Today’s BIS email was an interesting one in the light of recent events. It has a speech
by Christian Noyer, the Governor of the Bank of France, regarding Basel
II’s implementation in France. Remember while you read it that a
certain trader’s activities would have been classified as an operational
This passage is interesting in the light of the problems at SocGen:
By 31 December 2007, over 30 on-site inspections will have been conducted in 20 institutions, involving at times up to 100 inspectors at a time. These on-site inspections examined IRB systems for credit risk and advanced operational risk measurement approaches.
As SocGen is one of the largest banks in Europe I am presuming that
they were one of the banks visited – I think this a safe assumption.
This means that SocGen was assessed for operational risk issues while
all of the rogue trading activities was going on – the trading that was
risking much more than the capital of the bank.
He goes on to say:
…and 5 institutions (accounting for almost 60% of the total assets in the French banking system) are expected to adopt an advanced operational risk measurement approach. As institutions have the possibility under Basel II of using their IRB approaches to calculate regulatory capital requirements, supervisors must ensure that these approaches are reliable.
I really wonder how reliable the regulators found SocGen’s risk
management to be in their supervisory visit? How closely did they look?
You would have thought that the trading arm, where most, if not all of
these events have historically happened, would have been a primary focus
of that review. What did they see?
At the very least, SocGen will probably have to carry a much heavier operational risk capital burden now than they would have originally calculated less than a month ago. I think the BoF will have to have a bit more to say on this in the not too distant future. Who is next in line to resign over this? They may not be at SocGen.
[Update]In the light of the latest revelations – see here it looks like a lot more than a single trader should lose his job. It looks like senior management were turning a blind eye to the trading while it was making a profit and only got concerned once it was making a loss. If so, it would make the criminal charge hard to sustain.
There is a lot more to come from this one…[/Update]
30 January, 2008 at 20:56
Agreed it clearly shows that SocGen doesn’t have very effective control or insight to what is going on in the business. Perhaps controls are not alligned to exposures in a manner that they clearly representing risks but from this perspective the statement below isn’t quite about that …
“By 31 December 2007, over 30 on-site inspections will have been conducted in 20 institutions, involving at times up to 100 inspectors at a time. These on-site inspections examined IRB systems for credit risk and advanced operational risk measurement approaches.”
Basel II would be that control monitoring is in place, it is that which is being audited not the controls themselves. Does the bank monitor controls, does it reserve capital appropriately in the context of such results … Controls might actually be loose, void, strategically turned off, the key here is that was group risk aware of the dangers and was capital available for such hazards. If the answer was no, then they don’t only have busted controls, but either broken policy and weak monitoring.
They could acutally have all ills then really more than one single trader should loose his job.