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Banks cratering because of poor risk management

Costly fraud to follow?

Economic shifts, crypto deposits, weak controls and incompetent administration have led many tech-heavy banks to bite the dust this year. But none of the institutions’ C-suiters should’ve been caught flat-footed. Since the Great Depression, risk management has been the mantra of the money world. And we know that complacency and hubris can lead to fraud. Here’s how the bank collapsed and reminders for organizations to get it right.

On March 9, the day before Silicon Valley Bank (SVB) collapsed, and the day after Silvergate Bank announced its failure, supposedly stable Signature Bank sent an update on the bank’s mid-quarter financial status in a letter to its investors and regulators to try to reassure them of the bank’s financial health. “As shown by our current metrics, we intentionally maintain a high level of capital, strong liquidity profile and solid earnings, which continues to differentiate us from competitors, especially during challenging times,” Eric Howell, Signature’s president and chief operating officer, said in the update. The letter backfired. Immediately upon SVB’s collapse, customers started withdrawing large deposits from Signature. That caused a run on the bank, which regulators stopped by seizing the bank Sunday, March 12. (See “FDIC Establishes Signature Bridge Bank, N.A., as Successor to Signature Bank, New York, NY,” FDIC, March 12, 2023.)

Now Signature investors are suing the bank for fraud, accusing them of overstating their ability to weather the gathering financial storm. “The March 9 Update overstated the company’s market position, given that just a few days later, it was shut down by the New York Department of Financial Services,” the lawsuit states. (See “Signature Bank sued for fraud following FDIC takeover,” by Nina Pullano, Courthouse News Service, March 14, 2023 and lawsuit.)

Undoubtedly, with the recent collapse of SVB, Signature, First Republic, the implosion of Credit Suisse and fears of more debacles to come, the thin curtain of banks’ respectability will open and reveal fraud and corruption. (See “Smaller Banks Are Scrambling as Share Prices Plunge,” by Rob Copeland, Joe Rennison and Matthew Goldstein, The New York Times, May 4, 2023.)

Consumers are also worried that we’re headed toward another banking system failure akin to the Great Recession. What’s going on? The problems at these financial institutions are different but stem from a common issue — inadequate control environments to manage risk, which, of course, is a breeding ground for fraud.

“For several years, the bank maintained a weak management and control framework for its fiduciary activities and had an insufficient audit program for, and inadequate internal controls over, those activities.”

This quote is from the 2020 Office of the Comptroller of the Currency (OCC) order to Citigroup, fining the bank $400 million for failing to rectify known control weaknesses around operations and financial reporting in October 2020. But it could’ve come from many different reports issued by regulatory agencies reprimanding and fining banks. JPMorgan Chase, Credit Suisse, HSBC, Danske Bank, Deutsche Bank, USAA, Barclays, BNP Paribas, Bank of America, Santander, Wells Fargo, UBS, U.S. Bancorp and many others over the past 10 years have found themselves in trouble with regulators.

Here we dissect a handful of financial institutions to discern why they collapsed and why weak controls allowed wrongdoing to occur. 

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