Managing Bank Operations Threat

De BISAWiki

So we've had a different enormous loss at a major bank. The unfolding Société Générale loss may be the most significant (so far), however it is neither the initial not the final. Jerome Kerviel seems set to join a notorious band of rogue traders which include Nick Leeson and Toshihide Iguchi.

As well as the funny thing is the fact that regardless of each of the hand wringing and accusations leveled at its newly exposed rogue trader, the management of Société Générale fails to determine where the true blame definitely lies. Put ?discover more merely - on it's own doorstep.

Because the evidence of this huge loss and its underlying circumstances begins to emerge 1 thing is eminently clear. The entire debacle might be blamed squarely on the failure of Société Générale's Board and its Senior Management to take its operations risk management obligations seriously.

Currently, within days from the loss becoming discovered an abundance of anecdotal proof has begun to emerge. Let's appear at a few of these;

o "The ... bank said that it attempted on quite a few occasions to create Mr. Kerviel take a number of weeks off, but that it ultimately went in conjunction with his excuses for staying at work" (breakingviews.com)

o "The prosecutor also mentioned that Mr. Kerviel admits to disregarding Société Générale's trading guidelines but says other folks also flouted limits developed to contain dangers for the bank". (Wall Street Journal - January 29, 2008).

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

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

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

And yet initially Société Générale painted themselves as the hapless victim of a canny and malicious fraudster who ruthlessly overrode all controls, so cautiously made to trap his ilk.

And all this points squarely at a massive management failure within the operational danger arena.

Basel II , which the European banking sector has spent the last half decade preparing for and which officially came into impact within the EU on 1st January 2008, is the existing standard of greatest practice for management of operational danger.

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

Apart from the certain information of how capital is to be allocated against operational threat Basel II demands 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" normal on the BIS), these additional sophisticated banks making use of either the "Standardized Approach" or the "Advanced Measurement Approaches" need to satisfy its regional banking supervisor that, as a minimum;