Banks Failure: The Rebuttable Presumption of Fraud

Technical Staff

March 21, 2023

Earlier this month, the failures of Silicon Valley Bank and Signature Bank caused widespread fear and concern in both local and global markets. However, timely government intervention helped maintain public confidence in financial institutions and capital markets, preventing further damage. There are both monetary and nonmonetary costs associated with these failures, raising the question of who will be responsible for covering them.

The Rebuttable Presumption: There is Fraud

Since the banks’ collapse, reputable sources have suspected fraud as a potential cause. When a bank fails, the rebuttable presumption shold be that fraud and corruption caused its failure, requiring regulators and auditors to investigate such allegations.

The Board and Senior Management Liability

Regardless of the fraud, senior management and the board should be held accountable for the bank’s failure. Since banks often reward good performance with bonuses, shareholders, government officials, and other stakeholders should be able to pursue legal action against the board and senior management for their gross negligence and wrongdoing. Governance only works when leaders are held accountable for their actions or inaction. The U.S. Congress must act swiftly to reduce governance risks within financial institutions and maintain the U.S. banking system’s resilience and solid foundations.

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Originally published at https://blog.theaaci.com on March 21, 2023.