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May 16, 2023

Amid Bank Failures, Pressley Highlights Golden Share Proposal to Mitigate Financial Mismanagement

Proposal Would Allow Government-Appointee on Board of Large Banks to Safeguard Public Interest

“If the American public is going to suffer the consequences of poor corporate governance, then maybe it’s time for the American public to have a seat at the table.”

Video (YouTube)

WASHINGTON – Today, in a House Financial Services Committee, Congresswoman Ayanna Pressley (MA-07) highlighted the “golden share” proposal, which would allow government-appointed directors to serve on the boards of large banks to mitigate financial mismanagement and safeguard the public interest. In her line of questioning, Rep. Pressley discussed how having a government-appointed director at Silicon Valley Bank could have helped prevent the mismanagement of risk that led to the bank’s collapse.

A video of her exchange with the witnesses can be found here, and a transcript is available below.

Transcript: Amid Bank Failures, Pressley Highlights Golden Share Proposal to Mitigate Financial Mismanagement

May 16, 2023

House Financial Services Committee

REP. PRESSLEY: Thank you so much to our witnesses for joining us. Since Vice Chair Barr and FDIC Chair Gruenberg last testified in front of this committee, as we all know, another bank has collapsed. So that’s three bank failures this year.

In the Federal Reserve’s report on the collapse of SVB, it underscores that bank executives committed “textbook” failures in managing interest rate risk and regulators failed to understand the depth of the problem and to react appropriately.

Certainly the 2008 financial crisis gave us all a front row seat. The entire nation learned in that moment that we cannot solely rely on the decision-making of executives to ensure systemic stability.

So this is not a new issue. This is no epiphany here.

Chair Gruenberg, as you well know, and I want the public to know, that banks are subsidized by the government through the deposit insurance fund and their access to the Fed’s liquidity backup facilities. Banks perform what is essentially a delegated public responsibility – including providing transactional accounts, operating payment systems, and serving as channels of monetary policy.

So, Chair Gruenberg, bearing this in mind, would it be fair to say that banks operate similarly to a public-private partnership?

CHAIR GRUENBERG: It’s interesting. They certainly have a public charter and a set of public responsibilities that comes with their charter and the provision of public support, and that is also why they incur the obligations relating to both supervision for safety and soundness as well as consumer protection and community reinvestment.

REP. PRESSLEY: Very good,thank you. So yeah, I think it is an accurate characterization, however it is a skewed public-private partnership because the profits are enjoyed by the private bank but the losses are borne by the public.

For too long, banks have been content really to chase profits irresponsibly and then to turn to the government to bear the risk when they collapse.

If the American public is going to suffer the consequences of poor corporate governance, then maybe it’s time for the American public to have a seat at the table.

One proposal that would do exactly that is to give the government a Special Government Share, or what some would call a “golden share. “

The way it would work is simple: the federal government would receive a unique share in large banks that are considered systemically important, which would allow for a government-appointed director to join the bank’s board and be responsible for representing the public interest.

Now, under normal circumstances, the director would keep an eye on proceedings and not interfere with the day-to-day affairs. But when credible concerns arise that the bank is mismanaging its risk and threatening our economy, then the director can act as an early-warning early-action system to prevent a potential crisis.

So, Vice Chair Barr, it’s my opinion that having a government-appointed director at SVB could have helped to avoid the now obvious mistakes and errors and repeat of history here.

Do you agree that a board member with a unique public mandate would support around remedial measures, early intervention, and then the director would have been more ideally positioned to spot and flag the problems with unhedged interest rate risk and overreliance on wholesale deposits that the executives were willing to ignore?

VICE CHAIR BARR: The system we have for that now is that the board of directors has that responsibility. They are required to oversee the management of the firm in a while that takes into account appropriate risk management, and the board in this case failed to do that. The senior officers of the bank also failed to appropriately manage their risk, and as we outline in our report, the supervisors called out that risk, cited them for the risk but did not –

REP. PRESSLEY: The time is elapsing. I’m so sorry – well, actually, I don’t apologize so I’m just going to reclaim my time. You said “fail” there several times and I think that’s the point is that we don’t want this to happen again.

The swift government intervention to insure all deposits and prevent a systemic crisis showed us once again that the profitable business of banking is deeply intertwined with public interest.

The “golden share” proposal would allow an appointee on the board of large banks to safeguard the public interest. The reoccurring bank failures demonstrate that bank executives are not making decisions in the best interest of the people.

The American people deserve a seat at the table.

Thank you.