Currently, the FDIC has a limited ability to claw back executive compensation in the event of a bank failure. An unlikely combination of U.S. Senators, including Elizabeth Warren (D-MA), Josh Hawley (R-MO), and J.D. Vance (R-OH) are teaming up to propose new legislation that would change this. Warren’s bill would require the FDIC to claw back from certain “covered parties” of large banks all or part of the compensation that they received over the three years preceding their institution’s failure or FDIC resolution. 

This clawback obligation seems to be at the discretion of the FDIC as to “all or part,” but it otherwise is not based upon any concepts of negligence or malfeasance on the part of the covered parties. Any clawback proceeds would be directed to replenish the Deposit Insurance Fund. The measure would cover banks with $10 billion or more in assets — carving out the smallest “community” banks — and apply to directors, officers, controlling shareholders, and other persons involved in decision-making as determined by a banking regulator. 

Compensation over this three-year period would cover the standard salaries and bonus compensation, but it would also cover stock-based compensation and gains from stock sales. The broad nature of this bill, as to the attachment of liability, the covered parties, and the covered compensation, extends well beyond other public company clawback legislation that is much more narrowly tailored.  

Senator Hawley signed on to an earlier version of this bill that Warren circulated in March, and she then worked with Vance to craft the latest iteration of the bill that was announced last week. With 11 of the Senate Banking Committee’s 23 members co-sponsoring the bill, Warren said she has asked Chair Sherrod Brown (D-OH) to schedule a vote on the legislation. 

We will pay close attention to this bill, and to the extent it gains traction towards passage, we certainly hope the legislators will see the merits in more narrowly tailoring the language.