Failed Bank Executives Should Answer to Investors

Normally, a consensus between Democrats and Republicans in Washington is a heartening sign. Not so when it comes to populist interventions in the banking system.

A new bipartisan bill, backed by Senators Sherrod Brown and Tim Scott, seeks to impose deeper penalties on wayward bank executives. Among other things, it would empower the Federal Deposit Insurance Corp. to recoup any pay granted to an executive in the two years before a bank fails. It’s an understandable impulse: Bonuses awarded after the 2008 financial crisis, especially at big companies bailed out with taxpayer funds, still rankle in the collective memory (although the government’s direct investment was later recouped). After the recent failures of Silicon Valley Bank and Signature Bank, lawmakers have sensed another opportunity to stick it to greedy executives.

Yet this bill is the wrong approach to the problem.

For one thing, the turmoil that precipitated the current legislation differs from the 2008 crisis in key respects. Both SVB and Signature Bank were allowed to fail. Their boards and senior executives were removed, their unsecured creditors took losses, and their shareholders were wiped out. Although the government agreed to reimburse depositors, no taxpayer funds were at risk. Nor did the executives involved commit a crime; they simply misjudged how suddenly depositors might be spooked by the effects of higher interest rates on the bank’s balance sheets.

In recent months, lawmakers have been raging at these misjudgments. Some of the banks’ mistakes were, in fact, egregious. Yet Congress should resist the temptation to selectively punish corporate incompetence — and leave that to companies’ own boards and shareholders.

Leaders make mistakes, and none seek to ruin their own companies. Since so much of executives’ pay is in the form of shares, a failure is often dire punishment in itself. (Much attention has been paid to the $3.6 million in stock SVB Chief Executive Officer Gregory Becker sold in an automated transaction before his bank failed, less than the $20 million or so that he lost in the failure.) Moreover, existing government regulations already require executive-pay clawbacks in a variety of circumstances, such as when companies issue material financial misstatements. Tasking the FDIC with deciding whether to exact further retribution seems unduly punitive — and unlikely to significantly change behavior.