Six months after SVB collapsed, what’s changed? Plus: The ‘atomic bomb’ of compensation, Goldman’s loss, and more

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It’s been six months since the collapse of Silicon Valley Bank, followed by failures at First Republic Bank and Signature Bank. We asked industry experts to weigh in on what has — and hasn’t — changed within the banking industry, as well as share predictions as to what could still happen in the near future.?

What has changed

In March, Silicon Valley Bank customers rushed to withdraw funds out of fear of insolvency, and the two-day bank run led regulators to take over and close the lender. Notably, on the heels of the panic at SVB was the failure at Signature Bank, where depositors withdrew large amounts of money.

The following month, First Republic went under, marking the second-largest bank failure in U.S. history, next to Washington Mutual’s collapse in 2008.

This spring, there was a lot of uncertainty about how long this banking crisis would last — and what would change to prevent more banks from being seized by regulators.

Kairong Xiao, a professor at Columbia Business School, says some of the biggest changes have been that “regional banks are regulated more like big banks now” — with greater capital requirements and more timely “living will” requirements.

Xiao also points to how bank regulators conduct stress testing. He sees it no longer as a one-dimensional look at an economic downturn, but now a multidimensional one with factors such as inflation and interest-rate hikes being more of a consideration.

Kevin Messina, director at consultancy Baringa, says with new capital requirements and new guidance from the Office of the Comptroller of the Currency (OCC) on third-party risk management, the focus will shift to “what this all means from a stress-testing standpoint.”

“Regulators will start to have their examination teams taking a closer look to see if banks are doing adequate stress testing,” Messina says, “and we expect to see them increase issuance of MRAs (matters requiring attention) and MRIAs (matters requiring immediate attention) when they are falling short.”

What hasn’t changed, but could?

Even with the expanded look at stress testing, Cindra Maharaj, partner at consultancy Baringa, says that too many institutions still view stress testing as “check-the-box exercises.”

“Stress testing has not been good enough, it hasn’t happened often enough and it hasn’t been conducted on enough levers,” Maharaj says. “Organizations must evolve the use of stress testing by thinking about these mechanisms as enterprise-planning initiatives that can better their business.”

Risk management within banking still needs a rethink, she adds, noting the need to integrate new, emerging risks into existing risk infrastructures and frameworks.

“Financial leaders are trying to determine how to operationalize and manage these new risks and identify the most accessible starting points to integrate,” Maharaj says. “Banks are also grappling with the operating models for managing between non-financial and financial risk. Financial risk is going to be more mature in theory, but when thinking about integration and mitigation, they’re both carrying equal weight right now.”

In addition to regulatory changes, many have expected there would be more consolidation within the industry. Dan Kimerling, who worked for SVB from 2015 to 2017 after his company was acquired by the bank, says there will be more consolidation within the industry, but that it will surely expand again.

“It’s a cyclical phenomenon,” Kimerling says.

We’ve seen it time and time again. When there’s a crisis, one of the biggest threats that corporations can make to appease shareholders is the potential of recouping compensation from executives thought to hold some level of responsibility for the event.

Sure enough, earlier this year as a result of the banking crisis, legislators went to work drafting a bill that would give authority to the FDIC to claw back pay when a bank fails.

The Senate Banking Committee considered the RECOUP Act following the failures of Silicon Valley Bank, First Republic Bank and Signature Bank.

“Executives at these banks received exorbitant compensation as the banks took on excessive risks,” said Sen. Jack Reed (D-R.I.).

SVB’s ex-CEO Greg Becker, who was paid $10 million last year, sold $3.5 million in stock in the days leading up to the company’s collapse. Chief execs at Signature Bank and First Republic also sold millions worth of stock earlier this year, prior to the bank failures.

“Taxpayers shouldn’t have to pay for the incompetence, negligence and misconduct of failed bank executives,” Sen. Reed said. “This bipartisan bill should make bank executives think twice before engaging in risky activities.”

