Using Clawbacks to Punish Bank Executives

The Federal Deposit Insurance Corporation has taken small steps to address this issue. It is pursuing claims for damages against former top executives at Washington Mutual, which became the largest bank failure in history. The F.D.I.C. has also adopted a new clawback rule for failed banks that would allow it to try to reclaim two years worth of executive compensation.

The F.D.I.C. is pursuing its case against Kerry K. Killinger, Washington Mutual's onetime chief executive, and two other executives at the bank for risky lending practices that led to its shutdown in September 2008. The complaint alleges they were grossly negligent and breached their fiduciary duty for undertaking a so-called "higher-risk lending strategy" that increased the bank's exposure to subprime mortgages concentrated in California and Florida, undermining its capital base when the housing market collapsed.