Rogue trader costs SG €4.9 billion
PARIS - French bank Société Générale (SG) has suffered €4.9 billion in rogue trading losses in its Paris office, sparking it to issue a €5.5 billion emergency rights issue.
The rogue trade - described by SG as "isolated and exceptional" - is perhaps the largest of its type ever committed. It dwarfs Nick Leeson's $1.4 billion theft from Barings Bank in 1995.
The equity index trader, identified as 31-year-old Jérome Kerviel, took "massive fraudulent directional positions" in European equity market index futures in 2007 and 2008, "beyond his limited authority", and then concealed the positions by logging non-existent transactions, according to SG. As a former middle-office employee he was able conceal his positions easily and avoid detection for some time. He and his supervisors have been dismissed.
SG chairman Daniel Bouton first learned about the trades on January 19, he said in a letter to the bank's customers. "We have suffered a very significant loss," he wrote. "Control procedures have been revised and reinforced to avoid any reoccurrence of further similar risk."
The bank has also announced €2.05 billion in writedowns for the fourth quarter of the year, including €1.1 billion related to US mortgage risk exposure and €550 million in exposure to US monoline insurers.
SG shares have been suspended from trading on the Paris stock exchange, and on hearing the news Fitch Ratings downgraded the bank from AA to AA-. The rating agency says that the extent of the fraud raises serious questions about the effectiveness of the bank's processing systems and creates reputational risk for the group. Even with the rights issue, the bank is now at risk from a takeover.
Thomas Sheffield, technical director on Aon's directors and officers, and financial institutions team says: "New banking regulations in the EU have focused on requiring banks to develop internal methods to ensure that these risks, while perhaps still harmful, in terms of reputation for example, are not crippling to the financial institutions." That said, it would be interesting to find out whether SG's regulatory capital for operational risk under the advanced measurement approach would have covered the €4.9 billion loss.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Regulation
Competitiveness mandate for Esma faces uphill battle
European Parliament offers last chance to force Esma to take more nuanced approach
Europe expects FRTB to bite on XVA hedges
Risk Benchmarking: One-third of European dealers fear new market risk rules will have major effect on hedges
Burning ambition: will Europe join the US in setting fire to the rules?
As the US dismantles post-crisis regulations, some think Europe will follow in a bid to boost economic growth
Can US perpetual futures solve their identity crisis?
Market could fall under four different regulatory categories, with sharply diverging outcomes
Banks want AML data upgrade to complement US regulatory reform
FinCEN’s proposed overhaul sparks debate on whether it will lead to smarter or weaker supervision
Industry pushes EU exchanges to solve equity post-trade frictions
Deutsche Bank, Goldman Sachs and JP Morgan join calls for mandatory cash CCP interoperability
Regulatory clarity urged for CME’s single-stock futures
SEC short selling and market access rules may hamper clearing and broker participation
Imminent US shake-up of LCR slated to include discount window
Adding Fed liquidity facility to bank regulation may help overcome stigma, raise lending capacity