said from the beginning, this was a failure 
in three parts, and we must discuss accountability across the 
board--for bank executives, bank regulators, and this 
Administration's inflationary spending policies. And I look 
forward to addressing these issues later in hearings this 
month.
    As for the bank executives, these were not your average 
banks. They were like the Las Vegas betting tables of banks 
that rolled the dice on falling interest rates when everything 
pointed in exactly the opposite direction. And if that did not 
have the red alert sirens going, we now know that they suffered 
rampant mismanagement and these very same risks that brought 
the banks down were in plain sight to the supervisors. Flashing 
red lights, without a question. What a blatant disregard for 
economic conditions, a disregard for supervisory warnings, and 
a disregard for basic corporate governance and risk controls.
    To start, SVB operated without a chief risk officer for 8 
months following the resignation of the previous officer in 
April of 2022. A very fast-growing bank--unprecedented growth--
without a risk officer for 8 consecutive months. But even more 
concerning is when Silicon Valley Bank failed, it had 31 open 
supervisory findings, and that level of findings is about three 
times the number of other peer banks.
    As a Charlestonian, I want to put it a different way. We 
are known for amazing restaurants and fantastic food. If one of 
our restaurants had 31 safety or health violations, they would 
be shut down in a heartbeat. We would not get to 31. But what 
is more, if an inspector failed to take note of those 31 safety 
or health issues in the first place, they would lose all 
credibility and their jobs.
    Regulators must also be held accountable for their 
supervisory failures to the same extent that the failed banks' 
executives and the directors should be. Otherwise, there is no 
incentive for anyone at fault to change.
    Just last week, we received the Federal Reserve and FDIC's 
reports on the failures of SVB and Signature Bank. The Federal 
Reserve report acknowledged the supervisors did not fully 
appreciate the extent of the vulnerabilities as SVB grew in 
size and complexity. But rather than focusing on these failures 
and providing mechanisms to ensure sufficient steps are taken 
in the future, the Federal Reserve used the report as a 
scapegoat to push its progressive, regulatory agenda.
    Where is the accountability for the inaction on the Federal 
Reserve? I think we should all keep in mind that the last time 
Michael Barr testified before the Committee, he would not 
commit to firing any of the employees who failed to do their 
jobs.
    The FDIC's report also found supervisory failures as well 
as failures in bank management. Additionally, after the failure 
of a second California bank, First Republic, with over $200 
billion in assets over the past weekend, it is clear that the 
practices and the standards of the California State supervisors 
also merit congressional scrutiny.
    Turning back to the bank executives. We must find a path 
forward to holding bad actors accountable. We all know that 
market behavior is a driving force, and perhaps we should look 
to strengthening corporate responsibility through good 
governance mechanisms.
    For example, it has been reported that SVB's bonuses came 
with so-called clawback provisions that would allow the lender 
to recoup the pay if there was wrongdoing. However, there was 
no provision allowing the bank to claw back the money if 
excessive risk-taking led to the losses. I certainly think this 
is something we can, and should, discuss.
    At the same time, if good governance reforms are not 
appropriately targeted and calibrated, an overly prescriptive 
approach has the potential to further siphon and divert talent 
away from the banking sector to nonbank sectors of the 
financial services industry. As we have seen here, good 
management is absolutely essential. Recruiting talented folks 
at financial institutions is of the utmost importance in making 
sure that these institutions run smoothly and soundly.
    It is questionable whether we should be encouraging 
supervisors to dedicate more time, attention, and manpower to 
evaluating the riskiness of compensation practices when they 
failed to resolve bread-and-butter banking practices at these 
failed banks. The FDIC, the SEC, and the DOJ have authorities 
to hold management at these failed banks accountable for any 
misconduct.
    At the end of the day, the United States banking system is 
one of the most heavily regulated industries in the world. What 
is the point of having law after regulation after rule after 
guidance if the regulators are not using the tools they already 
have at their disposal? It does not matter what we do in 
Congress if the regulators do not implement and enforce the 
laws we create as intended.
    With that, I look forward to hearing from our witnesses on 
accountability across the board, with existing authorities and 
any potential suggestions you may have.
    Chair Brown. Thank you, Senator Scott.
    Before introducing the witnesses I just came from a meeting 
with the CEO of Norfolk Southern, and I think most of you know 
the terrible train tragedy, the derailing, in East Palestine. 
One of the comments I have made about this is we know that when 
that happened, when Silicon Valley Bank happened, the first 
thing I thought of was East Palestine, because in the history 
of our country, the last 100 years, the most powerful two 
interest groups in this country are the banks and the 
railroads. And I know we often hear about all these rules and 
all these regulations on banks, but we also know this town 
swarms with bank lobbyists so often getting their way, and 
weakening those rules, and intimidating regulators, and we know 
all that.
    So I will introduce the witnesses. Da Lin is an Assistant 
Professor of Law at the University of Richmond. Her scholarship 
focuses on financial regulations, securities regulations, and 
corporate governance. Ms. Lin, nice to see you. Thanks for 
coming.
    Thomas Quaadman is Executive Vice President of the U.S. 
Chamber of Commerce Center for Capital Markets Competitiveness, 
Chamber Technology Engagement Center and the Global Innovation 
Policy Center. Mr. Quaadman, welcome. We are glad you here.
    Ms. Heidi Schooner is a Professor of Law at the Columbus 
School of Law, the Catholic University of America. Her 
scholarship focuses on regulation of the financial services 
industry. Welcome back to the Committee. Nice to see you again.
    Professor Lin, you start, please.

STATEMENT OF DA LIN, ASSISTANT PROFESSOR OF LAW, UNIVERSITY OF 
                     RICHMOND SCHOOL OF LAW

    Ms. Lin. Thank you, Senator. Chairman Brown, Ranking Member 
Scott, and Members of the Senate Committee on Banking, Housing, 
and Urban Affairs, thank you for the opportunity to appear 
before you. My name is Da Lin. I am an Associate Professor of 
Law at the University of Richmond School of Law, where I study 
and teach corporate governance, financial regulation, and 
securities regulation. I would also like to thank my supportive 
family who are here with me today, my husband, Parth, and our 
ever-curious toddler, Oliver.
    Federal banking regulators have broad authority to remove 
bankers from office for engaging in deceptive, unsafe, or 
unsound practices, and even to permanently prohibit them from 
working in the banking industry. Unfortunately, this authority 
has rarely been used against bank directors and senior 
executives, even when their mismanagement results in bank 
failure.
    I will briefly explain the current statutory landscape and 
then discuss potential reforms to strengthen bank oversight and 
governance.
    Under current law, Federal banking regulators may permanent 
bar any employee of a bank from working in the banking industry 
under the following circumstances: if an individual (1) 
participated in misconduct, including violations of law, 
breaches of fiduciary duties, and unsafe or unsound practices; 
(2) the misconduct harmed the bank or benefited the wrongdoer; 
and (3) the misconduct involved personal dishonestly or 
demonstrated willful or continuing disregard for the safety or 
soundness of the institution.
    Over the past 20 years, America's largest banks have 
settled hundreds of major lawsuits and paid over $195 billion 
in fines and penalties. They have admitted to pervasive fraud, 
bribery, money laundering, price fixing, illegal kickbacks, 
discriminatory lending, and a host of other consumer protection 
violations. Yet, Federal banking regulators have barred senior 
management of only one major U.S. bank from the industry. 
Instead, regulators have primarily excluded rank-and-file 
workers for low-level misconduct, such as embezzlement, that 
has little impact on bank safety or administration.
    In my study of enforcement actions issued by the Federal 
Reserve between 2015 and 2019, I found that 72 percent of 
individuals prohibited from banking were low-level employees 
who had already been terminated from their jobs. And after the 
2008 financial crisis, banking regulators barred 21 rank-and-
file workers but did not impose the sanction on a single senior 
executive.
    This disparity exists because the current law is not well 
designed to be applied to senior bank leadership, particularly 
at larger banks. There are two main obstacles. First, the 
culpability requirement for removal and prohibition is overly 
demanding, requiring, as I have mentioned, ``personal 
dishonesty'' or a ``willful or continuing disregard'' for the 
safety or soundness of the institution. Yet failed management 
is seldom a deliberate act, and it is even less likely to be 
provable as one. Directors and senior executives are typically 
shielded from knowledge of operational details by the diffuse 
decision-making processes that characterize most large and mid-
sized banks.
    Second, as banks have consolidated and grown over the past 
30 years, the role of senior bank leadership has transformed. 
Their responsibilities consist increasingly of institutional 
oversight rather than participation in operational details. 
Today when senior bankers fail to adequately perform their jobs 
it is nearly always because they either neglected known issues 
or they were uninformed because they did not establish systems, 
structures, and internal controls designed to effectively 
detect operational risk. However, the statute underlying the 
prohibition authority has not been substantively updated since 
1989.
    While the responsibilities of bank leadership are 
increasingly systemic in character, the requirements that 
regulators must satisfy to prohibit an individual from the 
industry remain focused on discrete activities. Congress should 
recognize mismanagement and institutional oversight failure as 
a distinct basis for removal and prohibition.
    I would like to close by observing that the authority to 
remove individuals from office and prohibit them from working 
in the banking industry is one of several tools available to 
Federal regulators to hold bankers accountable for unsafe or 
unsound practices, and I applaud the Committee for also 
considering proposals to broaden this toolkit.
    I want to emphasize, however, that those utter mechanisms 
cannot replicate or replace a potent removal and prohibition 
authority in strengthening bank governance. The same bank 
directors and executives whose mismanagement cause a bank to 
fail should not be permitted to run your bank.
    Thank you.
    Chair Brown. Thank you, Professor Lin.
    Mr. Quaadman, welcome.

STATEMENT OF THOMAS QUAADMAN, EXECUTIVE VICE PRESIDENT, CENTER 
  FOR CAPITAL MARKET COMPETITIVENESS, U.S. CHAMBER OF COMMERCE

    Mr. Quaadman. Thank you, Chairman Brown, Ranking Member 
Scott, and Members of the Committee for holding this hearing.
    From the information that is available it appears that the 
recent banking turmoil is the result of a failure of 
supervision, management, and governance. The subject of this 
hearing today covers 3 banks out of 4,500 in the United States. 
It is also important to remember that those three banks had 
very unique business models. Silicon Valley Bank concentrated 
on capital-intensive tech startups as well as biomedical 
startups, First Republic Bank concentrated on wealth 
management, whereas Signature Bank had a large exposure to 
digital assets. Those business models are much different than 
the traditional regional banks that provide financial resources 
for Main Street businesses.
    Turning to executive compensation, we have to remember that 
there is a global marketplace for CEO and executive talent. 
Compensation is key for acquiring and retaining the talent 
needed for the long-term success of a business. The Chamber has 
been on record since 2005, where we have been critical of 
behavior that drives short-term-ism, specifically the use of 
quarterly earnings guidance. Furthermore, if policies do not 
align with market demands, businesses will suffer.
    There are multiple checks on compensation specifically in 
governance, in general. We have investor and board oversight, 
which comes with it for publicly traded companies, SEC clawback 
authorities, as well as say-on-pay votes. We have the Federal 
Deposit Insurance Act which allows for the recoupment of 
compensation, of which over $4 billion has been recovered. 
There is a 2010 Joint Bank Regulator Guidance on Sound 
Incentive Compensation Policies, which, in our view, fulfills 
the requirements of Section 956 of the Dodd-Frank Act. 
Additionally, we have the Orderly Liquidation Authority 
clawback authority as well.
    This failure of supervision is quite startling. We have 
MRAs that went back as far as 2020. In the Federal Reserve 
report from last Friday, we have seen how there was a lack of 
communication between management and the board on key issues. 
Those are red flags that should have been brought to the 
immediate attention of the regulators, and action should have 
been taken. Furthermore, while the regulators were not taking 
action, JPMorgan Chase issued an investor note in November on 
the interest rate risk with Silicon Valley Bank.
    Moreso, we have to be very careful about how new policies 
are going to be developed in this area. We sent a letter to the 
banking regulators, both in terms of this banking crisis as 
well as a holistic review on capital requirements that the 
Federal Reserve and other banking regulators be transparent 
with the data, share that with stakeholders in order to fulfill 
the requirements of the Administrative Procedures Act as well 
as the Riegel Act.
    Furthermore, we have to look at some of the legislation 
that is before the Committee today. The Warren-Hawley bill 
would allow for a 5-year clawback of salary and compensation. 
Who would want to go work for any business that has a 5-year 
clawback of salary? Furthermore, that clawback authority also 
extends to professionals, such as lawyers and accountants. 
Which professional firm is going to want to engage in that kind 
of contract, and that is going to deprive those businesses of 
the talent they need to govern themselves.
    Furthermore, there is the Reed-Grassley bill, which we are 
sympathetic with. However, there needs to be more information 
on it, but let us also not forget that insider trading is 
already illegal. Heaping more authorities is not necessarily 
going to mean anything if the cop on the beat is not doing 
anything.
    And finally, let me just close with Credit Suisse, which is 
a cautionary tale. In 2013, the Swiss passed new compensation 
policies which prohibited bonuses, restricted salary, and had a 
binding say-on-pay vote. Credit Suisse's stock took a hit once 
that passed, and it never recovered. Furthermore, from 2013 
moving forward, Credit Suisse has cited those compensation 
policies as an obstacle to their being able to retain and 
attract talent, and actually flagging that as a risk to the 
long-term health of the bank. We need to keep that in mind 
because we also know how that ended.
    Mr. Chairman, thank you, and I am happy to take any 
questions you may have.
    Chair Brown. Thank you, Mr. Quaadman.
    Professor Schooner, welcome.

