French Finance Minister Christine Lagarde says Socit Gnrale “clearly” failed to detect Jerome Kerviel’s faulty trades, resulting in a 4.9 loss to the bank, Bloomberg reports.
Lagarde today presented the results of her investigation to Prime Minister Francois Fillon.
“Very clearly some internal mechanisms at Socit Gnrale did not work and those that worked were not followed-up with appropriate actions,” Lagarde says.
Investigation of the transactions by Kerviel that led to the biggest trading loss in banking history have focused on the bank’s management oversight and also on why the Bank of France Governor Christian Noyer waited three days before informing the government, Bloomberg reports.
Lagarde says she hopes for a better dialogue between the government and banking regulators in the future.
“The need of confidentiality can be a reason not to inform the ministry of finance or the prime minister,” Lagarde said at a parliamentary hearing today. “We must work on defining who the interlocutors are who must be informed.”
The report calls for stricter risk controls at banks and identifies four areas where bank controls need to be improved to prevent fraud. The report also recommends that fines for failing to meet regulatory standards be raised.
Lagarde emphasized the need for the “Chinese wall” between the back, middle and front offices and that more attention be paid to “behavioural aspects” such as vacation time taken by traders.
Experts say Kerviel most likely was using an old administer name and password from the back office to manipulate trades in the front office. Many agree with Lagarde that it is more than an IT problem for Soc Gen, but requires cultural change to spot fraud.
“I think now banks may really think about the whole psychology of traders and risk management and decide to put more money and more seriousness on risk management,” says Jean-Baptiste Gaudemet, professional services manager at Sophis, a portfolio and risk management service provider. “Because if you give this free option to the traders, the story will come back.
Kerviel, whose trades on futures exceeded the bank’s market value, admitted to hacking into computers and faking e-mails to hide bets, Prosecutor Jean-Claude Marin says. Kerviel was released after being charged by French judges of falsifying documents, computer hacking and breach of trust. Kerviel told prosecutors there were signs that should have tipped off the bank, including the fact that he took almost no vacation time in 2007, Bloomberg reports.
Speculation continues of a takeover of Socit Gnrale, after the banks lost capital from the faulty trades. Over the weekend, the bank published an open letter to clients saying the future of the bank isn’t threatened. But both rival French banks BNP Paribas and Crdit Agricole have expressed interest in a deal.