WASHINGTON, D.C. – U.S. Senator Bob Menendez (D-N.J.), a senior member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs, Thursday pressed federal financial regulators during an oversight hearing on their efforts to ensure greater executive accountability and effective supervision in the wake of recent bank failures.
The Senator noted that Michael Barr, the Federal Reserve Vice Chair for Supervision, identified in his recent report major weaknesses in Silicon Valley Bank’s incentive compensation program, noting that it encouraged excessive risk taking to maximize short-term financial metrics and did not adequately reflect longer-term performance, nonfinancial risks, or unaddressed audit or supervisory issues.
“As I noted in our hearing with the executives on Tuesday, the incentive structure SVB put in place rewarded breakneck growth and profitability, while kneecapping efforts to manage growing risks to the firm,” Menendez said.
The Senator pointed out that financial regulators have been slow to develop and swiftly implement a strong incentive-based compensation rule – a rule that is required under Dodd-Frank and is now more than 10 years overdue – that could have helped in preventing the situation we saw at SVB.
“I have a sense, having sat through the Great Recession, almost the financial collapse, listening to all we were asked to do as members of the Banking Committee back then. When we pass things, we seem to get it vetoed by omission,” Menendez said. “Which means maybe the regulators don’t like what we say, but it’s the law. And then nothing happens. A decade – a decade! At some point, gentlemen, you have responsibility. So, I hope you’ll get to that quickly.”
The Senator also highlighted how Vice Chair Barr’s report on the supervision of SVB revealed that Fed examiners gave the bank’s management satisfactory ratings even after supervisors began identifying and communicating issues with governance and risk management in 2018. The Federal Reserve continued awarding management satisfactory ratings despite identifying significant concerns year after year. He questioned why regulators appear reluctant to downgrade bank ratings to reflect their performance.
“To me, this shows that Fed examiners fundamentally misunderstood their role in enforcing a safe and sound banking system,” Menendez said. “Your job is to identify risks proactively and ensure they are fixed before they impact performance, since we’ve seen time and again that the banks themselves do a poor job of it.”
At the end of his line of questioning, Sen. Menendez secured commitments from Vice Chair Barr to sharpen the focus of the Federal Reserve’s supervisory efforts in order to proactively identify and ensure banks fix vulnerabilities.
In late March, Sen. Menendez led a bipartisan group of Senate Banking colleagues in pressing Federal Reserve Chair Jerome Powell on the agency’s use of enhanced supervision and prudential standards for SVB. He also signed a letter led by Chair Sherrod Brown to Securities and Exchange Commission (SEC) Chair Gensler requesting prompt examinations of Silicon Valley Bank’s purportedly selling millions of dollars’ worth of company stock in the days and months leading up to SVB’s failure.
In response to the recent bank failures, Sen. Menendez joined dozens of Senate and House colleagues to introduce the Secure Viable Banking Act, legislation that would repeal Title IV of S.2155, the Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018, and increase prudential standards for banks similar to Silicon Valley Bank and Signature Bank. Sen. Menendez is a longtime advocate for prudent financial regulation, and was outspoken about the dangers of passing S.2155 five years ago, which reduced critical oversight and capital requirements for large banks.