    STATEMENT OF HEIDI MANDANIS SCHOONER, PROFESSOR OF LAW, 
   COLUMBUS SCHOOL OF LAW, THE CATHOLIC UNIVERSITY OF AMERICA

    Ms. Schooner. Chairman Brown, Ranking Member Scott, and 
Members of the Committee, thank you for the opportunity to 
participate in today's hearing on the accountability of bank 
executives.
    In my testimony, I offer two central observations. First, 
bank executives play a critical role in maintaining the 
strength of our financial system, and that role requires a 
diligence and care that sets them apart from managers of 
nonbank firms. Second, Congress has recognized the importance 
of bank executives' responsibility by authorizing Federal bank 
regulators to hold executives accountable for management 
failures. Existing law, however, could be reformed to provide 
stronger accountability for bank executives who act negligently 
or for the board members who fail in their oversight 
responsibilities.
    As the Committee well knows, banks are special in the 
services that they provide, and they are also inherently 
fragile, subject to the kinds of runs that we have seen all too 
recently. Such characteristics justify extensive regulation of 
banks' operations, but the responsibility for safety and 
soundness of the institution ultimately rests with bank 
management.
    While managers owe fiduciary duties to their institutions, 
just like officers and directors of any corporation, their 
critical responsibilities do not end there. Bank executives are 
responsible for managing inherently risky institutions that are 
critical to sustaining the health of the economy, and thus, the 
well-being of all citizens. They are responsible for 
institutions that rely on taxpayer backing in the form of 
deposit insurance and emergency liquidity.
    Recent events amply illustrate the extent of this 
dependence. Bank management is a heavy responsibility indeed. 
In the United States and around the world, the importance of 
management to bank safety and soundness is recognized from 
cradle to grave. Law and regulation expressly demand competent 
management from the institution's initial chartering to the 
supervision of the bank's ongoing operations, and through to 
the resolution of the failed institution. Federal law also 
imposes liability on bank officers and directors for 
mismanagement. Recent proposals seek to enhance the banking 
agencies' ability to hold executives accountable for such 
mismanagement.
    Recent reform proposals seek to impose consequences through 
clawbacks of executive compensation on bank executives of 
failed banks. The relevance of this reform became clear when 
the Federal Reserve released its report last week on the 
failure of Silicon Valley Bank. The report finds that Silicon 
Valley Bank's incentive compensation arrangements encouraged 
excessive short-term risk-taking. Banker compensation should 
not encourage, let alone reward, excessive risk-taking that 
leads to significant loss, or worse, a bank's failure.
    Clawbacks, especially mandatory clawbacks, are an 
appropriate consequence for such mismanagement. Moreover, 
clawbacks can help maintain or restore the public's confidence 
in our financial system.
    While I support the accountability of bank managers of 
failed banks, I urge that such proposals be considered in 
conjunction with reforms that would improve the accountability 
of managers of both failed and open institutions.
    Strengthening existing administrative enforcement powers 
applicable to officers and director of open institutions as 
well as closed institutions offers two important advantages. 
First, explicit consequences for negligent behavior and failure 
of oversight could provide powerful incentives for bank 
executives to exercise prudence in managing fragile and often 
complex organizations, and thus help prevent needless bank 
failures and the associated losses. Second, strengthening 
agency enforcement tools would better level the competitive 
playing field between large and small banks. Given the reality 
of too-big-to-fail, only managers of relatively smaller banks 
are impacted by the consequences triggered by a bank's failure.
    The recent failures of Silicon Valley Bank, Signature Bank, 
and First Republic Bank highlight the importance of vigilance 
in maintaining the safety and soundness of our financial 
system. Bank executives form the frontline defense against bank 
failure. When bank executives fail in their responsibilities to 
protect the safety and soundness of their institutions, they 
should be held accountable to the public. Congress can enhance 
accountability through reforms aimed at both mismanagement at 
both failed and open banks.
    Thank you.
    Chair Brown. Thank you, Professor Schooner.
    We will begin the questioning with Senator Tester, of 
Montana.
    Senator Tester. Thank you, Mr. Chairman. I appreciate the 
hospitality. And I want to thank you and the Ranking Member for 
holding this hearing, and I want to thank the folks who 
testified today. Thank you all for being here.
    It is clear that the management at these banks made poor 
decisions. They ignored risk factors that ultimately resulted 
in failure. It is also clear that the regulators were not 
dropping the hammer on these banks, and the executives, or the 
boards, even when the problems that supervisors had identified 
were not being addressed. These were problems that the 
executives knew about, but instead of addressing them, they 
gave themselves bonuses, which should make everybody in this 
room's blood boil.
    Regulators and law enforcement must take steps to 
investigate actions of the former bank management. Those folks 
responsible must be held accountable, to make sure that similar 
mistakes are not made again, because if they are not addressed, 
they will be.
    Ms. Lin, where are the gaps in our existing Federal 
structure for holding these executives accountable? Are the 
laws there, or do we need to put more laws on the books?
    Ms. Lin. Thank you, Senator. For the prohibition and 
removal authority, as it is applied to bank executives and 
directors, senior bank leadership, there are important gaps 
that deter effective enforcement, effective use of this 
authority.
    The problems, in my opinion, are twofold. First is the 
culpability requirement, which requires regulators to show 
either personal dishonesty or a willful or continuing disregard 
for the safety or soundness of the institution. This demanding 
requirement broadly insulates directors and officers of large 
banks from liability or sanction because they can credibly deny 
knowledge of most operational details. The challenge of proving 
willful complicity increases as the distance to the wrongdoing, 
the wrongful activity, increases, especially when the 
misconduct relates to complex issues such as risk management.
    Senator Tester. So do you have recommendations on what this 
Committee could do to address those gaps?
    Ms. Lin. Yes, Senator.
    Senator Tester. OK. I would love to get them. I am going to 
move on because I have only got 5 minutes.
    Ms. Schooner, Professor Schooner I should say, do you 
believe those gaps are there, and do you have recommendations, 
if you believe there are gaps, that you could give this 
Committee, give myself, the Chairman, the Ranking Member?
    Ms. Schooner. Senator, I agree with Professor Lin that the 
standards for administrative enforcement are unduly high, 
requiring showing of reckless conduct, which especially with 
larger institutions is problematic.
    Senator Tester. OK. Trust me. If you can get them to me, I 
would love to see them.
    Mr. Quaadman, are your views on sufficiency of Federal 
regulators' law enforcement tools, what are your views on that, 
to be able to hold executives accountable? You talked about, in 
your opening statement, that you thought they were there. You 
stand by those?
    Mr. Quaadman. Yeah. We believe that the authorities were 
there. We do not believe that the regulators took effective 
action. We are actually looking forward to the hearings you are 
going to have here, both with those executives as with Vice 
Chair Barr, and if there is information that comes about where 
maybe our views are going to change a little bit on that we 
will be happy to talk with you further.
    Senator Tester. I want to clarify a little bit. I am not 
talking about the regulations that the banks are held to, 
because I think those regulations were there. The regulators 
had the ability to stop this from happening. They did not drop 
the hammer. They did not. I am talking about the regulators 
have the ability to hold the bank executives accountable.
    Mr. Quaadman. So with the specific point that you raised at 
the start of your question about the bonuses they were paid, we 
need the information there because insider trading is illegal, 
right? 10(b)(5) is not a safe harbor.
    Senator Tester. I got you.
    Mr. Quaadman. So we think that action should be taken. If 
it was inappropriate activity there, it should be handled then.
    Senator Tester. I am sure--and I appreciate that 
perspective, by the way, Mr. Quaadman--I am sure that you 
probably looked at this situation, particularly with Silicon 
Valley Bank. All the signs were there. I mean, all the signs. 
Why do you think we have not heard anything about clawing back 
or holding people accountable? Because I have not heard a word 
about that.
    Mr. Quaadman. I believe, to some degree, we are still in 
the investigatory stage with the different agencies that are 
there. And it takes a little bit of time.
    Senator Tester. OK. I have one more question, and that 
deals with regulation moving forward. You know what? I have run 
out of time. I will put it for the record. You were kind enough 
to let me go first. I do not want to hold up the hearing.
    Senator Scott. Quick, knock it out.
    Senator Tester. I can?
    Chair Brown. Yeah, go ahead.
    Senator Tester. You guys are both pretty----
    Senator Scott. I will yield you a minute of the Chairman's 
time.
    [Laughter.]
    Senator Tester. Will you? OK.
    So one of my concerns about the outcome of this, because 
the Fed report pointed out that the regulation was there to 
handle it, that the regulators did not enforce the regulation 
and hold people accountable. One of my concerns is that there 
will be a push to get more regulation. I think that is going to 
happen. I do not think it will happen, but I think there will 
be a push for it.
    But my concern is, similar to what happened in 2008, that 
the regulators will respond in a way where they put the screws 
to the banks who are following the rules, that the board is 
paying attention, that the executives are doing a good job.
    Do you see it the same way, and is there anything we can do 
to stop that? That is for Mr. Quaadman.
    Mr. Quaadman. First off, Senator, you are a small business 
man.
    Senator Tester. Yep.
    Mr. Quaadman. You understand how many of those banks work. 
And that is why I said, you know, that there was an esoteric 
model with the banks that we are talking about here.
    I do think, with the Federal Reserve, I think there were 
several assertions made in the report without the data, which I 
think is troubling. There were certain assertions made about 
executive compensation, and that we need to do more.
    Let me just read through page 75 of the report for a 
second, one sentence from the report, which contradicts some of 
what the assertions are, which is why I think your inquiries 
are going to be even more important. ``Supervisors' interviews 
with the Compensation Committee chair, SVB, indicated that the 
Compensation Committee decided not to reduce incentive 
compensation despite the known weakness of the enterprise risk 
management program. Freeing this would lead to the increased 
attrition of senior executives due to executives' compensation 
already being lower than peer firms.''
    So there is already contradictory information even in that 
report, which I think we need more information on.
    Senator Tester. The only thing that I would just say is 
that this board of directors did not do their job. Their 
executives did not do their job. If they got paid minimum wage, 
they got overpaid. That is all.
    Chair Brown. Thank you, Senator Tester.
    Senator Scott is recognized.
    Senator Scott. Jon, I could not agree with you more. There 
is no doubt that the failure that we are looking at for the 
bank execs is inexcusable, without any question. You and I will 
probably disagree on my next comment, but I will say that an 
Administration prints and spends trillions and trillions and 
trillions of dollars, that would be embarrassing to any drunken 
person with somebody else's credit card, is remarkable. And 
having the Fed have ten increases in about a year only exposes 
the vulnerabilities, and a bank that is gambling on lower 
interest rates, when every indication is it going higher and 
higher and higher, yet we do not have conversation about some 
of the underlying causes of an unstable, chaotic economy that 
leads to liquidity risks.
    On a different topic, it is not secret that these banks 
were rife with mismanagement. I said it myself time and again, 
and now even the regulators and the reports are confirming this 
truth. But the use of emergency powers may be just as 
detrimental to the continuity of our banking system going 
forward. If the Government is always there to intervene and 
bail out a failing bank, this could promote riskier decisions 
in the financial sector, moving forward. With potential bad 
actors hedging their bets with the strength of Uncle Sam, how 
could they lose? And that is not a bet I want to see.
    Principles of risk management are based around the 
possibilities of loss, and if we eliminate the reality of 
failure there ends up being no cause for prudent management, 
only a masking of bad decisions waiting to implode, like they 
did with SVB.
    Mr. Quaadman, does the increased usage of emergency powers 
incentivize proper management? And you already started to 
answer with Jon, with Senator Tester, without any question. But 
your last comment really struck me, and I wanted you to 
continue to expound upon this very important question. Jon and 
I both run businesses, and whenever you infuse in any sector 
the moral hazard that somehow you are just geniuses with no 
risk, because there is no chance of failure, you do incentivize 
more and more bad behavior and less focus on the underlying 
issue of prudent management.
    Mr. Quaadman. Senator Scott, there is a lot to unpack 
there, but I think you are hitting on the right points of we 
have had an issue of moral hazard. We have had an extended 
period of time of zero interest rates, where management and 
governance was not necessarily keeping pace with that. 
Additionally, regulators are not keeping an eye on things as 
well. So when we had the cash go up, right, with the spending 
that was happening, that had to go into bank deposits. There 
was not a sufficient focus on interest rate risk and the issues 
that had to happen there.
    One point I wanted to raise as well, and Senator Scott, as 
a small business person, regional banks are a very key player 
for Main Street businesses. They have been prudently acting and 
have not had the same esoteric issues here. But again, if the 
cop on the beat is not enforcing law, new authority is not 
going to do much.
    Senator Scott. Good work. Since 2008, the FDIC has filed 
dozens of lawsuits and entered into nearly 1,000 settlement 
agreements with officers, directors, and other professionals 
related to loss suffered by banks placed in FDIC receivership. 
Such actions have led to recoveries totaling more than $4 
billion. The FDIC has stated that it generally brings personal 
liability cases against the officers and directors of failed 
banks when there are these instances: dishonest conduct; 
inappropriate transactions with bank insiders; failure to 
establish, follow, or monitor sound underwriting policies and 
procedures; and failure to respond to concerns raised by 
regulators, counsel, or other professionals.
    Is there any reason to doubt that the FDIC has existing 
authority to hold senior leadership and directors personally 
liable?
    Mr. Quaadman. No. We think the authorities are there, and 
clearly you cite the statistics that show that. Additionally, 
the Fed and other banking regulators have those authorities as 
well. But what is clear, even from the rudimentary information 
that we have with SVB and the other banks, is that sufficient 
action was not taken, and some of these issues, in terms of, 
one, where management is not communicating problems to the 
board of directors, that is a red flag that should have been 
jumped on immediately and was not.
    Senator Scott. Two tools that work in your toolbox that you 
do not use does not mean you need a third one.
    Mr. Quaadman. Correct.
    Senator Scott. Thank you.
    Chair Brown. Thank you, Senator Scott.
    First question to all three of you, and please just answer 
yes or not. It is pretty straightforward. Do you agree that 
individual executives whose mismanagement and disregard for 
basic banking principles that led to the failure of these banks 
should face meaningful consequences for their action? Professor 
Lin?
    Ms. Lin. Yes.
    Chair Brown. Mr. Quaadman.
    Mr. Quaadman. Yes, if the information shows that.
    Ms. Schooner. Yes.
    Chair Brown. Thank you.
    It is clear, Professor Schooner, it is clear in the case of 
SVB and Signature Bank, executives failed to properly oversee 
and manage the risks of their institutions. Their compensation 
was tied to profits, which incentivized them to grow their 
banks. The SVB was almost unprecedented in the speed at which 
it grew. They also rewarded themselves with bonuses in the 
weeks and months leading up to their failure, even when 
regulators were raising red flag after red flag after red flag 
about risks at that bank.
    Do we need to deter this type of information by individual 
executives ahead of time so we can avoid a potential failure 
that put customers of the banking system, and ultimately 
taxpayers, at risk?
    Ms. Schooner. Yes, Senator. I think that we need to focus 
on the ongoing operations of banks in a safe and sound manner, 
and we should not send the signal to bank executives that when 
the bank fails they can walk away and that is it. I think that 
is the wrong kind of incentive. So we need to encourage prudent 
operations and management while banks are operating.
    Chair Brown. Thank you.
    Professor Lin, you have found that bank executives are 
rarely barred from the industry when they have engaged in 
mismanagement or poor supervision. Why is the existing removal 
power not suited for the executives of big banks like SVB?
    Ms. Lin. Thank you, Senator. There are two obstacles. The 
first is the culpability requirement, which currently is 
demanding. It requires personal dishonesty or a willful or a 
continuing disregard for the safety and soundness of the 
institution. And especially in larger banks, the challenge of 
proving willful complicity increases as to the distance of the 
wrongdoing. Executives today are shielded from liability 
because of the diffuse decision-making structure that exists in 
most large and mid-sized institutions.
    Second, there is a mismatch between the responsibilities of 
bank executives and directors which focus on systemic 
oversight, putting into place systems, internal controls, 
structures that promptly detect and efficiently deter 
operational risk. And the focus of the current authority to 
prohibit bankers from the industry, which narrowly focuses on 
discrete activities, and whether or not there was knowledge of 
and participation in discrete wrongdoing.
    So I would have two recommendations. The first is to adjust 
the culpability requirement, lowering it to perhaps 
recklessness or negligence, and the second is to identify 
mismanagement and oversight failure as a discrete basis for 
removal and prohibition from the industry.
    Chair Brown. Thank you.
    Last question, Ms. Schooner. Unlike many other countries 
that only have a handful of megabanks, the U.S. banking system 
has thousands of small banks that serve local communities. How 
would strengthening our enforcement tools to hold bank 
