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'Banks must take operational risk more seriously'

Latest update : 2008-02-04

Banks and regulators must take operational risk more seriously, French Economy Minister Christine Lagarde said on Monday after handing in a report into a rogue trading scandal at Société Générale.

Internal control failures at Societe Generale contributed to the bank's multi-billion-dollar rogue trade debacle, France's finance minister said Monday, urging tougher penalties for banks that neglect proper checks.
"Certain internal control mechanisms at Societe Generale did not work and those that did were not always followed up with the appropriate changes," Finance Minister Christine Lagarde said as she delivered a report on the scandal to the French government.
Already reeling from the biggest rogue trade losses in history, Societe Generale and its embattled chairman faced more trouble Monday as they went on trial over a French-Israeli money laundering scam dating from the 1990s.
Four banks including Societe Generale and 138 people including the bank's chairman Daniel Bouton, are accused of turning a blind eye to a multi-million euro traffic of cheques, in a trial set to run in Paris until July.
Societe Generale announced staggering losses of 4.8 billion euros (7.1 billion dollars) on January 24, blamed on 31-year-old rogue trader Jerome Kerviel who has been charged in the case.
Takeover talk is now swirling around the bank, with France's top two lenders Credit Agricole and BNP Paribas reportedly eyeing their weakened rival.
Lagarde's 11-page report, drawn up jointly with the French banking commission and the financial markets authority, the AMF, identifies several points that "may have been decisive" in the run-up to the scandal.
She stressed the report did not aim to pin down responsibilities in the case, which is the subject of several judicial investigations.
But it does make proposals for "reinforcing the security of market operations" and argues there is "clearly progress to be made" in tackling the "operational risk" of fraud.
Lagarde argued that the maximum fine the state banking commission can levy for breach of its rules, currently five million euros (7.4 million dollars), should be "substantially increased".
"In terms of what is at stake, but also the cost of investment in efficient internal control systems, the (current) amounts are not sufficient," she said.
Her report says banks should devote special attention to tackling internal fraud and that senior managers should be "fully involved" in the effort.
Lagarde said she would "very shortly" summon French bank auditors for them to "draw lessons" from the report.
Societe Generale issued a statement saying it had already taken steps to improve its regulatory system.
"Regarding the controls that were successively evaded by this fraud, the measures that would have enabled us to detect and prevent it have been implemented or will be in the short term," it said.
The bank accuses Kerviel of stealing computer codes and falsifying documents to place more than 50 billion euros (73 billion dollars) in futures trades that were discovered on January 20.
Societe Generale was forced over three days to unwind his deals despite a slumping market, resulting in losses of 4.82 billion euros.
Lagarde's report found that the bank acted "in a professional manner" when it unwound the deals and had disclosed sufficient information to the markets.
Kerviel has told prosecutors that his bosses must have been aware of his dealings because of the profits he had generated earlier.
A poll Friday suggested just 13 percent of French people hold Kerviel responsible while 50 percent blame Societe Generale's management.
Adding to his worries, the bank's chairman Bouton risks up to 10 years in prison and stiff fines as one of the defendants in the money laundering trial.
In the case, traders from the Sentier garment-making district of Paris are suspected of laundering ill-gotten funds, the proceeds of tax evasion, embezzlement or stolen cheques, via banks or money exchange offices in Israel.
Cheques were allegedly trafficked from France to Israel, where a third party can pay a cash commission to clear a cheque, and the sums then repatriated to banks in France.

Date created : 2008-02-04