Managing Bank Operations Danger

De BISAWiki

So we've had yet another enormous loss at a major bank. The unfolding Société Générale loss may be the largest (so far), nevertheless it is neither the initial not the final. Jerome Kerviel seems set to join a notorious band of rogue traders for instance Nick Leeson and Toshihide Iguchi.

Plus the funny point is that regardless of all of the hand wringing and accusations leveled at its newly exposed rogue trader, the management of Société Générale fails to view exactly where the genuine blame definitely lies. Put ?visit us basically - on it's personal doorstep.

As the evidence of this enormous loss and its underlying circumstances begins to emerge a single thing is eminently clear. The whole debacle may be blamed squarely on the failure of Société Générale's Board and its Senior Management to take its operations threat management obligations seriously.

Already, within days with the loss being discovered an abundance of anecdotal proof has begun to emerge. Let's appear at some of those;

o "The ... bank stated that it attempted on a number of occasions to produce Mr. Kerviel take several weeks off, but that it in the end went along with his excuses for staying at work" (breakingviews.com)

o "The prosecutor also mentioned that Mr. Kerviel admits to disregarding Société Générale's trading rules but says others also flouted limits designed to include risks towards the bank". (Wall Street Journal - January 29, 2008).

o "... was the IT drawbridge correctly raised when he produced his move out of the back-office and onto the trading desk in 2005? Clear segregation of back-office and front-office activities was one of many clearest lessons to emerge in the rogue-trading scandal at Barings Bank in 1995; at SocGen, these lines look to possess blurred." (Economist.com).

o "Eurex, the futures exchange of Deutsche Börse, questioned the trading position of Mr. Kerviel last November." (Wall Street Journal - January 29, 2008).

o "Veterans from the futures markets are baffled about how Mr Kerviel got away with creating up such a major position unnoticed." (Economist.com).

And however initially Société Générale painted themselves because the hapless victim of a canny and malicious fraudster who ruthlessly overrode all controls, so meticulously designed to trap his ilk.

And all this points squarely at a huge management failure within the operational risk arena.

Basel II , which the European banking industry has spent the last half decade preparing for and which officially came into impact inside the EU on 1st January 2008, is definitely the existing common of finest practice for management of operational risk.

The Basel II definition of operational threat is "... the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. This definition incorporates legal threat, but excludes strategic and reputational danger."

Aside from the distinct details of how capital would be to be allocated against operational threat Basel II calls for that apart from the "Basic Indicator Approach" (whose customers are anyhow essential to comply with "Sound Practices for the Management and Supervision of Operational Risk" standard from the BIS), these more sophisticated banks making use of either the "Standardized Approach" or the "Advanced Measurement Approaches" must satisfy its local banking supervisor that, as a minimum;