executives accountable not only help prevent failures but also 
improve fairness and competition between large and small banks?
    Ms. Schooner. So Senator, the reality is that most 
administrative enforcements actions are brought against the 
managers of failed institutions, and since megabanks do not 
fail, that means that they escape that kind of accountability. 
So I think reforming the administrative enforcement power that 
agencies currently have to better reach the managers of 
operating institutions would help level that playing field.
    Chair Brown. And I think all of us were concerned about the 
GSIBs that seem to get larger and larger, even those that have 
not performed particularly well. Wells Fargo is always the one 
that jumps to mind. All of those banks got bigger with 
migration of deposits after SVB and Signature deposits were 
moving to those big banks, including Wells Fargo, tens and tens 
of billions of dollars. And then what happened just this week, 
with FDIC choosing, under whatever decision-making that was 
done, choosing JPMorgan Chase.
    Senator Vance, from Ohio, is recognized.
    Senator Vance. Great. Thank you, Mr. Chair, and thanks to 
Senators Brown and Scott for hosting this important hearing.
    You know, I worked with some of my colleagues on some 
legislation related to clawbacks, and so I want to focus my 
line of questioning just one some very specific applications of 
how those potential statutes might work in practice. In 
particular, what we are worried about is, you know, you take a 
situation like Silicon Valley Bank, where executives paid 
themselves out very large amounts of money in the weeks and 
months leading up to the failure.
    And what is especially sick about this, of course, is the 
taxpayers end up bearing a lot of the risk of that failed 
decision making, and the executives end up running away like 
bandits. And that strikes me as an especially unfair way to run 
a banking system, where you can screw things up, pay yourself 
out fat bonuses, and then taxpayers end up dealing with the 
downside risk.
    So two particular questions that sort of come up in the 
conversations I have had with colleagues about this, how to 
narrowly tailor this such that you are targeting the bank 
executives who cause these problems and not, let's say, an 
administrative assistant or a bank teller who had no decision-
making authority in what ultimately led to the bank's collapse, 
whether that is Silicon Valley Bank or somebody else.
    This first question is going to Mr. Quaadman, and the 
question here is, can you explain who gets caught up in the 
statutory definition of a, quote, ``institution-affiliated 
party''? You know, could that potentially capture a bank 
teller, an administrative assistant to an executive? Sort of 
how broad does that sweep, because that influences how we draft 
this thing.
    Mr. Quaadman. It is extremely broad. You could also be 
talking about an accounting firm or a law firm that is 
providing services to that banking institution as well. Of 
course, lawyers and accountants are also extremely important 
for management and governance purposes, so firms would be 
reluctant to engage with a business if that provision was 
there. And that, again, goes toward the talent issues, the 
management issues. So that is an issue of particular concern 
that we have.
    Senator Vance. Great. OK. That is helpful to know, and 
certainly good knowledge for us to have.
    Professor Schooner, I wanted to sort of direct this 
question to you. One of the things that has sort of come up 
again on this question of narrowing is the question of 
directors and whether they should be liable under some of these 
clawback provisions. I know from my time in the private sector 
that ``director'' usually means a member of the board of 
directors, but sometimes it could be a director of marketing or 
a director of business development.
    So particularly that word, if you were to expose directors 
to clawback liability, do you think that could be reasonably 
interpreted by a court or a regulator to cover mid-level 
managers who have the director title, or do you think that 
would understandably, by most, be applied only to a member of 
the board of directors?
    Ms. Schooner. Senator, I think it would only be applied to 
the member of the board of directors. I have never seen that 
term used in a statute used to apply to anybody other than the 
board. In other words, the term ``director'' is really taken 
from the incorporation of the entity, and the responsible 
managers are the board of directors. So I would be very 
surprised if it was interpreted that way.
    Senator Vance. Got it. I would love to get the answer to 
that question from Mr. Quaadman and Ms. Lin.
    Mr. Quaadman. In reviewing some of the legislation 
announcements around before the Warren-Hawley bill, I think 
some of it could be--I agree in terms of the ``director'' 
issue, but I think some of the definitions could include line 
employees as well, which I do not believe is the intent. I 
think it is more trying to be directed around senior executives 
and others, where traditionally these compensation issues are 
more aligned.
    We have other concerns with the legislation, but we do 
think it could be over broad.
    Senator Vance. What is it that you think it could apply to 
line employees?
    Mr. Quaadman. I think it is how it is defined. Because if 
you look at other compensation statutes there are specific 
levels that are defined as to where entities--as to who it 
applies to.
    Senator Vance. Got ok. Ms. Da Lin.
    Ms. Lin. I agree with Professor Schooner, Senator, that 
``directors'' are typically used to refer to the board of 
directors, and, in fact, in several provisions, for example, in 
1818(e)(5), the term ``directors'' and ``officers'' are 
specifically defined in a way that also enumerates activities, 
such as substantial participation.
    So the focus of the statute and the aim of the statute has 
been always to use the term ``directors'' to mean boards of 
directors.
    Senator Vance. Got it. OK. Thank you all. I appreciate it, 
and I yield.
    Chair Brown. Thank you, Senator Vance.
    Senator Reed, of Rhode Island, is recognized.
    Senator Reed. Thank you, Mr. Chairman. Thank you, panel, 
for being here today.
    With Senator Grassley I have introduced S. 1181. It is the 
Bank Management Accountability Act. And our legislation would 
authorize the FDIC to claw back 2 years of compensation from 
directors and senior executives of failed, systematically 
important banks, and ban them from the financial industry. 
Frankly, I think the American public is appalled that they are 
looking at CEOs of Silicon Valley Bank getting $10 million, 
walking out with even more in terms of stock, and nothing can 
be done.
    Professor Schooner, how would depositors, regulators, the 
banking industry, and the American people all benefit if 
Congress were to strengthen FDIC's outdated and weak 
authorities for ensuring accountability in systematically 
important banks?
    Ms. Schooner. So Senator, I think you made an important 
point about the public's confidence in our financial system. I 
think that without clawback authority, particularly in the 
circumstances we are just living through, I think really that 
confidence in the financial system might be reasonably shaken. 
I think that reforms that would allow for that kind of 
accountability would not only impact the aftermath of a bank 
failure, but I also think it would impact the ongoing 
operations of a bank. Because bank directors and officers are 
quite aware, highly aware of their responsibilities, and I 
think that they would adjust their behavior accordingly.
    Senator Reed. And Professor Lin, do you have any comments?
    Ms. Lin. I fully agree with Professor Schooner that when 
banks are held accountable to the public, through regulators, 
enhanced regulators authority, those authorities seek to 
incentivize bank directors to operate not in shareholders' 
interests but also in the public's interest as well. We 
encourage them not to just focus on making the most profit and 
wealth maximization, but also taking steps to assure safety and 
soundness.
    And so by strengthening enforcement authorities that 
regulators can use against bank officers and directors, senior 
bank management, we strengthen their incentives to put the 
public's interest in mind.
    Senator Reed. I think both of you, particularly, one, it 
would enhance the confidence of the American public in the 
accountability and dedication to their interests by bank 
executives, and second, it would be a constant reminder to 
behave appropriately by the directors, and in both cases would 
enhance the overall stability of the financial system. Is that 
fair?
    Ms. Schooner. Yes, Senator, I agree. I think it would have 
both of those effects.
    Senator Reed. Thank you very much.
    The other aspect is that, and I think has probably been 
touched upon, our whole society, the world society is now 
supercharged by virtual connectivity. Are there any quick sort 
of thoughts you have about how the regulators deal with that? 
This is not Jimmy Stewart standing in the lobby, telling five 
people, ``Don't worry. Don't worry.'' It is instantaneously 
thousands of people saying, ``Get out. Get out. Get out of the 
bank now.''
    Ms. Schooner. Senator, I do think that complexity both at 
the bank operations level and in regulation is a problem. In 
the wake of the financial crisis of 2008-2009, there was a lot 
of talk about creating regulatory rules that were simpler, that 
could be applied more broadly, and I think we have sort of gone 
in the opposite direction. Regulation has become more and more 
complicated, and I think that makes it difficult for 
supervisors to apply those standards.
    And so I think that we could improve the system by dealing 
with the complexity of the institutions as well as regulation.
    Senator Reed. Thank you very much. Thank you all. Mr. 
Chairman, thank you.
    Chair Brown. Thank you, Senator Reed.
    Senator Britt, of Alabama, is recognized.
    Senator Britt. Thank you, Mr. Chairman. I appreciate all of 
you being here. Professor Lin, I have to say, as someone who 
went back to law school with essentially a newborn and an 11-
month-old, it particularly warms my heart to see Oliver here 
with you today.
    Ms. Lin. Thank you, Senator.
    Senator Britt. I want to start by saying I am proud being 
from a State where financial institutions are really strong. 
While Alabamians every day continue to face the daily impacts 
of inflation and economic uncertainty that I believe have been 
caused by the Biden administration's failed policies, I am 
proud of the work our regional banks, community banks, and our 
credit unions have continued to play to instill confidence in 
Alabama and to support our communities.
    Regarding the recent failures of Silicon Valley Bank, 
Signature Bank, and more recently, First Republic, I continue 
to be concerned with regulators' blatant failure to utilize 
their current authorities ahead of these events, and I believe 
that recent reports from the Federal Reserve, FDIC, and GAO 
even further spotlight these failures. I look forward to having 
the regulators back to testify later this month and provide 
more definitive answers to this Committee following their fact-
finding exercises.
    On today's topic, I certainly agree with my colleagues that 
bad actors at any institution must be held accountable. In this 
particular case, it is clear that there were significant 
mismanagement and risk controls at both Silicon Valley Bank and 
Signature that just went awry. And I believe any individual 
that knowingly contributed to or unjustly profited from the 
bank's failure and ultimate downfall should absolutely be held 
responsible.
    I want to discuss potential legislation, but before we do 
that, I think it is very important not to be duplicative. So 
very quickly, if we can just go across, and I will start with 
you, Professor Schooner, you mentioned existing law. If we can 
very tightly talk about what law is on the books currently that 
could be used to hold these bad actors accountable.
    Ms. Schooner. The bank regulators have administrative 
enforcement authority to bring actions in multiple different 
ways. The standards of culpability are high though, and so that 
is where I think that there could be some reform in those laws.
    Senator Britt. Thank you. Mr. Quaadman.
    Mr. Quaadman. Senator Britt, you know, if you take a look 
at the existing authorities that banking regulators have, the 
Department of Justice has, the SEC has, we do believe that 
those authorities can hold those people accountable, and we 
think that it is important. That is why I raised the Credit 
Suisse issue of, if we put things out of balance it is actually 
going to make our banking system weaker, and we do not want to 
go down that road.
    Senator Britt. OK. Let's actually drill down on that. How 
do you feel like there could be something that would be 
narrowly tailored that would not do that? Because the problem 
is you want to make sure that you are holding bad actors 
accountable, but not being overly broad, and clawbacks deter 
talent from entering this industry. You all have said, 
obviously, the banking industry is so critical to making sure 
that this country continues to thrive in the way it does, and 
so we need the best and brightest going into the banking 
sector.
    So can you drill down on a narrowly tailored solution to 
that?
    Mr. Quaadman. One of the reasons why I think that the 
upcoming hearings are so important is that we have the bank 
saying to the regulators, Silicon Valley Bank saying to the 
banking regulator, ``Our comp packages are below where our 
peers are.'' But then there are all these governance issues 
that then the supervisors are flagging but they are not doing 
anything on.
    So I think it is more looking at what broke down within the 
regulatory structure that needs to be done, because that is why 
I said, with Mr. Scott's questioning, of if the cop on the beat 
is not enforcing the laws, new laws are not going to do 
anything.
    Senator Britt. Correct. Correct. And Professor Lin?
    Ms. Lin. Thank you, Senator. I also agree that the current 
structure has enforcement tools at a regulator's disposal, but 
their hands are tied.
    Senator Britt. What would you use? If I made you right now, 
try to hold these men and women accountable, who unjustly 
enriched themselves, what would you use?
    Ms. Lin. There are three main tools. One is the removal and 
prohibition authority, which bars the bankers from the 
industry. The second could be civil money penalty order, which 
has been used against executives. And third would be a personal 
cease-and-desist order, which could halt certain activities and 
ask bankers to refrain from certain activities, identifiable 
activities, in the future.
    Senator Britt. OK. And those are all on the books right 
now. That is what you would use.
    Ms. Lin. But their culpability standards make it difficult 
for regulators to use, especially against senior leadership at 
large banks.
    Senator Britt. OK. I am out of time, but I certainly 
believe we need to hold these people accountable, but make sure 
that that is narrowly tailored to address the issue at hand. 
Thank you.
    Chair Brown. Thank you, Senator Britt.
    Senator Fetterman, of Pennsylvania, is recognized.
    Senator Fetterman. Thank you, Mr. Chairman.
    I would just like to keep everything simple here. This is 
question for really all three of you. Really, what do you think 
is the reason of the collapses? Was it incompetency, was it 
greed, or was it virtuous risk?
    Ms. Schooner. I think mismanagement was the primary cause.
    Senator Fetterman. And incompetency?
    Ms. Schooner. Yes.
    Mr. Quaadman. I think there was mismanagement, but there 
were also supervisory failures that did not allow for 
appropriate governance to take place.
    Senator Fetterman. Really? You do not believe that there 
was just incompetence?
    Mr. Quaadman. No. I think that there were issues in terms 
of, with Silicon Valley Bank, where they did not have a chief 
risk officer for a long period of time. They had a long 
transition with their chief financial officer, which created 
management issues. But then where the supervisors were actually 
flagging some of these issues, they never took any follow-up 
action, which could have prevented the collapse from happening.
    Ms. Lin. Senator, I believe that it was mismanagement, 
specifically, that the leadership pursued rapid, unrestrained 
growth without appreciating or adequately controlling the 
increasing risks that the banks faced.
    Senator Fetterman. Mismanagement. Was that really clouded 
by greed, or just incompetence? You know, were they just 
incompetent? I think these were high achieving, you know, 
executives and successful banks. Do you think it was not greed, 
or do you think, theoretically, they were like, ``We can really 
crash really good, because they are going to come clean up our 
mess here,'' kind of a thing. Because that, to me--what do you 
think? Because I do not think an average human being in our 
nation, you know, would not just say, ``Hey, you know what? I 
am going to run up too much debt and I am going to come by 
bankruptcy, but I am going to get paid it off,'' kind of a 
thing.
    So do you think anything that is not part of this idea that 
we are going to clean up my mess?
    Ms. Schooner. Senator, I believe that mismanagement is the 
problem, but you are talking about the motives for 
mismanagement, and I think that what the Fed report suggests is 
that the motives were short-term gains that were tied to 
compensation. In fact, I think it was one of the most startling 
findings in the Federal Reserve's report.
    Mr. Quaadman. Senator, first off, we look forward to the 
upcoming hearing that you are going to have with the CEOs of 
these banks, to get more information to better understand that. 
But again, there was a failure of board oversight. There was a 
failure of management making appropriate decisions. There was a 
failure of the supervisors to actually oversee this. And 
interestingly enough, we have investors such as JPMorgan Chase 
issue an investor note with Silicon Valley Bank in November, 
yet there was no action taken by the supervisors.
    So I think there is a lot of blame to go around here.
    Ms. Lin. Senator, I think that the incentives are twofold, 
at least, with the mismanagement. First, there is the problem 
of compensation, which drives incentives toward short-term 
gains. Second, as the reports reveal, there is the problem of 
growing banks, that the management perhaps, which could be 
characterized as incompetence, did not grow with the size of 
the banks, and that led to incompetence in the performance of 
their duties.
    Senator Fetterman. Personally, I just find a hard time 
believing that they do not believe that these banks realize 
that someone is going to come in to save me. And I think they 
figure that the kind of risk, they know that because they are 
not going to be held accountable, and they are going to be made 
whole. And I just find that your average American would find 
that outrageous.
    Anyway, thank you.
    Chair Brown. Thank you, Senator Fetterman.
    Senator Warner is recognized from his office. Senator 
Warner, of Virginia.
    Senator Warner. Thank you, Mr. Chairman, and I appreciate 
you holding this hearing. I agree with a lot of my colleagues' 
comments that I think this was a disaster that could have been 
avoided, on Silicon Valley Bank in particular. The number of 
notices that the regulators had the bank management had that 
things were going awry and the fact that nobody acted on those 
is extraordinarily problematic.
    I also appreciate the fact that you have got Professor Da 
Lin from University of Richmond, another great law school, 
another great Virginia person on this panel, and I have 
listened in on some of her comments.
    As you know, Mr. Chairman, I, along with a lot of other 
Members, have cosponsored all of the legislation out there on 
the ability to claw back provisions from management who are 
irresponsible, who make these kinds of mistakes. I do know, and 
