What does it mean for a bank to find “material weaknesses”?
What does it mean for a bank to find “material weaknesses”?
Regional lender New York Community Bancorp has already had a rough 2024. The latest development came at the end of last week: The bank swapped out its CEO following the revelation of what it called “material weaknesses in the company’s internal controls.”
You may also recall that NYCB acquired just under $40 billion in assets last year from the failing Signature Bank. So, what are “material weaknesses” exactly?
Banks need to make lots of calculations. For example, how likely is it that this borrower will default on that loan?
Banks have people to make, check and double-check those calculations. “Material weaknesses” happen when an error occurs during that process and shows up in the bank’s financial reporting.
“Obviously that’s a real problem,” said Mayra Rodriguez Valladares, a financial risk consultant.
Whenever a bank discloses material weaknesses, regulators and traders start thinking, “‘Wait a minute, if it’s having problems with internal controls in this particular area of the bank, does it also mean that we can’t trust anything else?’” she said.
In these cases, it’s important for banks to quickly understand how deep their issues go, per banking industry consultant Merrill J. Reynolds.
“And you have to see what those problems add up to being as far as potential losses for the bank,” he said.
Sometimes when a bank gets bigger all of a sudden — like New York Community Bank did last year — Reynolds added that it can be hard for internal controls to keep up.
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