The bill, which was passed at the committee level, is still making its way through Congress. If passed, it could potentially mean more stringent expectations for banking professionals.

Robin Melman, co-chair of the employee benefits and executive compensation practice at Baker Botts, explains that even though clawbacks are the “atomic bomb” of compensation, most public companies have policies in place to claw back pay. After the passage of Dodd-Frank and Sarbanes-Oxley in 2010, the SEC said that it wanted to see more companies create policies around clawbacks.

Then in 2015, draft rules were finally put forward, but the proposal sat stagnant for several more years under the Trump administration. In 2022, the SEC finally adopted provisions, which go into effect next month.

While companies were waiting on finalized rules, the vast majority put policies in place. According to Shearman & Sterling’s 2022 annual corporate governance survey, 95% of the 100 companies surveyed disclosed that they maintain a financial-related clawback policy, while 83% have clawback policies in place for “detrimental conduct.”

But despite the policies in place, clawing back pay happens very infrequently.

According to SEC analytics provider MyLogIQ, three public companies in 2023 have so far clawed back pay. In the previous two years, only four others did.

While only a few companies went through with the clawbacks, another 59 over the past three years disclosed in regulatory filings that it was a possibility.

David Harmon, co-chair at Norris McLaughlin’s executive compensation and employee benefits practice, says there is an appetite to see clawbacks occur more frequently in both the public and private sectors — “not only with respect to financial improprieties, but also in instances of violations of executive employment agreements for sexual harassment, discriminatory conduct, breach of restrictive covenants, such as non-competes.”

He’s seen an increase in recent years in clawback provisions in employment and related agreements across a range of industries. “I believe that trend will increase,” he says.

At the end of the day, though, Michele Alt, partner and co-founder of advisory and investment firm Klaros Group, says that “a clawback right is just the right to bring a lawsuit.”

“It is expensive and time-consuming to bring such a lawsuit, and — as with any lawsuit — success is not guaranteed,” Alt says.

You win some, you lose some. Not 18 months ago, Goldman Sachs paid $1.7 billion for GreenSky, which specializes in home renovations lending. Goldman CEO David Solomon said at the time the acquisition would help the firm become the “consumer banking platform of the future.” Now, the bank is reportedly in advanced talks to sell GreenSky to a group of investment firms for a fraction of what it spent. Sixth Street, PIMCO and KKR could reportedly buy GreenSky for roughly $500 million. The Wall Street Journal called it a “costly retreat from a key part of the Wall Street bank’s failed experiment in consumer lending.”

$23

Next month, Bank of America’s minimum hourly wage will jump to $23, which means full-time employees will make nearly $48,000. The bank’s announcement is a step on its path to raise wages to $25 an hour by 2025. It has boosted pay several times since 2017, when it jumped on the trend of increasing hourly wages to $15. “Providing a competitive minimum rate of pay is foundational,” Bank of America CHRO Sheri Bronstein said in a statement Wednesday. “By investing in a variety of benefits to attract and develop talented teammates, we are investing in the long-term success of our employees, customers and communities.”

Let’s travel back 15 years, shall we? Just days after Lehman Brothers filed for bankruptcy on Sept. 15, 2008, the financial industry as we knew it underwent various changes and volatility. Goldman Sachs and Morgan Stanley changed their status in banking by no longer being considered investment banks. On Sept. 22, 2008, they transformed themselves into banking holding companies, which subjected them to greater regulation and supervision, as opposed to only being overseen by the SEC. The change marked “the end of an era,” The New York Times wrote.

With unions front and center right now across several industries, will the banking industry be next? Wells Fargo is currently the only major bank where workers are openly trying to unionize.

As of January, only about 1.3% of the financial services industry were in unions, according to the U.S. Department of Labor.

Do you anticipate more banking professionals will try to unionize? Why or why not?

Join the conversation in the comments below.

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