I appreciate the fact that we need to move on some of this 
legislation, and I look forward to a markup taking place soon. 
And given we are seeing what may be follow-on Silicon Valley 
Bank and First Signature, the dislocation that is taking place 
in the regional bank markets today. You know, we are seeing 
what appears to be close to a meltdown, and a lot of this not 
due to maybe necessarily bad management practices, but the 
potential for contagion that is taking place. But making sure 
we have got rules in place for clawbacks, making sure that the 
regulators move forward on the executive compensation issues is 
something that I know other colleagues have mentioned as well.
    I guess my one question for the whole panel will be about 
the role of boards of directors, and answering Senator 
Fetterman's questions about board responsibilities. I think too 
often bank boards have been viewed as a nice perk to have, but 
with that ought to be a greater level of responsibility. I 
know, Professor Schooner, that you have talked about this, but 
could the whole panel give us some guidance on what policy 
recommendations we should put in place to make sure that all 
board responsibilities, but bank board responsibilities, in 
particular, are taken in a more serious vein, both incentive-
wise and potentially penalty-wise, if bank boards, in the case 
of Silicon Valley Bank, do not take their actions responsibly? 
So I would ask the whole panel to address that.
    Ms. Schooner. Thank you for that question, Senator, and as 
a Virginia native I am happy to take this particular question 
from you. The boards of directors, the functioning of the board 
of directors is different from the executive suite in that 
boards are responsible for overseeing operations and making 
sure that risk management procedures are in place. That can 
lead to unsafe and unsound banking practices, but our current 
administrative enforcement laws could be amended to make 
clearer that that oversight function is the standard by which 
directors are held.
    Senator Warner. Would the absence, in the case of Silicon 
Valley Bank, of not having a chief risk officer for 8 months 
when the bank was experiencing this kind of growth, would that 
have not been a board responsibility to hold management 
accountable?
    Ms. Schooner. Absolutely.
    Mr. Quaadman. Senator, I was just going to say, as with any 
public company, the board is an extremely important part of the 
oversight function and governance of the company. As you just 
cited, the lack of a chief risk officer was a board issue. The 
lengthy transition of the CFO was a board issue. What is also 
concerning coming out of the Federal Reserve report, which I 
think we need more information on, is also how management was 
not reporting to the board information that they should have 
had, where the board should have taken action on as well.
    So we are looking forward to more of the information coming 
out of your hearings to better understand where those failures 
where and what action, if any, should be taken.
    Senator Warner. Thank you.
    Ms. Lin. Senator, the enforcement actions that are 
currently at regulators' disposal do not take into account 
oversight responsibilities, clearly, as a basis for authority 
action. So for example, in Wells Fargo, Wells Fargo had 
implemented, according to a report, better tools and systems to 
detect employees who did not meet their sales goals than it did 
to catch employees who engaged in sales practices misconduct. 
This is a problem of board oversight. They did not implement 
the proper structures, systems, and internal controls.
    Yet for prohibition action, the regulators are asked to 
train their eyes solely on the wrongful activity, who knew and 
who engaged in that sales misconduct themselves, rather than 
what structures were in place, what board failures there were.
    Senator Warner. Thank you, Mr. Chairman. Thank you, 
panelists.
    Senator Chafee. Thank you, Senator Warner.
    Senator Tillis, of North Carolina, is recognized.
    Senator Tillis. Thank you, Mr. Chair. Thank you all for 
being here.
    I have been watching the hearing when I have had the 
opportunity to in my office, and Senator Fetterman asked a 
question of all three of you, and it had to do with what the 
root cause was of the bank failure. Ms. Da Lin--did I pronounce 
that right?
    Ms. Lin. Yes, Senator.
    Senator Tillis. ----you said it was management. I agree. 
Mr. Quaadman, you said it was management and supervision. I 
agree. Ms. Schooner, you said management.
    Why did the two of you not mention any skepticism around 
the level of supervision and that being a potential root cause? 
The chief risk officer is an obvious one, I agree. That was a 
mess of management. I think the CEO not understanding his 
liquidity threats and internal liquidity stress testing results 
that he had to have some indication of before he dumped stock. 
And this is also something, who was a Class A director on the 
board of directors, who lost his job the day the failure was 
identified.
    Why would not the fact that three matters requiring 
attention and three matters requiring immediate attention--what 
we do not know yet and we hope to find out in the report is 
whether or not any of those MRAs become MRIs--why did not 
management act on that and why did not the supervisory function 
press the accelerator on getting a response and resolution to 
that?
    It just seems to me, on its face, and I could get into more 
details, but it just seems to me, on its face, anybody that is 
looking at this, to not stipulate that it was both a breakdown 
in executive management, and every single dime that we can claw 
back from anybody in the C suite, we should, and I do believe 
that there are devices to do that now, that we should act on. 
But why would that not be a part of your observation of some of 
the factors that likely led to it?
    Not to mention the overall portfolio. If you take a look at 
Silicon Valley Bank, we have other banks that are now getting 
caught up by depositors thinking, well, maybe they were like 
Silicon Valley Bank. There are only a handful of banks that 
have the kind of risk portfolio that Silicon Valley Bank had.
    So Ms. Da Lin, why would you not have mentioned a 
supervision lapse as one of the potential root causes? I have 
the same question for you, Ms. Schooner.
    Ms. Lin. Thank you, Senator. I do think that we found out 
two important causes of the recent bank failures from the 
reports that were released last week. First, senior leadership 
was incentivized to pursue short-term growth----
    Senator Tillis. But talking more about the supervisory 
question.
    Ms. Lin. Yes. Also we learned that regulators missed 
obvious problems and they were slow to address the problems 
they did recognize. And management----
    Senator Tillis. OK. So I do not want to interrupt you, but 
I do not want to be the last person--oh well, Senator Warren is 
here so I will not be the last person. So it was not that you 
do not think that there are clearly some questions to be 
answered there. In response To Senator Fetterman's question, 
you just did not go down that path in your response. You said 
it was a failure of management. But you also understand there 
are questions that have to be asked on the supervisory 
function?
    Ms. Lin. Yes, Senator.
    Senator Tillis. That is good. I am sorry to interrupt you. 
I hate the 5-minute limit, but it is there for a reason. Ms. 
Schooner?
    Ms. Schooner. I answered Senator Fetterman's question 
because I interpreted it as asking me what the primary cause of 
the failure was, and I see it as a management failure. I agree 
with you that regulatory forbearance is a persistent problem in 
our system, but I also think that it is very important to keep 
in mind a finding about Silicon Valley Bank which I found 
alarming, that the management was relying on bank regulators to 
help them manage their interest rate risk, and that is----
    Senator Tillis. I think there is one more layer to the 
supervisory discussion where I know I disagree with some of my 
colleagues who did not support Senate bill 2155. But we did not 
stipulate that regulatory--there are escalation options, 
because we said that they may be able to take a given bank, 
based on its activities and the risks that a supervisor 
perceives, and subject them to a regulatory regimen that we do 
not think is necessary for other banks with very different 
portfolios. So I also want to know why the supervisor chose not 
to do that, particularly if that supervisor had six outstanding 
MRAs or MRIs. That, to me, leads me to believe that we may find 
out, if we have an objective assessment, if there was equal 
weight in that.
    CEOs were incompetent. You need to claw back as much of 
their compensation as possible. Maybe the supervisory function 
of the Fed in San Francisco could have equal weight in why that 
failed.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Tillis.
    Senator Warren, from Massachusetts, is recognized.
    Senator Warren. Thank you, Mr. Chairman.
    So in its postmortem of the Silicon Valley Bank collapse, 
the Fed found that legislation passed out of this Committee in 
2018, led to weakened rules for big banks that were major 
contributors to Silicon Valley Bank's failure. The lessons, I 
think, are clear. Regulators need to strengthen bank oversight, 
and Congress must reinstate stronger rules.
    And here is a place to start. SVB, Signature Bank, and 
First Republic all lobbied Congress to weaken the guardrails, 
preventing them from making risky bets with depositors' money. 
And then surprise, surprise--these executives took risks to 
boost their short-term profits, gave themselves huge salaries 
and bonuses and stock options, and when they crashed their 
banks, they walked away with fortunes.
    That is why Senator Cortez Masto, Senator Hawley, Senator 
Braun, and I introduced a bipartisan bill to ensure that when 
executives crash their banks and threaten the banking system, 
those executives are forced to give up their fancy compensation 
packages.
    Professor Lin, you are an expert on corporate governance 
and financial regulation. If our Failed Bank Executives 
Clawback Act, which applies to failed banks, no matter how they 
are dealt with by the FDIC, had been the law of the land when 
SVB failed, would it have applied to SVB executives?
    Ms. Lin. Yes, I believe so, Senator.
    Senator Warren. Uh-huh. And would it have applied to 
Signature executives?
    Ms. Lin. I believe so, Senator.
    Senator Warren. And would it have applied to First Republic 
executives?
    Ms. Lin. I believe so.
    Senator Warren. All right. SVB, Signature, and First 
Republic were resolved by the FDIC through different processes, 
using different statutory authorities. To make clawbacks 
effective we have to give regulators broad authority to claw 
back executive pay whenever banks collapse, regardless of the 
specific process that the FDIC uses to pick up the pieces.
    Now, unsurprisingly, bank executives hate clawbacks. They 
want to keep on taking risks with zero consequences.
    Professor Lin, if our banking regulators had the choice 
whether or not to claw back executive compensation after a bank 
failure would you expect Wall Street to exert significant 
pressure on them not to use that authority?
    Ms. Lin. Yes, I think that is a real possibility.
    Senator Warren. You know, it is clear that giving 
regulators power to do something is not always enough. Congress 
needs to force regulators to use it, which is what Senators 
Cortez Masto, Hawley, Braun's and my bill does.
    Now in its review of the Silicon Valley Bank collapse, the 
Government Accountability Office found that, quote, ``In the 5 
years prior to 2023, regulators identified concerns with 
Silicon Valley Bank and Signature Bank, but both banks were 
slow to mitigate the problems the regulators identified, and 
risks built up over time.''
    Professor Schooner, if regulators had had the authority 
they needed to claw back compensation from Silicon Valley Bank 
executives, would it be reasonable, in your view, for them to 
consider the executives' actions and pay since 2018, when the 
regulators first began warning Silicon Valley Bank about its 
risky practices?
    Ms. Schooner. Senator, I think that would be very 
reasonable. Incentive arrangements often rely on short-term 
metrics, that it takes long-term to determine whether those 
involve excessive risks. So I think giving regulators the 
opportunity to capture that kind of excessive risk-taking is 
reasonable.
    Senator Warren. OK. That is very helpful. Thank you.
    You know, Congress needs to put in place tough rules that 
make sure that executives pay up when their actions lead 
directly to a bank failure, and in order for us to do that, the 
regulation needs to do three things: force regulators to claw 
back compensation from the executives who are responsible for 
the failure; second, apply in all cases of bank failure, no 
matter how the particular form comes out; and third, allow up 
to 5 years of compensation to be clawed back.
    My bill with Senators Cortez Masto, Hawley, and Braun 
achieves all three of those, and I hope that this Committee 
will take action on it soon.
    Thank you, Mr. Chairman.
    Chair Brown. Thank you, Senator Warren.
    Senator Cortez Masto, I understand, is joining us from her 
office, from Nevada.
    [Pause.]
    Chair Brown. She is not.
    [Pause.]
    Chair Brown. I will just make a closing statement because 
they are not here. Bottom line is bank executives responsible 
for these failures, they need to be accountable. I agree with 
Ranking Member Scott that if this bank were a restaurant with 
31 safety violations it should be shut down, but it would not 
be shut down if the chief health inspector is telling the 
inspectors to go easy on the restaurant, because keeping people 
safe is just as important. That is what former Vice Chair 
Quarles said after he weakened the rules at the Fed, what he 
said. That is why we need to strengthen regulatory guardrails.
    Thanks to our witnesses today for their testimony. Senators 
who wish to submit questions for the record, these questions 
are due 1 week from today, Thursday, May 11th. To the 
witnesses, please submit your responses to the questions for 
the record 45 days from the day you receive them.
    The hearing is adjourned.
    [Whereupon, at 11:31 a.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
supplied for the record follow:]
               PREPARED STATEMENT OF CHAIR SHERROD BROWN
    Most Americans who put their money in a bank should trust that it 
will be safe. They shouldn't have to give it a second thought.
    That money isn't just sitting in the bank vault collecting dust. 
Working Americans lend their hard-earned money to their banks, with the 
promise to get it back, with a little interest. They expect that their 
banker will not only keep their money safe, but that they'll also take 
those customer deposits and put them to good use.
    And that's what many banks do.
    They make loans to small businesses, issue mortgages to homebuyers, 
and finance new apartment buildings so that our communities can 
continue to grow and prosper. This is Banking 101. It's pretty boring--
as good banking should be.
    Because of the important role that banks play in our economy, that 
responsibility comes with a public safety net--American taxpayers 
subsidize this industry with Government guarantees, like deposit 
insurance and access to emergency loans.
    These are perks that most Americans don't get. Workers don't have 
access to special emergency loans when something goes wrong in their 
life.
    Banks get special treatment, because they're supposed to play a 
special role in our economy.
    But we've seen over and over that some bank executives don't hold 
up their end of the deal.
    Banks need to manage their risks, build capital, and be able to pay 
back their depositors when they need their money back.
    That's not what happened at Silicon Valley Bank and Signature Bank.
    Their CEOs and executives led their banks off a cliff.
    They failed to manage the risks associated with their business 
model and investments. They lacked strong corporate governance and 
internal controls. They failed to respond to--and in some cases 
ignored--regulators' concerns.
    And we ended up with a bank run.
    As their banks grew rapidly--more than doubling and tripling in 
size in just 3 years--their already-weak risk management couldn't keep 
up.
    It's the Wall Street business model we see corporations follow over 
and over: executives put short-term profits above everything else.
    In this case, that meant taking on more and more risk. Fatter 
profit margins meant higher payouts for those at the top--and more risk 
for the small businesses with their money in the bank.
    At Silicon Valley Bank, executive bonuses were tied to the bank's 
return on equity, so they bought securities with higher yields to chase 
higher and higher profits. When those investments started to lose 
money, instead of changing course they doubled down.
    At Signature Bank, executives had incentive compensation plans that 
were tied to return on assets to ``reflect additional focus on 
profitability.''
    ``Additional focus on profitability.''
    Then when the writing was on the wall, SVB executives dumped 
millions of dollars' worth of company stock.
    At First Republic, senior executives sold millions in their bank 
stock less than a week after SVB and Signature Bank failed and sparked 
further concerns at their own bank.
    For a lot of Americans, this all brought a sickening feeling of 
deja vu.
    Everyone remembers 2008. We all remember Wall Street wrecking our 
economy, setting off the worst recession since the Depression that cost 
millions of Americans their jobs and their homes.
    And Americans will never forget that, by and large, the Wall Street 
executives who caused all that pain didn't face any consequences.
    Their profits and bonuses weren't clawed back--they went up.
    Only in corporate boardrooms can you run your business into the 
ground, take the whole economy along with you, and come out ahead.
    We cannot--we will not--let that happen again.
    Bank executives who take on too much risk and crash their banks 
because of their own hubris and greed shouldn't get to ride off into 
the sunset with their ill-gotten gains.
    And they shouldn't get to take their bad behavior to another bank, 
where they can continue to profit off an unsustainable business model 
and put more people's money at risk.
    When it comes to holding big bank executives accountable for their 
recklessness, the wheels of justice move slowly--or often not at all.
    We know that when workers make just one mistake--if they overdraft 
their bank account or miss a credit card payment, they get dinged with 
fees and penalties.
    But when big bank executives and giant Wall Street firms do 
something far worse, like run their bank into the ground or crash our 
whole economy, they're almost never held accountable.
    The big banks have more money and resources to fight tooth and 
nail. They have layers of complex management and bureaucracy to shield 
them. And that makes it harder and takes longer to enforce the law.
    Just a few days after the SVB and Signature Bank failures, Carrie 
Tolstedt, the former Wells Fargo executive who led the bank's years-
long fake account scandal that was uncovered in 2016, was finally 
banned from the industry and fined $17 million.
    Only now--nearly a decade later--is the executive responsible for 
the massive scandal that hurt hundreds of thousands of Americans being 
held to account.
    We need to strengthen our financial watchdogs' ability to impose 
fines, ban bad actors from the banking industry, and claw back 
compensation, so that accountability doesn't just apply to the teller 
who miscounts the cash box or the community bank director who makes a 
bad judgment on a loan.
    We must modernize our enforcement rules to match the size and 
complexity of banks with billions of dollars in assets and multiple 
business lines--banks like Silicon Valley and Wells Fargo.
    We need legislation to:

