Senator Fetterman: Have Banks Become Too Comfortable With Risk?

Fetterman Banking CommitteeSubmitted Image

Pennsylvania U.S. Senator John Fetterman tackled some difficult questions Thursday as he participated in a Senate Committee on Banking, Housing, and Urban Affairs hearing on executive accountability following recent bank failures. The hearing comes as another devastating blow in the aftermath of First Republic Bank’s collapse on Monday, which sadly marks the third occurrence in the last two months of regulators taking over banks, following the collapse of both Silicon Valley Bank and Signature Bank.

At the hearing, senators focused their line of questioning on the excessive risks taken by these financial institutions, executive compensation, and the lack of accountability for bank executives. Senator Fetterman specifically zeroed in on the concept of “moral hazard,” which, in essence, removes the consequences of risky decisions, leading to an absence of incentive to safeguard against financial risk. The senator pressed witnesses on a key question: What role does moral hazard play in bank executives’ decision-making? He challenged witnesses to respond to whether the collapses resulting from these risky moves were due to incompetence, greed, or ‘virtuous risk.’

“Mismanagement? Was that really clouded by greed? Were they just incompetent? I thought these were high-achieving executives at successful banks. Or were they thinking ‘you know, we can just crash here, cause they’re going to come clean up our mess,’” Senator Fetterman pressed witnesses who answered they believed the collapses were due to mismanagement.

Senator Fetterman is a bold advocate of executive accountability and steadfastly combats corporate greed. When the Silicon Valley Bank collapsed, he co-sponsored the Secure Viable Banking Act. If passed, this act would reinstate crucial safeguards to keep Big Banks in line and prevent potentially catastrophic future crises.

Additionally, Senator Fetterman is a strong proponent of the Failed Bank Executives Clawback Act, bipartisan legislation crafted to promote better regulation in the banking industry. The act would require federal regulators to reclaim compensation received by bank executives in the five-year period preceding a bank failure.

The hearing “Holding Executives Accountable After Recent Bank Failures,” held on June 26, 2021, was a highly anticipated event that drew inquisitive minds from all over the industry. It served as an opportunity to explore different perspectives and gather valuable insights from some of the brightest and most illustrious minds in the field.

The panel of subject-matter experts leading the discussion included Ms. Da Lin, Assistant Professor of Law at the University of Richmond School of Law, who brought in unique insights into developments in the legal and regulatory landscape. Mr. Thomas Quaadman, Executive Vice President of the Center for Capital Market Competitiveness at the U.S. Chamber of Commerce, shared his experience and expertise on legislative and policy matters that impact the banking industry. Last but not least, Professor Heidi Mandanis Schooner, Professor of Law at Columbus School of Law at the Catholic University of America, provided insights into the future of the industry, discussing current trends, and potential improvements.

The hearing highlighted an important lesson: seeking the guidance of professionals is crucial in improving the quality of discourse regarding failures within the banking industry. The insights of experts in this field can shed light on the critical root cause of the problems, the potential impact of the issues, and the recommended measures to avoid future failures.

A recording of the full hearing can be found here.

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