SocGen debacle shows flaws in EU bank supervision

By Huw Jones and David Milliken

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.