    Expand the banking agencies' authority to ban a bank 
        executive or manager from the industry for failing to properly 
        oversee the bank's operations.

    Make it easier for agencies to bring actions against bank 
        executives and managers who are asleep at the switch, so we can 
        disincentivize the lax oversight that leads to bank failures.

    Clarify and expand the FDIC's authority to claw back 
        compensation.

    Increase penalties and make it easier to impose fines 
        against bad actors.

    Require the agencies to finally finish the Dodd-Frank 
        section 956 rule on incentive-based compensation.

    I have been talking to many of my colleagues about this, including 
the Ranking Member, and I know there is bipartisan interest on many of 
these issues. Two of the Members on this Committee have bipartisan 
bills. I hope we can work together to get this done.
    As we've seen over the past few months, we need a system that 
deters excessive risk taking and imposes real, financial consequences 
on individuals for failing to oversee and manage those risks. Bank 
executives cannot continue to operate under the assumption that basic 
risk management is optional and secondary to making profits.
    Let me say that again: Bank executives cannot operate a bank in a 
manner where risk management is optional.
    And that's exactly what happened here, and is underscored by the 
reports the regulators and GAO put out last week. Executives failed to 
manage these banks.
    Later this month, we will hear from the regulators about what they 
can do to strengthen their oversight and supervision and how we can 
make the banks and our financial system more resilient. And we will 
hear directly from the failed bank executives, who must answer for 
their banks' downfalls.
    But today, our focus is on how to improve the tools we have to hold 
bank executives accountable and prevent these failures from happening 
in the first place.
    Ultimately, bank executives are responsible for the success or 
failure of their institution. They are responsible for keeping their 
depositors' money safe. They know when they sign up for the job that 
banking is built on trust. They are responsible for holding up their 
end of the deal.
                                 ______
                                 
                PREPARED STATEMENT OF SENATOR TIM SCOTT
    Today we're supposed to be talking about ``Holding Executives 
Accountable After Recent Bank Failures''. But from where I sit, all I 
see is finger pointing. I don't see anyone--from the bank executives, 
to the regulators, to the Biden administration--taking meaningful 
accountability for their actions that played a role in the recent bank 
failures.
    We should, 100 percent, discuss certain authorities regulators have 
to claw back executives' compensation if that individual acted in 
malpractice. And we should discuss the lack of accountability at the 
executive and board of director level, as well. But we should not 
forget that the regulators should also be held accountable.
    So, like I have said from the beginning, this was a failure in 
three parts, and we must discuss accountability across the board--for 
bank executives, bank regulators, and this Administration's 
inflationary spending policies. And I look forward to addressing these 
issues later in hearings this month.
    As for the bank executives, these were not your average banks. They 
were like the Las Vegas betting tables of banks that rolled the dice on 
falling interest rates when everything pointed in exactly the opposite 
direction. And if that didn't have the red alert sirens going, we now 
know that they suffered rampant mismanagement and these very same risks 
that brought the banks down were in plain sight [of] the supervisors. 
Flashing red lights, without a question. What a blatant disregard for 
economic conditions, a disregard for supervisory warnings, and a 
disregard for basic corporate governance and risk controls.
    To start, SVB operated without a chief risk officer for 8 months 
following the resignation of the previous officer in April of 2022. A 
very fast-growing bank--unprecedented growth--without a risk officer 
for 8 consecutive months. But even more concerning is when Silicon 
Valley Bank failed, it had 31 open supervisory findings, and that level 
of findings is about three times the number [at] other peer banks.
    As a Charlestonian, I want to put it a different way. We are known 
for amazing restaurants and fantastic food. If one of our restaurants 
had 31 safety or health violations, they would be shut down in a 
heartbeat! We wouldn't get to 31. But what's more, if an inspector 
failed to take note of those 31 safety or health issues in the first 
place, they would lose all credibility and their [job]!
    Regulators must also be held accountable for their supervisory 
failures to the same extent that the failed banks' executives and 
directors should be--otherwise, there is no incentive for anyone at 
fault to change.
    Just last week, we received the Federal Reserve and FDIC's reports 
on the failures of SVB and Signature Bank. The Federal Reserve report 
acknowledged the supervisors did not fully appreciate the extent of the 
vulnerabilities as SVB grew in size and complexity. But rather than 
focusing on these failures and providing mechanisms to ensure 
sufficient steps are taken in the future, the Federal Reserve used the 
report as a scapegoat to push its progressive, regulatory agenda.
    Where is the accountability for the inaction [of] the Federal 
Reserve? I think we should all keep in mind that the last time Michael 
Barr testified before the Committee, he would not commit to firing any 
of the employees who failed to do their jobs. The FDIC's report also 
found supervisory failures as well as failures in bank management. 
Additionally, after the failure of a second California bank, First 
Republic, with over $200 billion in assets over the past weekend, it is 
clear that the practices and the standards of the California State 
supervisors also merit congressional scrutiny.
    Turning back to the bank executives. We must find a path forward to 
holding bad actors accountable. We all know that market behavior is a 
driving force, and perhaps we should look to strengthening corporate 
responsibility through good governance mechanisms.
    For example, it has been reported that SVB's bonuses came with so-
called clawback provisions that would [have allowed] the lender to 
recoup the pay if there was wrongdoing. However, there was no provision 
allowing the bank to claw back the money if excessive risk-taking led 
to the losses. I certainly think this is something we can, and should, 
discuss.
    At the same time, if good governance reforms are not appropriately 
targeted and calibrated, an overly prescriptive approach has the 
potential to further siphon and divert talent away from the banking 
sector to nonbank sectors of the financial services industry. As we 
have seen here, good management is absolutely essential. Recruiting 
talented folks at financial institutions is of the utmost importance in 
making sure that these institutions run smoothly and soundly.
    It is questionable whether we should be encouraging supervisors to 
dedicate more time, attention, and manpower to evaluating the riskiness 
of compensation practices when they failed to resolve bread-and-butter 
banking practices at these failed banks. The FDIC, the SEC, and the DOJ 
have authorities to hold management at these failed banks accountable 
for any misconduct.
    At the end of the day, the United States banking system is one of 
the most heavily regulated industries in the world. What is the point 
of having law after regulation after rule after guidance if the 
regulators aren't using the tools they already have at their disposal? 
It doesn't matter what we do in Congress if the regulators don't 
implement and enforce the laws we create as intended.
    With that, I look forward to hearing from our witnesses on 
accountability across the board, with existing authorities and any 
potential suggestions you may have.
                      PREPARED STATEMENT OF DA LIN
    Assistant Professor of Law, University of Richmond School of Law
  GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT                             May 4, 2023

