Societe Generale affair

Bank controls 'failed to work'

France's Finance Ministry has called for tighter banking controls after the Societe Generale trading scandal


Story from BBC News


Christine Lagarde, France's economy minister, said some of the bank's internal controls failed to work. She made the comments as she delivered a report on the bank's trading losses to the French government. The bank blames junior trader Jerome Kerviel, 31, for a 4.9bn-euro ($7bn) loss, though he has reportedly said it knew the risks he was taking.

"Very clearly, certain mechanisms of internal controls of Societe Generale did not function, and those that functioned were not always followed by appropriate modifications," Ms Lagarde said.

The report also said that inspections by the Bank of France's banking commission had previously found weaknesses in Societe Generale's control system. "Inspections by the banking commission carried out in 2006-7 had led to recommendations seeking to strengthen the security of operations," a summary of the report said.

The report into the scandal also called for clearer divisions between the roles of government and regulators, and it recommended the banking commission be able to impose tougher penalties. It also proposed talks with major trading partners on the scandal to ensure that international standards apply.

Rules followed

Ms Lagarde said the bank followed rules on disclosure of market information when it unwound the unauthorised transactions by Mr Kerviel.

"The unwinding of the positions at the source of the loss on 21, 22 and 23 January was done in a professional way in difficult market conditions that could not be attributed to Societe Generale," Ms Lagarde said. Some analysts have said Societe Generale was behind sharp falls in European stock indexes during January.

"One cannot say that the unwinding of positions by Societe Generale provoked a market fall in Europe," she told the banking commission of the French lower house of parliament. The bank's chief Daniel Bouton has been under pressure to resign over the trading scandal, but last week the Societe Generale board gave Mr Bouton their backing.

The report did not seek to assign blame for scandal, which has rocked France's banking sector and triggered talk that Societe Generale could be taken over or split up. Mr Kerviel is being investigated for breach of trust, falsifying documents and breaching computer security - but not the more serious charge of fraud. Societe Generale says Mr Kerviel had an unauthorised position, or a bet, worth about 50bn euros on the future direction of European shares. To avoid that potentially catastrophic loss, the bank had to unwind Mr Kerviel's trades, but that still cost it 4.9bn euros.


(Published: 10.02.2008.)

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