US Capitol east side by Martin Falbisoner is licensed under CC BY-SA 3.0

Sen. Sherrod Brown (D-Ohio) introduced the Recovering Executive Compensation Obtained from Unaccountable Practices Act of 2023 (RECOUP Act) to ostensibly hold banks’ C-suite executives accountable, and mitigate the risk of future bank failures in the wake of the collapses of Silicon Valley Bank (SVB), Signature Bank, and First Republic Bank. However, if the bill is enacted, only two outcomes are certain: (1) bank failures will continue and (2) the federal government will receive more power to intervene in the banking sector. Instead of pursuing slapdash punitive actions that hand over more regulatory authority to federal financial regulators, Congress should focus on holding the Federal Reserve (Fed) accountable for its failure of supervision.

Bill Status

On June 21, 2023, the Senate Committee on Banking, Housing, and Urban Affairs passed the RECOUP Act by a vote of 21-2. Sens. Thom Tillis (R-N.C.) and Bill Hagerty (R-Tenn.) voted in opposition. Now the bill awaits potential action on the Senate floor.

Current Laws and Authorities

Federal regulators already possess statutory authority to limit bank executives’ compensation. Additionally, a bank or its shareholders can sue bank directors for breach of fiduciary duty pursuant to state corporate law, regardless of whether the bank is chartered by the federal government or a state. The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), crafted “a federal cause of action against directors of any depository institution insured by the FDIC for gross negligence, as that term is defined by state law.” Under this law, the Federal Deposit Insurance Corporation (FDIC) can hold bank directors “personally liable for civil monetary damages” in the event of a bank failure with a minimum standard of gross negligence. FIRREA preserves state law, so depending on the state, stricter standards may apply, or the threshold for culpability may be lower than gross negligence. This was affirmed in Atherton v. Federal Deposit Insurance Corporation.

Federal financial regulators can remove a party associated with a bank from office if the party breaches its fiduciary duty and “demonstrates willful or continuing disregard” for the “safety or soundness” of the bank, among other requirements and potential violations.

Federal securities law can also expose bank executives to liability. As early as Monday, March 13, 2023, a class action lawsuit was filed against SVB Financial Group’s former CEO and CFO for alleged securities fraud.

Current federal and state laws contain several tools to hold bank executives accountable.


Removal Provisions

The RECOUP Act exempts community banks from the provisions forcing banks to amend their bylaws and the two-year compensation clawback, but community banks are not exempt from the provisions that enhance federal regulators’ powers to remove bank executives from their roles. Section 2 of the bill allows the FDIC, Fed, and Office of the Comptroller of the Currency (OCC) to remove bank executives from their positions if they fail “to carry out the responsibilities of the senior executive for governance, operations, or risk or financial management of an insured depository institution or business institution.” Regulators may remove bank executives from their roles if they demonstrate gross negligence “in the performance of the duties of the senior executive to the insured depository institution or business institution.” This adds a stricter standard to executives than any other party to the banks. The bill also applies a federal fiduciary duty standard that conflicts with state corporate law and duplicates the fiduciary standard already in federal law.

Additionally, the bill fails to include a legal standard for two “specific violations.” If a bank executive fails to “to appropriately implement financial, risk, or supervisory reporting or information system or controls” or fails to “oversee” the supervisory reporting, information system or controls, then the federal regulators have full discretion to remove executives without any legal standard to limit culpability.

These new removal provisions apply to all banks, even the ones that are solvent and not at any risk of failing. The provisions give the regulators leeway to remove bank executives from key roles if they have determined through matters requiring attention (MRA) or matters requiring immediate attention (MRIA) that executives have failed to implement and oversee new risk reporting and controls. The language is also broad enough that “risk” reporting or controls could include environmental, social, and governance (ESG) risk. If a regulator determines that an executive failed to appropriately implement or oversee, for example, “climate risk” reporting or controls, then regulators could potentially remove bank executives from their roles without any legal threshold for culpability (other than perhaps the business judgement rule as found in state law). Regulators could make these determinations without any additional consultation or authority from Congress. This is an expansion of regulatory authority over the banking sector, plain and simple.

It remains to be seen how expanding bank executive removal provisions for banks of all sizes that are financially healthy will help curtail future bank failures. It seems more likely that these removal provisions are a new tool for regulators to make bank leadership more compliant with the preferences of the executive branch.


The bill forces banks with more than $10 billion in assets to adopt governance standards in their bylaws. These bank bylaws are regulated at the state level. Superimposing these governance standards conflicts with state law. Moreover, the “required contents” of the bylaws must include ensuring that bank executives “implement reporting or information system or controls” just as described in section 2 of the bill. This bolsters federal regulators’ unchecked authority to remove bank executives from office without any legal standard to do so. The required contents would also include, in the event of a bank collapse, the recoupment of executive compensation during the two years prior to the bank entering receivership. Compensation includes but is not limited to bonuses, severance pay, and employee stock ownership.