                 PREPARED STATEMENT OF THOMAS QUAADMAN
 Executive Vice President, Center for Capital Market Competitiveness, 
                        U.S. Chamber of Commerce
                              May 4, 2023
    Chairman Brown, Ranking Member Scott: my name is Tom Quaadman, 
Executive Vice President of the U.S. Chamber of Commerce's Center for 
Capital Markets Competitiveness. Thank you for the opportunity to 
testify today regarding recent bank failures, executive compensation, 
and the importance of a well-functioning system of corporate 
governance.
    The failure of Silicon Valley Bank has prompted many legitimate 
questions about the nature of bank management, regulation, supervision, 
and the compensation incentives of bank executives. The work of 
policymakers and the regulatory system to investigate the causes of 
SVB's failure and subsequent entities is crucial, and the business 
community is one of the beneficiaries of these investigations. To 
create well-functioning and attractive capital markets in the United 
States, the entire economic ecosystem needs to have well-defined and 
clear regulation that can be well-understood, implemented, and adhered 
to. While the circumstance of bank failure is a difficult way to learn 
lessons about what regulations are working and which are not, the work 
of this Committee, the House Financial Services Committee, and the 
prudential regulators to identify how such failures happen helps to 
improve the marketplace for all participants.
    There are, however, important aspects of the SVB failure that must 
not be overlooked and cannot be understated; Chief among these is the 
blatant mismanagement of the bank and an unexplained disregard for 
clear regulation. For instance, despite a clear requirement that 
financial institutions maintain a Chief Risk Officer (CRO), SVB was 
effectively without one for 8 months. \1\ According to SVB's risk 
committee charter, the CRO is responsible for reporting ``regularly'' 
on the company's ``top risks, significant risk issues and overall 
management.'' \2\ Moreover, according to the company's 2022 proxy 
statement, the Chief Risk Officer ``reviews and shares her input on 
[compensation] risk assessments, and reports and discusses with the 
committee her risk assessment of our compensation programs (including 
plan design and execution), and any recommendations.'' \3\ In 2022, the 
company concluded that ``Based on these assessments and discussions, we 
do not believe that our compensation program promotes excessive risk 
taking or creates risks that are reasonably likely to have a material 
adverse effect on the company.'' \4\ As the Congressional Research 
Service identifies, SVB had, over the last year-and-a-half leading up 
to the failure, received six supervisory warnings from the Federal 
Reserve System (Fed) and offered some of the most generous compensation 
packages among publicly traded banks. \5\ It is clear that the absence 
of a CRO--and management's failure to appoint a new one--had an impact 
both on the company's overall risk assessment and the compensation 
plans deployed at the company.
---------------------------------------------------------------------------
     \1\ ``Silicon Valley Bank Had No Chief Risk Officer for 8 Months 
While the VC Market Was Spiraling''. Fortune. March 10, 2023. Available 
at: https://fortune.com/2023/03/10/silicon-valley-bank-chief-risk-
officer/.
     \2\ Silicon Valley Bank Risk Committee Charter. Available at: 
https://www.svb.com/globalassets/library/uploadedfiles/content/
corporate-governance/board-risk-committee-charter--april-2022-
final.pdf.
     \3\ Silicon Valley Bank 2022 Proxy Statement, p. 29. Available at: 
https://www.svb.com/globalassets/library/uploadedfiles/content/
corporate/2022-proxy-statement.pdf.
     \4\ Id.
     \5\ Congressional Research Service. ``Silicon Valley Bank's 
Failure and Potential Director/Officer Liability''. April 7, 2023. 
Available at: https://crsreports.congress.gov/product/pdf/LSB/LSB10946.
---------------------------------------------------------------------------
    As Members of Congress and other stakeholders have rightly pointed 
out, mismanagement at the bank and delinquencies related to supervisory 
action are not necessarily due to a lack of regulation. Human error is 
elemental to SVB's failure. Consequently, one of the questions left 
outstanding relates to appropriate management safeguards, 
repercussions, and examining compensation incentives to be sure they 
sufficiently align the interests of the entity as a whole and broader 
market with individual interest.
    In response to this question, some Members of Congress and 
regulators have called for rulemaking under section 956 of the Dodd-
Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-
Frank), despite guidance issued in 2011. Section 956 seeks to limit 
compensation packages that encourage excessive risk-taking. Incentive-
based compensation arrangements are critical tools in the management of 
financial institutions. Compensation plans are uniquely designed by 
boards of directors and management and are tailored for the employees 
of a particular institution. While financial institutions should avoid 
excessive risk that damages the long-term viability of the firm and 
potentially the financial system as a whole, it is essential that any 
regulator charged with writing compensation rules comprehensively study 
all the relevant issues and data and analyze the likely effects of its 
regulations on the highly competitive market for talent. To date, the 
agencies responsible for section 956 have taken a much too prescriptive 
approach that deviates from congressional intent when they have 
proposed rules in 2011 and 2016. \6\
---------------------------------------------------------------------------
     \6\ Comments from Tom Quaadman responding to the Office of the 
Comptroller of the Currency, Board of Governors of the Federal Reserve 
System, Federal Deposit Insurance Corporation, Federal Housing Finance 
Agency, National Credit Union Administration, and Securities and 
Exchange Commission's ``Reproposed Rule on Incentive-Based Compensation 
Arrangements''. July 21, 2016. P. 5. Available at: https://www.sec.gov/
comments/s7-07-16/s70716-25.pdf. See also: Comments from Tom Quaadman 
responding to SEC ``Proposed Rules on Incentive-Based Compensation 
Arrangements'', Release No. 34-64140. July 13, 2011. Available at: 
https://www.sec.gov/comments/s7-12-11/s71211-742.pdf. See also: 
Comments from Tom Quaadman responding to Fed, FDIC, OCC, and SEC 
``Incentive Based Compensation Arrangements''. February 25, 2014. 
Available at: https://www.sec.gov/comments/s7-12-11/s71211-752.pdf.
---------------------------------------------------------------------------
    To be clear, compensation should not create perverse incentives, 
including awarding bonuses to executives when internal company crisis 
is imminent, and clawbacks can be a tool to help disincentivize 
unsavory corporate behavior. However, if the costs of a section 956 
rule outweigh its benefits, professionals may flee covered businesses 
in favor of other financial firms, other industries, or seek 
opportunities in jurisdictions whose regulators more appropriately 
balance the putative governmental interest in regulating compensation 
plans with management's ability--and, under prevailing corporation law, 
its statutory duty--to make business judgments for the benefit of the 
firm's owners.
    This result could actually have the effect of undermining 
regulators' goals in promulgating these rules by discouraging the most 
talented individuals--those most capable of preventing or managing the 
types of losses the regulator is trying to proscribe--from working in 
the financial services sector. It might also chill the kind of healthy 
risk-taking--lending, financing, and investing--that spurs economic 
growth and job creation in our capitalist system, resulting in 
corporate stagnation. If section 956 implementation becomes the clarion 
call from SVB's failure, then the regulators required to promulgate 
those rules need to start on those rules afresh and not reprise the 
proposal from 2011 or reproposal from 2016. Too much has changed, both 
from a Government policy perspective and an internal corporate 
hygienics perspective, for regulators to simply pick up where the 
rulemaking was last left off 7 years ago. At the very minimum, 
regulators must perform a rigorous cost benefit analysis, allow the 
stakeholder community ample time to comment, and evaluate whether the 
prescriptive approach previously proposed is in harmony with 
congressional intent in the original statute.
    There is a global competition for talent on the chief executive and 
senior executive level. This competition for talent should also be 
viewed through the lens of the context of a business. For instance, a 
business that needs to execute a turn-around may have to pay a premium 
for the talent. Such a premium may not fit nicely within the box of a 
pay versus performance disclosure; however, it is within the interest 
of a corporation and necessary to fulfilling the fiduciary duty of the 
board. Increased Government intervention in compensation issues, such 
as the raise in the IRS deduction for compensation in the early 1990s, 
set the stage for income enhancements outside of salary and increased 
compensation packages, skewing that market.
    In a related vein, recent legislative proposals to claw back 
executive compensation from executives at failed banks \7\ should 
adequately weigh the costs and benefits of such policies, particularly 
from the perspective of attracting and retaining human capital in 
covered industries. While aspects of these policies may be appropriate 
and well-intentioned, they should not unduly punish executives, 
directors, and other employees who may not have had influence over 
recent crises or mismanagement. Unnecessarily disincentivizing top 
talent from participating in the financial sector may well result in 
additional mismanagement or, worse, additional failures. \8\
---------------------------------------------------------------------------
     \7\ See: S. 1045, Failed Bank Executives Clawback Act; S. 1181, 
Bank Management Accountability Act.
     \8\ Wayne Guay, Wharton School of the University of Pennsylvania. 
``Can Bonus Clawback Rules Fix Finance Industry Incentives?'' May 4, 
2016. `` . . . the new plan targets not only senior executives at 
financial institutions, but also lower-level employees who handle large 
sums of money, a provision that could potentially include tens of 
thousands of industry professionals . . . This is sparking concerns 
that financial workers could abandon banks and take their talents to 
less-regulated institutions.'' Available at: https://
knowledge.wharton.upenn.edu/article/can-bonus-clawback-rules-fix-
finance-industry-incentives/.
---------------------------------------------------------------------------
    Beyond a parochial focus on financial institutions, the corporate 
governance landscape in the U.S. has changed rapidly and dramatically 
in the last decade, including topics like director elections and 
executive compensation. Setting aside the Dodd-Frank Act, the SEC has 
been pushing rulemaking and other initiatives in the corporate 
governance space that do not have a direct congressional mandate, 
adding compliance burdens without analyzing the aggregate impact of 
those changes. It is not an overstatement to say that corporate 
governance, and by extension the executive compensation space, has 
gotten significantly more complex in the last 2 years alone. Companies 
must be able to understand their responsibilities and how to execute 
them, and compounding changes to corporate governance policies create a 
challenge for companies to observe sound corporate governance 
practices.
    Companies need to be able to focus on financial factors in their 
corporate governance and compensation decisions. When company 
management is made to focus on mandated factors other than performance, 
it can serve as a distraction. Of concern, the SEC's recent pay vs. 
performance rule sought to incorporate factors beyond company financial 
performance into compensation considerations. \9\ That mandate exceeded 
congressional intent of the Dodd-Frank Act and may have an impact on 
companies' ability to focus on long-term performance and growth.
---------------------------------------------------------------------------
     \9\ Comments of Tom Quaadman to the SEC, ``Reopening of Comment 
Period on Pay Versus Performance; Proposed Rule, Securities and 
Exchange Commission''. March 4, 2022. P. 4. Available at: http://
www.centerforcapitalmarkets.com/wp-content/uploads/2022/03/220304-
Comments-PayvPerformanceReopening-SEC.pdf?#.
---------------------------------------------------------------------------
    Corporate governance--and, by extension, executive compensation--
does not exist in isolation; it is directly tied to American 
competitiveness and the attractiveness of the American capital markets. 
Overburdening companies with compliance mandates diminishes the public 
company model and thereby reduces the incentives for U.S. companies to 
go, and stay, public. There is need for regulation in the marketplace, 
but regulations must appropriately balance the costs and benefits, be 
well-considered, and must be practical.
    Accordingly, it should be recognized that with the recent banking 
issues the relevant agencies and the Department of Justice have many 
tools at their disposal to punish wrongdoing. A rush to judgment and 
implementing new policies around compensation will have ramifications 
well beyond the banking sector and may ultimately impact all public 
companies. It is important for Congress, the Administration, and the 
relevant agencies to consider the evidence at hand and not to swing 
wildly in such a manner as to create an atmosphere that will prevent 
businesses from going and staying public. Such an outcome will harm 
American competitiveness and main street investors.
    Thank you for the opportunity to participate in this conversation 
and I look forward to your questions.
             PREPARED STATEMENT OF HEIDI MANDANIS SCHOONER
 Professor of Law, Columbus School of Law, The Catholic University of 
                                America
                              May 4, 2023
 GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                          FROM DA LIN

Q.1. In your written testimony, you indicated that the 
authority to remove and prohibit bank directors and senior 
management from office for unsafe or unsound practices is 
inadequate. You suggested that regulatory enforcement actions 
have come to focus on rank-and-file employees, compared to a 
prior focus on bank presidents, chief executive officers, and 
board members in the 1990s. If the removal and prohibition 
authority under 8(e) of the Federal Deposit Insurance Act has 
not changed since 1989, why has this shift in enforcement 
occurred?

A.1. I believe the declining number of removal and prohibition 
actions against bank leadership relative to rank-and-file bank 
employees is primarily the result of 12 U.S.C. 1818(e)'s 
demanding culpability requirement coupled with consolidation of 
the banking industry. Between 1990 and 2020, the number of 
insured depository institutions with assets greater than $100 
billion grew from 1 to 33, and the number of insured depository 
institutions with assets between $10 billion and $100 billion 
doubled from 59 to 118. \1\ As banks grew and became more 
decentralized, the challenge of proving that a bank director or 
senior executive actually knew of a problem and was willfully 
complicit correspondingly increased. This is particularly the 
case if the illegal or unsafe conduct occurred on the 
operational side; executives at the top of today's banking 
conglomerates delegate day-to-day operational responsibilities 
to lower-level subordinates, and this dispersion of duties 
nearly always insulates executives from knowledge of detailed 
activities. \2\ As I emphasized both in my written and oral 
testimony, over the past 30 years, oversight has become the 
linchpin of senior bankers' responsibilities yet failed 
oversight is seldom a demonstrably deliberate act.
---------------------------------------------------------------------------
     \1\ Request for Information and Comment on Rules, Regulations, 
Guidance, and Statements of Policy Regarding Bank Merger Transactions, 
87 FR 18740, 18740-41 (Mar. 31, 2022).
     \2\ See, e.g., Dep't of the Treas., Off. of the Comptroller of the 
Currency, In re David Julian, No. OCC AA-EC-2019-71, Recommended 
Decision, at *21 (December 5, 2022) (David Julian, Wells Fargo's former 
Chief Auditor, testified that given the size and the scope of Wells 
Fargo & Company and the amount of activity that Wells Fargo Audit 
Services was performing and just the size of Wells Fargo Audit 
Services, as I mentioned at one point 1,200 professionals, it would 
have been impossible for me, as Chief Auditor, to be involved in the 
day-to-day supervision of an audit engagement, so he ``felt it was 
appropriate and necessary to delegate responsibilities within the 
organization for those activities'') (internal quotation marks 
omitted).

Q.2. Under 12 U.S.C. 1818(e), the removal and prohibition 
authority requires culpability of either ``personal 
dishonesty'' or a ``willful or continuing disregard'' for the 
safety and soundness of a bank.
    Why do the activities of senior bank executives and 
directors, particularly of regional and large banks, shield 
them from meeting culpability under the current standard?

A.2. Please see my response to Question 1.

Q.3. If the existing culpability standard is too high to reach 
the activities of senior bank executives and directors, what 
culpability standard should Congress impose for these removal 
and prohibition authorities?

A.3. As I discuss in my response to Question 1, 1818(e)'s 
removal and prohibition authority is rarely used--at least, 
formally--against senior bankers of large and midsize banks 
because of the steep challenge of attributing knowledge of 
operational-level problems to these individuals. A negligence 
standard would better achieve accountability as it does not 
require knowledge of or intentional complicity in wrongdoing. 
Banking regulators should be able to sanction bank directors 
and senior executives under 1818(e) for conduct that could 
reasonably be expected to result in (or to fail to prevent) 
excessively risky or illegal activities, including foot-
dragging in response to regulators' supervisory concerns or 
establishing weak internal controls.

Q.4. Should Congress consider imposing a different culpability 
standard on the senior bank executives and directors of 
community banks? If so, what?

A.4. I am not convinced that most qualified individuals would 
avoid serving as senior executives and directors of community 
banks if 1818(e) sanctions could be imposed for negligent 
conduct. Moreover, even if that were the case, I believe 
modifying the default terms of removal or prohibition for 
community bankers would be a better lever than modifying the 
culpability standard because terms are more flexible and can be 
more easily tailored to specific circumstances. As I noted in 
my written testimony, Congress could create a tiered structure 
within 1818(e)'s framework that varies the default terms of 
any removal or prohibition order depending on the individual's 
role within the institution, his culpability, and the harm to 
the affected institution.

Q.5. The largest U.S. banks have continued to grow in size over 
the last decade. \3\ The collapse of Silicon Valley Bank, 
Signature Bank, and First Republic Bank, in addition to 
increased big bank consolidation, have exacerbated this trend. 
\4\ How has the growth in the size of the largest U.S. banks 
contributed to regulators' inability to hold senior bank 
executives and directors accountable? Please list the types of 
``diffuse administrative processes,'' as referenced in your 
testimony, that characterize the work of senior bank executives 
and directors at the largest U.S. banks.
---------------------------------------------------------------------------
     \3\ See Lindsey Hall and Jahan Zaib Mehmood, ``Ten Years Later, 
World's Biggest Banks Keep Getting Bigger'', S&P Global (Nov. 27, 
2017), https://www.spglobal.com/en/research-insights/articles/ten-
years-later-worlds-biggest-banks-keep-getting-bigger.
     \4\ See David J. Lynch, ``Big Banks May Get Bigger as Crisis 
Swamps `Too Big to Fail' Worries'', Wash. Post (Mar. 19, 2023), https:/
/www.washingtonpost.com/us-policy/2023/03/18/big-banks-silicon-valley-
bank/; See Edward Harrison, ``The Fed Is Helping Too-Big-to-Fail Banks 
Become Bigger'', Bloomberg (May 2, 2023), https://www.bloomberg.com/
news/newsletters/2023-05-02/the-fed-is-helping-too-big-to-fail-banks-
become-bigger.

