The concept of a financial “clawback” in banking was a phenomenon that once only seemed to exist in the minds of regulators, or politicians’ indignant speeches. No longer.
This month, the US bank Wells Fargo sent shockwaves through the financial world by admitting that its staff opened 2m fake customer accounts.
That is startling, but equally noteworthy is the decision by the bank’s board to claw back $41m of stock awards previously given to John Stumpf, chief executive. It is also removing $19m unvested stock awards from Carrie Tolstedt, the bank’s former retail head, along with her pension.
In some respects this seems like too little, too late. The board only imposed this clawback after five Democrat senators wrote a letter to the bank complaining about the issue — and Mr Stumpf delivered a truly dreadful performance in a Congressional committee. It would have been far more commendable if the Wells board had acted before it was pushed.
But tardy or not, historians may end up viewing this clawback as a watershed moment. It will not hurt Mr Stumpf too badly: he is hugely wealthy. Even by the mind-boggling standards of America’s rich, however, $41m is hardly small change. And it marks the first time that a board has imposed a tangible clawback of this size, let alone against a chief executive.
This matters. While the idea of “clawing back” compensation from bankers who mess up is not new, before the 2008 financial crisis boards had few legal provisions to impose them. The only way to hit bankers where it hurts — in their wallets — was to slash a bonus (or fire them).
Since 2008, most large banks have introduced clawback clauses that enable them to remove previous compensation awards, typically for three years. While these have not yet been applied widely, regulators are cranking up the pressure. In 2015 the Securities and Exchange Commission proposed reforms that would force listed companies to “adopt policies that require executive officers to pay back incentive-based compensation that they were awarded erroneously”. These are supposed to take hold in a couple of years, and would cover seven years of compensation. Separately, UK regulators are pushing banks to impose clawbacks for 10 years of compensation.
There is now every chance that if other banks face scandals they will copy Wells’s move; indeed, shareholders will increasingly demand this sort of action.
The really interesting and timely issue, however, is what happens in Europe, particularly in Germany. Deutsche Bank’s share price this week dived to a 30-year low after the US Department of Justice called for a $14bn fine over past misconduct with US mortgage-backed securities. Deutsche executives are fighting to cut this to nearer $3bn. Even if they succeed, the fine will blow a hole in the bank’s balance sheet, since its total market capitalisation is $16bn.
Deutsche could plug that hole by using shares or selling assets. There is another option that could shrink that hole: clawbacks. For example, Stuart Graham, an analyst at Autonomous Capital research group, estimates that if the bank recouped all its currently unvested compensation awarded to bankers, and cancelled 2016 bonuses, it could raise about €1.5bn.
Some former Deutsche employees think that sum could be far higher if the bank got truly aggressive. They point out that the bank paid €4bn worth of bonuses in 2006 and 2007 to its staff, and €2bn in 2008.
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Unsurprisingly, these suggestions horrify Deutsche executives in private, not to mention other senior European bankers. They argue that clawbacks on this scale would make it impossible to retain staff, which would further undermine the banks’ business model and value at a time when the sector is already being labelled “uninvestible” in Europe. Draconian clawbacks would also spark a legal fight: although Deutsche has clawback provisions in place, these mostly refer to unvested stock compensation.
Nevertheless, this week’s move by Wells’s board and the rising political anger in Germany raise the chance that Deutsche will be forced to act. Rightly so. If bankers are going to defend their craft, let alone their high pay, they have to start truly sharing risks with shareholders and taxpayers.
Indeed, such a move is essential for them to win trust again. It is a huge pity that it has taken so long for these reforms to bite. If clawbacks had been in place a decade ago, those scandals at Deutsche and Wells might never have erupted in the first place. Clawbacks need claws.
This article has been amended to clarify that Deutsche Bank’s market capitalisation is $16bn. It has more than $60bn in capital.