SocGen debacle shows flaws in EU bank supervision

BRUSSELS/FRANKFURT (Reuters) - Market watchdogs' handling of Societe Generale's rogue trades has again highlighted Europe's fragmented supervisory system and should inject more momentum into reforms already underway.

The closing of the unauthorized positions on January 21 triggered a loss of nearly 5 billion euros ($7.4 billion) for SocGen, leaving dealers wondering if it contributed to the biggest one-day fall on European stock markets since the 9/11 attacks on the United States in 2001.

On January 22 the Federal Reserve, unaware of SocGen's problems, cut interest rates by 75 basis points, its biggest cut in over two decades, a step taken to help soothe share markets.

The French central bank told the Fed about SocGen's problems the following day. SocGen issued a public statement on January 24.

Despite the size of the rogue trade and the inevitable attention it would garner, market regulators elsewhere in Europe were generally not informed ahead of the public announcement.

"Even the Federal Reserve was not informed so why would we be informed," Eddy Wymeersch, chairman of the Committee of European Securities Regulators (CESR), told Reuters.

CESR groups all the EU's 27 national securities regulators and its role is to improve cooperation among watchdogs.

"This is first and foremost a national question and things should be put in order at the national level. It's not the market that has failed, it's the bank that has failed," Wymeersch said.

However, not informing French President Nicolas Sarkozy and French Economy Minister Christine Lagarde quickly, was "perhaps tricky and not necessarily optimal," Wymeersch said.

The EU's top financial regulator, Internal Market Commissioner, Charlie McCreevy, was also not informed ahead of time about SocGen but he cautioned against hasty reactions.

"No regulation in the world could have foreseen what happened last week in France," McCreevy said.

ANOTHER NARROW ESCAPE

European Union regulators and politicians are breathing a sigh of relief that once again a troubled bank has no cross border fallout.

The bailouts of IKB in Germany, Northern Rock in Britain and now the problems at SocGen remind policymakers of the need for a more coherent pan-EU system of crisis management and supervisory coordination.

"What's frightening is what if SocGen had been broke? What would have been the management of the crisis? We had Northern Rock and we were lucky that wasn't cross border," a senior official involved in banking supervision told Reuters.

"These sorts of things lead to a profound reflection about how we organize things," said the official, who declined to be named due to the sensitivity of his current work.

Memorandums of understanding currently form the basis of cross-border cooperation among central banks and watchdogs.

"MOUs work well in peace time, but in a crisis they don't always work. There's a big question mark. MOUs are gentlemen's agreements and soft law," the official said.

He said the biggest difficulty is between central banks and politicians, and getting a real understanding of what's going on inside banks.

France takes over the presidency of the EU in the second half of the year and will be in a position to put the issue of regulation high on its agenda.

Before then, EU states are due to sign an MOU to beef up cooperation in handling crises at cross-border banks but they have yet to settle the issue of how much and whose taxpayers' money would be used in a multinational bailout.

Separately, the EU is also taking steps to improve day-to-day cooperation among banking, securities and insurance supervisors but some countries like Italy want more radical changes such as a single EU financial rulebook.

Wymeersch said in most EU states, there was a single watchdog covering banks, insurers and markets while the EU was looking to keep the three sectors separate.

"Cross-sector coordination takes place at national level but this is not the case at the European level. Sooner or later we will have to tackle this question," Wymeersch said.

(Reporting by Huw Jones and David Milliken; editing by Elaine Hardcastle