A.5. In my response to Question 1, I describe how the growth of 
banks has impacted regulators' ability to hold members of bank 
leadership accountable under 1818(e). The degree of 
decentralization varies across large banks and different banks 
adopt different hierarchical structures, but operational 
decision-making is nearly always diffused through various 
levels and lines of business. For example, in its report on why 
Signature Bank of New York failed, the Federal Deposit 
Insurance Corporation (FDIC) observed that ``[t]he bank's 
organizational structure lacked clear decision-making 
processes, transparency as to who made decisions, and 
documentation as to approval and escalation protocols.'' \5\ 
Wells Fargo's ``decentralized corporate structure'' likewise 
enabled those in charge of its Community Banking unit to 
conceal known risks related to its sales goals pressure from 
the bank's top executives and directors. \6\
---------------------------------------------------------------------------
     \5\ See Fed. Deposit Ins. Corp., Fdic's Supervision of Signature 
Bank 9 (2023).
     \6\ See In re David Julian, supra note 2, at *247.

Q.6. In your testimony, you recommend that Congress incorporate 
management and institutional oversight failures as distinct 
bases under the removal and prohibition authority.
    How would you define management and institutional oversight 
failures, respectively?

A.6. Banking regulators define oversight as a distinct function 
from management. The Federal Reserve Board of Governors (Fed), 
for example, expects ``boards of directors of supervised firms 
[to] provide effective oversight, and that management is 
responsible for daily and operational decisions.'' \7\ 
Regulators have, moreover, provided guidance on the substance 
of bank directors' oversight role, such as setting an 
appropriate risk appetite, supervising senior officers, and 
ensuring that a robust system of internal controls exist. \8\ 
Senior bank executives manage the day-to-day operations of the 
bank consistent with the directions given by the board. But 
within most large and midsize banks, top executives' 
responsibilities are primarily oversight obligations that 
resemble those of directors, including supervising lower-level 
subordinates and maintaining effective internal controls. \9\ 
Failure to adequately perform these functions constitutes 
oversight failure or mismanagement.
---------------------------------------------------------------------------
     \7\ Bd. of Governors of the Fed. Rsrv. Sys., Review of the Federal 
Reserve's Supervision and Regulation of Silicon Valley Bank 1 (2023).
     \8\ See Bd. of Governors of the Fed. Rsrv. Sys., Sr 21-3/Ca 21-1, 
Supervisory Guidance on Board of Directors' Effectiveness, (2021).
     \9\ See supra note 2.

Q.7. How would you incorporate management and institutional 
oversight failures into the statutory framework of 12 U.S.C. 
---------------------------------------------------------------------------
1818(e)?

A.7. Oversight failure or poor management by senior bankers 
should be explicitly added as a distinct basis for removal or 
prohibition under 1818(e)(1)(A).

Q.8. How would these distinct bases fill the types of 
regulatory enforcement gaps against senior bank executives and 
directors that you have identified in your testimony?

A.8. Refining the bases of 1818(e) to explicitly include 
oversight failure and poor management complements the change to 
1818(e)'s culpability requirement that I identified in my 
response to Question 2. This reform would broaden the focus of 
1818(e) beyond who committed and knew about discrete wrongful 
acts. Importantly, it would clarify that 1818(e) is a 
mechanism for holding individuals accountable for maintaining 
flawed systemic apparatuses, such as inadequate internal 
controls or unsafe compensation practices, that in turn 
encouraged (or failed to prevent) subordinates from committing 
misconduct.

Q.9. The Federal banking regulators' cease-and-desist 
authorities apply to institution-affiliated parties, including 
independent contractors such as attorneys and accountants, who 
knowingly or recklessly participate in the violation of a law 
or regulation, breach of fiduciary duty, or unsafe or unsound 
practice that is ``likely to cause more than a minimal 
financial loss to, or significant adverse effect on'' an 
insured depository institution. \10\
---------------------------------------------------------------------------
     \10\ 12 U.S.C. 1813(u)
---------------------------------------------------------------------------
    To what extent have the Federal banking regulators issued 
cease-and-desist orders under 12 U.S.C. 1818 against the 
independent contractors of insured depository institutions?

A.9. Based on my research, which primarily focuses on 1818(e) 
removal and prohibition actions, I am not aware of any cease-
and-desist order against an individual who was not a current or 
former employee, director, or shareholder of an insured 
depository institution. I have also reviewed all 65 cease-and-
desist orders initiated by the Fed since 2000 against an 
individual institution-affiliated party, and I did not find any 
order against an individual who was not a current or former 
employee, director, or shareholder of the institution.

Q.10. To what extent have the Federal banking regulators 
initiated enforcement actions under 12 U.S.C. 1818 against the 
independent contractors of insured depository institutions?

A.10. From my research on 1818(e) removal and prohibition 
actions initiated by the Fed between 1989 and 2019 against 
institution-affiliated parties of domestic depository 
institutions, I am aware of only four actions (out of a total 
of 190 in the data sample) \11\ that were brought against 
individuals who were not current or former employees, 
directors, or shareholders of the institution. Among the four 
sanctioned individuals, three were appraisers who jointly 
participated in ``alleged violations of laws and regulations 
and unsafe and unsound practices in the preparation of 
appraisals'' in connection with the same group of banks; and 
one was described as an ``independent consultant'' who 
extracted excessive payments from the bank through his friend 
and business partner, who was the bank's chief executive 
officer, chairman of the board, and controlling shareholder. 
\12\
---------------------------------------------------------------------------
     \11\ Five of the 190 1818(e) orders that I reviewed only describe 
the individual as an ``institution-affiliated party,'' which could 
encompass employees, directors, and shareholders, as well as external 
independent contractors.
     \12\ The description of the misconduct was not described in the 
removal and prohibition order against Mr. Lawrence. I have adopted the 
description from a related judicial opinion, Magee v. Greenspan, 808 F. 
Supp. 847 (D.D.C. 1991).
---------------------------------------------------------------------------
    I have listed the relevant enforcement actions in my answer 
to the Question below.
    My research did not find any removal or prohibition actions 
since 1997 that was initiated by the Fed against a bank 
affiliate who was not a current or former employee, director, 
or shareholder.

Q.11. Please provide a list of the cease-and-desist orders or 
enforcement actions you have relied upon to reach a conclusion 
to the questions above.

A.11. 1. Bd. of Governors of the Fed. Reserve Sys., In re 
Gaylon M. Lawrence, Sr., Order of Removal and Prohibition 
Issued Upon Consent Pursuant to the Federal Deposit Insurance 
Act, as Amended, Nov. 16, 1992.
    2. Bd. of Governors of the Fed. Reserve Sys., In re John 
``Bud'' Harlow, Jr., Order of Prohibition From Further 
Participation And For Other Affirmative Relief, June 28, 1995 
(issued jointly with the Federal Deposit Insurance Corporation 
and the Office of the Comptroller of the Currency).
    3. Bd. of Governors of the Fed. Reserve Sys., In re Joseph 
G. Donner, Jr., Order of Prohibition From Further Participation 
And For Other Affirmative Relief, May 22, 1996 (issued jointly 
with the Federal Deposit Insurance Corporation and the Office 
of the Comptroller of the Currency)
    4. Bd. of Governors of the Fed. Reserve Sys., In re Albert 
L. Margolin, Order of Prohibition From Further Participation 
And For Other Affirmative Relief, August 6, 1996 (issued 
jointly with the Federal Deposit Insurance Corporation and the 
Office of the Comptroller of the Currency).
                                ------                                

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                          FROM DA LIN

Q.1. The collapse of Silicon Valley Bank and Signature Bank 
exposed flaws in the legal framework for holding banking 
executives accountable. That is why I strongly urged Federal 
Deposit Insurance Corporation (FDIC) Chair Martin Gruenberg to 
revisit rulemaking for the compensation clawback provisions 
authorized by Dodd-Frank when he appeared before the Committee 
in March. \1\ Additionally, Congress and financial regulators 
must explore all available options, including utilizing Section 
1818(e) \2\ as an enforcement tool to hold bank directors and 
senior management accountable for their oversight failures. 
Risky behavior taken by bank executives must not be tolerated.
---------------------------------------------------------------------------
     \1\ https://www.warnock.senate.gov/newsroom/press-releases/
senator-reverend-warnock-pushes-federal-banking-regulators-to-hold-
silicon-valley-bank-executives-acco/
     \2\ 12 U.S. Code 1818
---------------------------------------------------------------------------
    How should Congress revise the requirements for culpability 
under 1818(e) to better hold bank directors and senior 
management accountable?

A.1. 12 U.S.C. 1818(e)'s removal and prohibition authority is 
rarely used--at least, formally--against senior bankers of 
large and midsize banks because of the steep challenge of 
proving that bank directors or top executives actually knew of 
a problem and was willfully complicit. This is particularly the 
case if the illegal or unsafe conduct occurred on the 
operational side; executives at the top of today's banking 
conglomerates delegate day-to-day operational responsibilities 
to lower-level subordinates, and this dispersion of duties 
nearly always insulates executives from knowledge of detailed 
activities. \3\ A negligence standard would better achieve 
accountability as it does not require knowledge of or 
intentional complicity in wrongdoing. Banking regulators should 
be able to sanction bank directors and senior executives under 
1818(e) for conduct that could reasonably be expected to 
result in (or to fail to prevent) excessively risky or illegal 
activities, including foot-dragging in response to regulators' 
supervisory concerns or establishing weak internal controls.
---------------------------------------------------------------------------
     \3\ See, e.g., Dep't of the Treas., Off. of the Comptroller of the 
Currency, In re David Julian, No. OCC AA-EC-2019-71, Recommended 
Decision, at *21 (December 5, 2022) (David Julian, Wells Fargo's former 
Chief Auditor, testified that ``given the size and the scope of Wells 
Fargo & Company and the amount of activity that Wells Fargo Audit 
Services was performing and just the size of Wells Fargo Audit 
Services, as I mentioned at one point 1,200 professionals, it would 
have been impossible for me, as Chief Auditor,'' to be involved in the 
day-to-day supervision of an audit engagement, so he ``felt it was 
appropriate and necessary to delegate responsibilities within the 
organization for those activities'') (internal quotation marks 
omitted).

Q.2. What are the benefits and drawbacks of a permanent 
industrywide prohibition from working in the banking industry 
---------------------------------------------------------------------------
as a consequence of a 1818(e) order?

A.2. The main advantage of setting permanent prohibition from 
working in the banking industry as the default consequence of a 
1818(e) sanction is that it prevents a banker who was removed 
or fired from one bank for participating in unsafe or illegal 
activities from finding subsequent work at other banks and 
posing serious risk to those institutions. The primary drawback 
is that the severity of the consequence appears to deter 
banking regulators from invoking this authority, resulting in 
enforcement that is infrequent and inconsistent. As I observed 
in my written testimony, regulators have critiqued 1818(e) as 
a draconian remedy that ``tak[es] away'' the 
``[l]ivelihood[s]'' of bankers whose careers span years or even 
decades. \4\
---------------------------------------------------------------------------
     \4\ Offs. of Inspector Gen., Fed. Deposit Ins. Corp., Bd. of 
Governors of the Fed. Rsrv. Sys. & Consumer Fin. Prot. Bureau, Dep't of 
the Treasury, ``Enforcement Actions and Professional Liability Claims 
Against Institution-Affiliated Parties and Individuals Associated With 
Failed Institutions 23 (2014)''.

Q.3. How should Congress encourage Federal banking regulators 
to employ 1818(e) without being dissuaded by the severity of 
---------------------------------------------------------------------------
its consequences?

A.3. I believe Congress could mitigate banking regulators' 
reluctance toward 1818(e) sanctions by creating a tiered 
structure that varies the severity of any prohibition order 
depending on the individual's role within the institution, his 
culpability, and the harm to the affected institution. Options 
for intermediate penalties include shortening the duration of 
the prohibition, restricting the size of the banks at which the 
individual may work, restricting the types of positions the 
individual may hold, and restricting the activities in which 
the individual may engage. Congress could also mandate removal 
or prohibition under 1818(e) in certain situations, such as 
cases when the individual's conduct caused the bank's failure.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                      FROM THOMAS QUAADMAN

Q.1. As you probably know, I support clawing back executive 
compensation and bonuses when their mismanagement causes a bank 
to fail. Yet--as you know well, designing a good policy here is 
easier said than done.
    In stating your position on Section 956 of Dodd-Frank, your 
testimony alludes to a cost-benefit analysis that some 
executives may conduct when choosing whether or not to lead a 
bank. Let's assume a world in which there was a law that 
required executive compensation and bonuses to be clawed back 
in the event of bank failure. What would the cost-benefit 
analysis look like when making a decision on whether or not to 
take the job?

A.1. The market for talent in the financial services industry 
is global. Laws and regulations play a key role in determining 
which markets are most attractive for top talent in the 
industry, including executive compensation rules. The success 
of businesses relies heavily on the skills and dedication of 
talented individuals, and competition for top-tier employees is 
fierce.
    As early as 2012, Credit Suisse expressed concerns about 
the impact of regulatory changes on their ability to keep and 
attract highly skilled employees. In 2013, the company declared 
that a Swiss law limiting executive compensation \1\ could pose 
a risk to the company's business structure, stating that ``new 
limits on executive compensation could potentially affect our 
ability to retain and hire highly qualified employees.'' \2\ In 
2021, the company's annual report warned that compensation 
reductions and other factors that affect their finances or 
reputation could hurt their ability to keep and recruit 
employees. \3\ In 2022, Credit Suisse's annual report--which 
was released just 7 days before the sale of the company--
reemphasized this position, noting that the inability to 
attract and retain talent could significantly impact their 
ability to pursue strategic goals and achieve financial 
success. \4\
---------------------------------------------------------------------------
     \1\ New York Times, ``Swiss Voters Tighten Country's Limits on 
Executive Pay''. Mar. 3, 2013. Available at: https://www.nytimes.com/
2013/03/04/business/global/swiss-voters-tighten-countrys-limits-on-
executive-pay.html.
     \2\ Credit Suisse, ``Annual Report, 2013''. P. 41. ``We must 
recruit and retain highly skilled employees. Our performance is largely 
dependent on the talents and efforts of highly skilled individuals. 
Competition for qualified employees is intense. We have devoted 
considerable resources to recruiting, training and compensating 
employees. Our continued ability to compete effectively in our 
businesses depends on our ability to attract new employees and to 
retain and motivate our existing employees. The continued public focus 
on compensation practices in the financial services industry, and 
related regulatory changes, may have an adverse impact on our ability 
to attract and retain highly skilled employees. In particular, new 
limits on the amount and form of executive compensation imposed by 
recent regulatory initiatives, including the Ordinance Against 
Excessive Compensation in Switzerland and the implementation of CRD IV 
in the U.K., could potentially have an adverse impact on our ability to 
retain certain of our most highly skilled employees and hire new 
qualified employees in certain businesses.'' Available at: https://
www.credit-suisse.com/about-us/en/reports-research/annual-reports.html.
     \3\ Credit Suisse, ``Annual Report, 2021.'' P. 52. ``We must 
recruit and retain highly skilled employees Our performance is largely 
dependent on the talents and efforts of highly skilled individuals. 
Competition for qualified employees is intense and the hiring market in 
the financial services and other industries has been and is expected to 
continue to be extremely competitive . . . The continued public focus 
on compensation practices in the financial services industry, and 
related regulatory changes, may have an adverse impact on our ability 
to attract and retain highly skilled employees. In particular, limits 
on the amount and form of executive compensation imposed by regulatory 
initiatives, including the Swiss Compensation Ordinance, or any 
successor legislation thereof in Switzerland and the Capital 
Requirements Directive IV (as amended by CRD V) in the EU and the U.K., 
could potentially have an adverse impact on our ability to retain 
certain of our most highly skilled employees and hire new qualified 
employees in certain businesses . . . Decreases in compensation, as 
well as matters impacting our financial results or reputation, can 
negatively impact our ability to retain employees and recruit new 
talent.'' Available at: https://www.credit-suisse.com/about-us/en/
reports-research/annual-reports.html.
     \4\ Credit Suisse, ``Annual Report, 2022''. P. 56. ``The failure 
to attract and/or retain highly qualified employees could also have a 
negative impact on our ability to comply with our legal and compliance 
obligations . If we are unable to attract and/or retain highly 
qualified employees across our businesses, this may have a material 
adverse effect on our ability to implement our strategic initiatives 
and on our results of operations and financial condition.'' Available 
at: https://www.credit-suisse.com/about-us/en/reports-research/annual-
reports.html.
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    The success of U.S. capital markets depends on strong 
talent, and talent is clearly concerned about restrictions to 
compensation. Clawback policies that have a long lookback 
provision could draw away talent from U.S. markets to locations 
do not observe the same approach.

