Banker accountability is easier to demand than deliver
Hours after Swiss authorities pushed Credit Suisse into merging with its local rival UBS, CS leaders emailed staff. Don’t worry, previously scheduled bonuses and raises will go ahead, chair Axel Lehmann and chief executive Ulrich Körner wrote.
This comes on top of news that Silicon Valley Bank CEO Greg Becker sold nearly $30mn in shares over the past two years, including a $3.6mn chunk just days before the bank sparked a deposit run by revealing big losses on securities sales. The Federal Deposit Insurance Corporation had to bail out the California lender.
Cue the usual outrage. President Joe Biden and members of Congress from both parties rushed to propose legislation that would make it easier to claw back bonuses or stock sale proceeds from executives at failed banks of all sizes and ban them from the industry. “No one is above the law — and strengthening accountability is an important deterrent to prevent mismanagement in the future,” Biden said.
But accountability is a lot easier to demand than deliver. After the 2008 financial crisis, politicians and regulators promised to rewrite the incentive structure for banking. No longer, they said, would it be possible for executives to reap the upside of risky bets while counting on taxpayers to absorb the losses when the markets turned.
Everyone agreed that pay must be tied more closely to long-term results through deferral periods and clawbacks if losses developed later. The 2010 Dodd-Frank reform law directed US regulators to come up with formal rules to this effect, and the EU wrote them into its laws along with a bonus cap.
Yet scandals continued. A dozen global lenders were caught up in rate-rigging of Libor and foreign exchange rates in the 2010s. Wells Fargo shelled out billions in fines for aggressive sales targets that led employees to open millions of fake accounts. And JPMorgan Chase is fighting claims from women who allege the bank “benefited” from sex trafficking by convicted offender Jeffrey Epstein.
However, benign financial conditions made it possible to believe that changes to pay and accountability had made banks safer if not actually nicer or culturally improved. Now we know better.
SVB executives were warned more than a year ago by their own consultants and supervisors at the San Francisco Federal Reserve about the bank’s inability to monitor and manage interest rate risks in its securities portfolio. Yet it fatally undermined depositor and investor confidence by racking up big losses on those holdings as rates rose. Credit Suisse made a series of bad calls on risky dealings with Archegos and Greensill Capital, and further unsettled the market last week by admitting to “material weaknesses” in its financial controls.
That bank did build both deferrals and clawbacks into its pay plans, and Swiss authorities said on Tuesday they had blocked CS from paying out the SFr1.25bn in deferred pay already on its books. But they stopped short of blocking this year’s cash bonuses, to “avoid impacting employees who did not themselves cause the crisis.”
But the US never finished writing those rules on pay and accountability. Two different drafts, one in 2011 and one in 2016, were put forward but not finalised, partly because there were profound disagreements about how best to make them work.
Dennis Kelleher, of the consumer group Better Markets, argues that pay rules can only do so much and authorities should make more use of their criminal powers when overseeing the sector: “Put a couple of them in jail and you’ll be surprised by much compliance you get.”
But prosecutors have largely failed to bring charges that stick, particularly against senior management. CEOs rarely send emails about specific operational decisions. The UK toyed with reversing the burden of proof for senior bank managers and requiring them to show they had not caused a regulatory breach but dropped the idea in 2015.
Nearly eight years after Wells Fargo’s misbehaviour was made public, US prosecutors brought their first prosecution. Carrie Tolstedt, once retail banking head, agreed to plead guilty last week to obstructing a bank examination by leaving statistics about employee firings out of a 2015 memo. No one has been charged over the high pressure sales targets that led employees to misbehave in the first place.
For all the stormy rhetoric about accountability now, the reality is likely to be somewhat different. The more lenders that wobble, the easier it is for their leaders to claim that no one could have expected the problems, and the harder it is to prove criminal negligence.
Follow Brooke Masters with myFT and on Twitter