Clawback Authority

The RECOUP Act gives the FDIC the authority to claw back compensation as outlined in the new provisions required in bank bylaws. While the FDIC is not required to claw back compensation, the bill still enhances the authority of the government to intervene and take away compensation if it determines it is the right course of action. Moreover, the clawback does not apply a legal threshold of culpability for executives “responsible for the failed condition of the depository institution or depository institution holding company.” This gives the FDIC free rein to make unilateral decisions and further encroach on the operations of bank boards.

Regulator Reports

The RECOUP Act does not appear to try to rectify the problems observed during the collapse of SVB. The real source of SVB’s demise was the Fed’s failure to promptly supervise and enforce rules on SVB. Since 2011, the Government Accountability Office (GAO) and the Fed’s Office of the Inspector General (OIG) discussed how the Fed failed to escalate supervisory actions to mitigate risk before bank failures. Burdensome regulations that are already on the books are not being enforced.

The RECOUP Act does not hold the Fed accountable for its failures. Section 8 requires the Fed to publish a regular report about its own supervisory and regulatory policies. As we have seen from the Fed’s own report about the SVB collapse, their self-evaluations leave a lot to be desired. If a bank fails, section 9 requires the inspector general of that bank’s regulator to submit a report to Congress evaluating how federal regulators carried out their responsibilities. While these reports are a positive step in shedding light on agency actions, reports have already been conducted by GAO and IGs. At the very least, other independent reviews of the Fed should be conducted to remove any bias. One Fed governor, and the Fed’s community bank representative, Michelle Bowman, has called for an independent review.

The Fed failed to escalate concerns with SVB after it identified issues with its positions on interest rate risk. Congress needs to focus on stricter regulator accountability, more transparency without increasing regulation on industry, and mitigation of moral hazard that already exists in the banking sector.

Alternative Solutions

Below is a list of legislative considerations lawmakers should contemplate moving forward: 

  1. Establish a new inspector general office to oversee misconduct from federal financial regulators.
    • A new inspector general office that can receive complaints from banks and other financial institutions about regulatory misconduct or inadequacy in real-time could better inform Congress on how to improve supervision without any need for additional regulatory authority.
  2. Further deregulate reciprocal deposits.
    • In 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (P.L. 115-174) largely removed reciprocal deposits from the definition of a “brokered deposit” to unleash more bank products that allow more deposits to be insured under the current deposit insurance limit. Currently, reciprocal deposits are considered “non-brokered” if they amount to no more than $5 billion or 20 percent of a bank’s total liabilities, whichever is less. These private sector alternatives protect depositors and avoid exacerbating moral hazard to the same degree as increasing the deposit insurance cap. Allowing banks more leeway to pursue these products could benefit both household and business depositors. 
  3. Promote bank sweep accounts.
    • Businesses and individuals can take advantage of these private sector alternatives. For example, some community banks and regional banks offer insured cash sweep programs that allow depositors to distribute their cash around to different accounts “to money market deposit accounts at other FDIC-insured financial institutions” to earn higher interest and stay under the insurance limit. A heightened government backstop is not needed because the private sector is already innovating new products to benefit individuals and businesses. 
  4. Direct the Fed on how it should handle capital requirements.
    • Issuance of long-term debt (total loss-absorbing capacity), reimposing interest rate controls (Regulation Q), and expanding other capital requirements on banks will only increase bank leverage (making them riskier) and constrain liquidity. Expanding these regulations should be opposed.  
    • More regulations will also fail to stymie future bank failures. The fulcrum of the bank collapses is the Fed and FDIC’s failure to supervise and escalate concerns with bank behavior. 
  5. Ensure mark-to-market accounting for all bank securities.
    • Simple accounting tweaks, such as marking-to-market a bank’s securities portfolio, can offer transparency to bank shareholders, bondholders, and depositors. Charles Calomiris and Phil Gramm have proposed this idea.
    • This mitigates the need to account for unrealized gains and losses on available-for-sale securities in bank capital. SVB’s idiosyncrasies, such as a high-level of venture capital and tech startup depositors and borrowers, should not distort how accumulated other comprehensive income (AOCI) is interpreted. In general, unrealized losses are not a problem if the bank does not have to sell the assets at fair market value. SVB’s depositor base combined with the Fed’s lackluster monetary policy put it in a unique position. Disclosure of mark-to-market accounting enhances transparency for shareholders and bondholders without the need to change capital calculations for all banks with more than $100 billion in assets.
  6. Pass the International Regulatory Transparency and Accountability Act.
    • This bill requires federal financial regulators to be more transparent about international negotiations and meetings with groups such as the Basel Committee on Banking Supervision and the Financial Stability Board. Under the bill, regulators would be required to notify the public and provide at least 60 days for stakeholder feedback before entering into an international agreement, such as a future framework for Basel capital requirements.