Q.2. My assumption is that you would take a finance 
practitioner's view on the question above. You would take your 
total compensation and discount it against the odds of your 
compensation being clawed back within the appropriate look back 
window. Is that wrong? Am I missing something here?

A.2. While there was some warning about the risks at Silicon 
Valley Bank (SVB), those warnings largely went unheeded and the 
bank's failure occurred rapidly due to changed market 
conditions. Policies that take a broad approach to the scope of 
responsible parties do not consider that not all management or 
board members may have been culpable for the mismanagement of 
risk that ultimately led to failure. The bank did not address 
formal concerns raised by its supervisors, information that 
would not be available to an outside party considering 
employment at the bank.
    A simple calculation of total compensation against the risk 
of an institution's failure elides the reality that competition 
for talent is global. An overly punitive lookback provision 
could deter top talent from coming to the U.S. altogether, as 
failures do not necessarily occur with advanced warning or a 
complete outsider's perspective of the bank's governance 
structure and hygiene.

Q.3. What deterrent power would a clawback bill have if 
clawbacks were allowed to be completely covered by D&O 
insurance? Specifically, would it be a material financial 
factor for executives to consider?

A.3. It is likely that the deterrent effect of Director & 
Operator insurance coverage of the corpus of clawed back 
compensation would apply to companies, not to company 
executives themselves. D&O coverage of potential executive 
compensation clawbacks would likely drive the price of D&O 
insurance higher, incentivizing companies that observe ``good'' 
or ``vigilant'' oversight practices would have lower premiums 
for coverage than those whose practices are less robust. This 
would place the onus on the company to address oversight of 
executives to manage the risk that the insurance policy would 
need to cover a clawback (thus driving coverage costs higher) 
rather than deterring individual bad actors.
    As was recently discussed at a House Financial Services 
Committee hearing on capital formation, D&O coverage is 
expensive and can have a deterrent effect on initial public 
offerings, as it drives the costs of being a public company 
higher. Before proceeding on any policy implicating D&O 
coverage for clawbacks, policymakers should consider the costs 
and benefits of expanding coverage to include the corpus of 
executive compensation clawbacks against the aggregate impact 
to the attractiveness of U.S. public markets.
                                ------                                

         RESPONSES TO WRITTEN QUESTIONS OF CHAIR BROWN
                  FROM HEIDI MANDANIS SCHOONER

Q.1. Under Section 210 of the Dodd-Frank Act, the FDIC may claw 
back compensation from senior bank executives or directors who 
are ``substantially responsible for the failed condition'' of 
an insured depository institution that has entered FDIC 
receivership. \1\ In your written testimony, you indicated that 
mandatory clawbacks can restore and maintain the public's 
confidence in our financial system.
---------------------------------------------------------------------------
     \1\ Dodd-Frank Wall Street Reform and Consumer Protection Act, 
Pub. L. No. 111-203, 124 Stat. 1376, 210 (2010) (codified at 12 U.S.C. 
5390(s)).
---------------------------------------------------------------------------
    Should Congress extend the clawback authority to senior 
executives and directors of insured depository institutions 
that have not entered receivership?

A.1. Yes. Congress should extend the clawback authority to 
senior executives and directors of insured depository 
institutions who substantially contribute to an institution's 
unsafe or unsound operations regardless of whether the 
institution has entered receivership. Such clawback authority 
could provide powerful incentives for bank executives to act 
with prudence in the ongoing management of insured depository 
institutions.

Q.2. How does the reality of too-big-to-fail banks in the 
United States affect the Federal banking regulators' ability to 
hold senior bank executives and directors accountable?

A.2. When a bank is placed into receivership, the FDIC, acting 
as receiver, may bring professional liability claims against 
the bank's officers and directors. From 2007 to 2021, the FDIC, 
as receiver, filed claims against 178 individual officers or 
directors of failed banks. \2\ Officers and directors of banks 
that are too-big-to-fail, are never subject to such 
proceedings. This context places special importance on Federal 
regulators' administrative enforcement powers (i.e., cease and 
desist, civil money penalty, and removal powers), which may be 
brought against officers and directors regardless of whether 
the bank has been placed into receivership. Thus, the use of 
administrative enforcement powers is a critical to bank 
regulators' ability to hold bank officers and directors 
accountable.
---------------------------------------------------------------------------
     \2\ FDIC Professional Liability Annual Report for 2021, at 4.

Q.3. The Federal banking regulators' cease-and-desist 
authorities apply to institutional-affiliated parties (IAPs), 
including independent contractors such as attorneys and 
accountants, who knowingly or recklessly participate in the 
violation of a law or regulation, breach of fiduciary duty, or 
unsafe or unsound practice that is ``likely to cause more than 
a minimal financial loss to, or significant adverse effect 
on,'' an insured depository institution. \3\
---------------------------------------------------------------------------
     \3\ 12 U.S.C. 1813(u)
---------------------------------------------------------------------------
    To what extent have the Federal banking regulators issued 
cease-and-desist orders against the independent contractors of 
insured depository institutions?

A.3. I have not conducted research on this issue. Based on my 
related research in this area, I believe that Federal banking 
regulators have not issued cease and desist actions against 
independent contractors with any frequency. For an example of a 
cease and desist action brought by the FDIC against a law firm, 
see Lindquist & Vennum v. FDIC, 103 F.3d 1409, cert. denied 522 
U.S. 821 (1997). The statutory standard for bringing an 
enforcement action against an independent contractor is very 
high. Independent contractors fall within the definition of 
``institution affiliated party'' only if they ``knowingly or 
recklessly participate in (A) any violation of any law or 
regulation; (B) any breach of fiduciary duty; or (C) any unsafe 
or unsound practice.''

Q.4. To what extent have the Federal banking regulators 
initiated enforcement actions against independent contractors 
of insured depository institutions?

A.4. As indicated above, I have not conducted research on 
Federal bank regulators use of administrative enforcement 
powers against independent contractors, but based on my general 
knowledge in the area, I suspect that such cases are not 
frequently initiated.

Q.5. Based upon recent events, should Congress adjust the 
definition of IAP under 12 U.S.C. 1813(u)? If so, how?

A.5. The current IAP definition identifies the individuals who 
are subject to administrative enforcement actions (i.e., cease 
and desist, civil money penalties, removal and prohibition). If 
Congress were to create new administrative enforcement 
authority, e.g., new clawback authority, Congress might 
identify a subset of IAPs who would be subject to such new 
authority. For example, Congress may prefer to limit any new 
clawback authority to a bank's senior executives as opposed to 
any IAP.

Q.6. In your scholarship, you have examined the three civil 
money penalty tiers that Federal banking regulators may impose 
against IAPs. \4\ The highest tier requires that an IAP 
``knowingly'' commit a violation, engage in an unsafe or 
unsound practice, or breach a fiduciary duty that ``knowingly'' 
or ``recklessly'' causes a substantial loss to the insured 
depository institution. Are these culpability standards 
ineffective? If so, what level of culpability should Congress 
require of IAPs prior to removing or prohibiting them from 
conducting the affairs of an insured depository institution?
---------------------------------------------------------------------------
     \4\ See Heidi Mandanis Schooner, ``Big Bank Boards: The Case for 
Heightened Administrative Enforcement'', 68 Ala. L. Rev. 1011, 1020 
(2017), https://www.law.ua.edu/lawreview/files/2011/07/The-Big-Bank-
Boards-Enforcement.pdf; see also 12 U.S.C. 1818(i)(2).

A.6. Certainly, IAPs should be held accountable for their 
knowing and reckless conduct that causes loss to a bank. 
Federal bank regulators should utilize their full, existing 
authority to hold IAPs accountable for such behavior. In 
addition, I believe that the removal authority should be 
extended to include removal for negligent conduct. Individuals 
who act without ordinary care are not well-suited to the 
---------------------------------------------------------------------------
management of an insured depository institution.

Q.7. Under 12 U.S.C. 1818(e), the removal and prohibition 
authority requires culpability of either ``personal 
dishonesty'' or a ``willful or continuing disregard'' for the 
safety and soundness of a bank. If the activities of bank 
directors and executives shield them from meeting the 
culpability standard under 12 U.S.C. 1818(e), to what level of 
culpability should Congress lower the removal and prohibition 
authority?

A.7. The removal and prohibition authority should be triggered 
by negligent behavior. Explicit consequences for negligent 
behavior (in addition to gross negligent and reckless behavior) 
could provide powerful incentives for bank executives to act 
with prudence in managing insured depository institutions.
                                ------                                

        RESPONSES TO WRITTEN QUESTIONS OF SENATOR SINEMA
                  FROM HEIDI MANDANIS SCHOONER

Q.1. With respect to clawbacks, can you elaborate a bit more on 
current law's legal standard of ``recklessness'' in cease-and-
desist authority, relative to ``negligent'' or ``grossly 
negligent''? Specifically, can you provide a relevant example 
or two of something that is negligent or grossly negligent but 
may not meet the current legal threshold?

A.1. The existing cease and desist authority does not 
explicitly include clawbacks as a remedy although it is 
possible that the power to claw back IAP compensation is 
available under current law as a form of restitution. Bank 
regulatory agencies have the authority to issue a cease and 
desist order against an IAP who is engaging, has engaged, or is 
about to engage in an unsafe or unsound banking practice, or 
has violated a law, rule, regulation, or condition imposed in 
writing by the agency. \1\ The cease and desist power includes 
the authority to require respondents to make restitution or 
provide reimbursement, indemnification, or guarantee against 
loss if the respondent was unjustly enriched or acted in 
reckless disregard of the law. Congress did not define 
``reckless'' for purposes of this authority. Generally, 
negligence is the lack of ordinary care under the relevant 
circumstances. Gross negligence and recklessness typically 
involve a greater departure from ordinary care. The term 
recklessness may also require a finding of deliberate conduct 
or deliberate failure to act.
---------------------------------------------------------------------------
     \1\ 12 U.S.C. 1818(b)(1)
---------------------------------------------------------------------------
                                ------                                

       RESPONSES TO WRITTEN QUESTIONS OF SENATOR WARNOCK
                  FROM HEIDI MANDANIS SCHOONER

Q.1. While your testimony underscores that prudential financial 
regulators have various enforcement mechanisms at their 
disposal, including the power to remove irresponsible managers, 
these authorities may be underutilized. That is why I joined my 
colleagues in sending a letter to the Government Accountability 
Office (GAO) urging them to conduct a follow-up report from 
2019 to assess the communications of supervisory concerns from 
the Federal Depository Institutions Corporation (FDCI), the 
Federal Reserve, and the Office of the Comptroller of the 
Currency (OCC). \1\ Additionally, the report will review the 
supervisory findings from the Federal Reserve and FDIC and the 
responses received from the management of both Silicon Valley 
Bank and Signature Bank. We hope the report will show that 
regulators not only find problems but also take the necessary 
steps to stop them. I'm eager to see what the report finds and 
make sure regulators have everything they need to prevent bank 
failures.
---------------------------------------------------------------------------
     \1\ https://www.banking.senate.gov/newsroom/majority/brown-
colleagues-call-for-review-of-bank-regulatorssupervisory-practices
---------------------------------------------------------------------------
    Are there specific examples of enforcement actions where 
regulators removed a manager from their depository institution? 
Please provide details on the grounds for such action.

A.1. A 2014 study by the Offices of Inspector General of the 
Federal banking agencies (OIG Report) analyzed the 275 
administrative enforcement actions brought against IAPs of 
failed banks from September 2008 to September 2013. \2\ The 
most commonly used administrative sanction was removal/
prohibition (128), then civil money penalties (120), 
administrative restitution (8), and, finally, cease and desist 
orders (19).
---------------------------------------------------------------------------
     \2\ OIG-CA-14-012

Q.2. Have regulatory authorities failed to bring certain cases 
to light? If so, could you cite any specific examples of such 
---------------------------------------------------------------------------
cases?

A.2. I lack the necessary facts to identify a specific failure 
by bank regulators. In my prior research, I questioned whether 
bank regulators failed to take action regarding the JP Morgan 
London Whale debacle. \3\
---------------------------------------------------------------------------
     \3\ Heidi Mandanis Schooner, ``Big Bank Boards: The Case for 
Heightened Administrative Enforcement'', 68 Ala. L. Rev. 1011 (2017).

Q.3. Do regulators underuse their enforcement authorities? If 
so, what factors do you believe contribute to this 
---------------------------------------------------------------------------
underutilization?

A.3. The OIG Report referenced above identified several factors 
that might explain an underutilization of existing enforcement 
authority in actions against IAPs: the agencies' reluctance to 
bring cases with limited chance of success to avoid negative 
precedent; actions barred by the statute of limitations; 
limited staff resources; and limited resources of the 
respondent to pay civil money penalties or restitution. \4\
---------------------------------------------------------------------------
     \4\ Id. at 24-25.
```