Financial Regulatory Forum

SocGen scandal prompts EU bank watchdog crackdown

By Reuters Staff
December 21, 2009

LONDON, Dec 21 (Reuters) – European Union bank supervisors unveiled draft guidelines on Monday to apply lessons from a trading scandal that forced Societe Generale to book billions of euros in losses.

The Committee of European Banking Supervisors (CEBS), made up of national banking regulators from the 27 EU states, said it would consult on its guidelines that are due to take effect by the end of 2010.

They flesh out how high level risk management and remuneration principles should be applied to control risks in trading activities to make fraud harder to hide.

“Past and recent cases show that when institutions do not adhere to basic principles of sound internal governance, the severity of operational risk events in market-related activities can be very high, jeopardising the institution’s earnings, the existence of the particular business area or even the existence of the whole institution,” CEBS said in a statement.

“As an example, the failure of internal governance mechanisms, at multiple levels, was the main cause of the rogue trading event discovered at SocGen in early 2008,” CEBS said.

In September this year, Jerome Kerviel was ordered to stand trial on charges of breach of trust, fraud and manipulating French bank Societe Generale’s computer system.

SocGen said the 4.9 billion euros ($7.02 billion) of losses it unveiled in January 2008 were due to unauthorized deals carried out by Kerviel, a former junior trader at the bank.

The CEBS guidelines aim to beef up supervision of a bank’s governance mechanisms, internal controls and reporting systems in trading activities.

There should be regular fraud testing with a specific programme for identifying the risk of fraud and measures to increase fraud awareness among staff.

Banks will have to describe in their annual reports of the internal controls they have and efforts undertaken to limit possible fraud.

“Traders should initiate transactions only when these are compliant with their set terms of reference,” the draft guidelines state.

Transactions should be initiated and concluding in the trading room and during trading hours with a documented audit trail. The guidelines also say that whistle-blowing may help to detect abnormal trading patterns and probe incidents. (Reporting by Huw Jones, editing by Andy Bruce) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com)) ($1=.6978 Euro)

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