Wake-up Call

Jérôme Kerviel could be a name that joins that of Nick Leeson (Barings Bank) in the annals of ‘those who broke the bank’. With France’s second biggest bank, Société Générale, reeling from the €5bn loss allegedly resulting from Kerviel's rogue trading, the bank is going to have to do some pretty fast footwork to regain credibility in the eyes of shareholders, customers and, not least, regulators.

Reports received at the time of writing suggest that Kerviel was not a deliberate fraudster but that most dangerous of individuals – a gambler who believes he has an infallible system. He does not appear to have been acting for personal gain.

Kerviel allegedly set up a fictitious company to speculate on European stock market performance, using his computer skills to erase all tracks of his actions from SocGen’s system. Clearly, if proved, this would be fraud but perhaps fraud is not the only risk that caused the bank’s losses. I suggest that the first risk that SocGen failed to manage was that of complacency.

With Basel II, banks have been forced to get their operational risk management procedures into gear. As a result of compliance, these institutions tend to think that they are leading the world in risk management practice. I would guess that if you added up the number of chief risk officers (CROs) in the world and then attributed them to industries, most would be in the financial services sector.

“Knowing that you comply with strict regulatory rules and having all the systems in place breeds complacency

Knowing that you comply with strict regulatory rules and having all the systems in place breeds complacency. And that can produce a false sense of security.

The risk management message here is not to rely just on the strength of your systems but to make sure there is good people management. Allow for the fact that someone who is operating outside those systems might also be able to cover their tracks.

Perhaps the most frightening thing about this case is that, if Kerviel’s bets had been successful and the bank had gained €5bn, we might not be hearing about it now. And Kerviel would be getting a mega bonus at the end of the year!