The Recoup Act of 2023 – Attacking the Problem of Mismanagement

I have been honored to have worked with Ohio’s United States Senator, Sherrod Brown, for the past three decades on credit union and deposit insurance matters, and I always respected his efforts to direct federal legislation to better manage the banking industry, when necessary. In June 2023, Senator Brown, as Chairman of the U.S. Senate Banking Committee, introduced S.2190 – The Recovering Executive Compensation Obtained from Unaccountable Practices Act of 2023 or the RECOUP Act of 2023. I think the name says it all. Senator Brown is seeking to amend the Federal Deposit Insurance Act to place blame (and cost) where it belongs – on the back of management and bank boards that guide their FDIC-insured banks into the disaster zone while accumulating significant personal gain.

The bill basically enhances the FDIC’s authority, or that of a conservator or board of an insured bank, to allow it to “clawback “…any bonus, other incentive-based or equity-based compensation, severance pay, or golden-parachute benefits…” which was received by a senior executive(s) who was determined to be responsible for the failed condition of the bank.  The lookback is limited to 24 months. The FDIC’s limit on civil money penalties assessed against such executives is also to increase from $1 million to $3 million. In other words, the FDIC could recover some of its losses from those who were incentivized to put the bank at the risk of loss to the FDIC.

Senator Brown’s bill also calls for greater disclosure and transparency to the public and to Congress when the FDIC closes a failed bank, including a reporting of its detailed review of management, and the supervision and regulation of the failed institution. This would appear to require the FDIC to report on the state banking regulator as well as federal banking regulators. Interestingly, the two notable banking failures of 2023 - Silicon Valley Bank (CA) and Signature Bank (NY) – were both state-chartered banks.

Senator Brown’s bill also seeks to dramatically drop the regulatory stress testing thresholds ($250 billion now in effect) to those called for under the Dodd-Frank Act of 2010 ($10 billion) to assure better risk assessment by the FDIC. The two subject banks highlight the consequences of poor asset/liability management, concentration risk and volatile social media exposure – something greater stress testing might have helped identify earlier.

As in past banking crises, reactive re-regulatory legislation is not uncommon, so I would watch for more to come – maybe even affecting credit union?