PARIS (Reuters) - France told its banks to get their houses in order on Monday in the wake of the 4.9 billion euro ($7.3 billion) rogue trading scandal at Societe Generale (SOGN.PA), for which it reserved particular criticism.
A report prepared by Economy Minister Christine Lagarde said sophisticated risk control procedures were to no avail if “human factors” were ignored, and it said SocGen had been warned last year that its security systems were not up to scratch.
The report said it did not aim to apportion blame, but listed a catalogue of problems that had come to light and were still being investigated at France’s second-largest listed bank.
These included a failure to monitor unusual staff behavior, such as foregoing holidays, and failures in the protection of access codes to security systems and in the logging of transactions with counterparties.
“There is a risk which is operational risk, as opposed to market risk, which must be taken more seriously into consideration,” Lagarde told reporters after handing her report to Prime Minister Francois Fillon.
SocGen pinned the losses on junior trader Jerome Kerviel, who is under investigation for falsification, computer abuse and breach of trust, but not fraud, as the bank had wanted.
Kerviel covered his tracks in part by posting fake forward deals with phantom counterparties who appeared to be inside the SocGen group itself, the report said.
Most damningly, it said Banking Commission inspectors from the Bank of France had found SocGen’s security procedures wanting and had twice made recommendations to Daniel Bouton, the bank’s head.
“In March 2007, a mission letter to this effect was addressed to the executive chairman of Societe Generale,” said the report. The inspectors followed up with another letter addressing the bank’s exposures in derivatives markets, the area in which Kerviel ran up billions of euros in illicit trades.
A source close to rival bank BNP Paribas BNP.PA, who asked not to be named, said the report had identified “chilling” shortcomings in risk management.
The Bank of France has separately disclosed it warned SocGen about its risk control systems for some financial derivatives, and last week a Paris prosecutor said that in November 2007, derivatives exchange Eurex had warned SocGen about suspicions it had regarding Kerviel’s trading positions.
The finance ministry report also called for a clearer demarcation of roles between regulators and the government in situations where financial stability could be at risk.
The government has criticized the Bank of France for delays in informing ministers about the biggest rogue trading scandal in banking history.
SocGen is working on a 5.5 billion euro capital increase to repair the trading hole and help offset a 2 billion euro charge for subprime losses. Bankers say the discounted rights issue should be launched well before SocGen releases its earnings on February 21 and will be priced at a sizeable discount.
The finance ministry report called for a big increase in the top fine, currently 5 million euros, that the Banking Commission can impose on banks for serious lapses in risk controls.
This the first of three reports commissioned after the scandal provides little comfort for SocGen’s Bouton, who is staying on at the bank despite offering to resign. His fate is likely to hang on the outcome of the other two — one from the central bank’s Banking Commission, and the third by SocGen’s own independent directors.
But the report said SocGen had acted professionally to unwind the trading positions Kerviel secretly built up.
In another blow, however, the Wall Street Journal reported on Monday the U.S. Securities and Exchange Commission was investigating stock sales by SocGen board member Robert Day.
SocGen shares ended Monday down 4.77 percent at 85.61 euros, having risen last week on speculation of a takeover bid from BNP Paribas (BNPP.PA), France’s biggest listed bank, or Credit Agricole (CAGR.PA).
BNP has confirmed it is considering a move for SocGen, which has a market value of around 40 billion euros.
French President Nicolas Sarkozy’s chief of staff Claude Gueant said at the weekend France preferred any bid for SocGen to be “friendly” rather than hostile and to come from a French rather than a foreign company.
Additional reporting by Marcel Michelson, Nick Antonovics and Tim Hepher; Writing by Andrew Hurst and Tim Hepher; editing by Will Waterman