Managing Bank Operations Risk

So we've had another enormous loss at a major bank. The unfolding Société Générale loss could possibly be the greatest (so far), nevertheless it is neither the first not the final. Jerome Kerviel seems set to join a notorious band of rogue traders for example Nick Leeson and Toshihide Iguchi.

Plus the funny thing is the fact that in spite of all of the hand wringing and accusations leveled at its newly exposed rogue trader, the management of Société Générale fails to see where the true blame actually lies. Place basically click here  on it's own doorstep.

Because the evidence of this huge loss and its underlying situations begins to emerge 1 thing is eminently clear. The whole debacle may be blamed squarely around the failure of Société Générale's Board and its Senior Management to take its operations risk management obligations seriously.

Already, inside days from the loss becoming found an abundance of anecdotal proof has begun to emerge. Let's look at a couple of of these;

o "The ... bank said that it attempted on many occasions to produce Mr. Kerviel take a few weeks off, but that it eventually went along with his excuses for staying at work" (breakingviews.com)

o "The prosecutor also stated that Mr. Kerviel admits to disregarding Société Générale's trading rules but says other individuals also flouted limits developed to contain risks to the bank". (Wall Street Journal - January 29, 2008).

o "... was the IT drawbridge effectively raised when he produced his move out on the back-office and onto the trading desk in 2005? Clear segregation of back-office and front-office activities was among the clearest lessons to emerge in the rogue-trading scandal at Barings Bank in 1995; at SocGen, those lines look to possess blurred." (Economist.com).

o "Eurex, the futures exchange of Deutsche Börse, questioned the trading position of Mr. Kerviel last November." (Wall Street Journal - January 29, 2008).

o "Veterans in the futures markets are baffled about how Mr Kerviel got away with developing up such a big position unnoticed." (Economist.com).

And but initially Société Générale painted themselves because the hapless victim of a canny and malicious fraudster who ruthlessly overrode all controls, so carefully made to trap his ilk.

And all this points squarely at a massive management failure inside the operational risk arena.

Basel II, which the European banking industry has spent the last half decade preparing for and which officially came into effect inside the EU on 1st January 2008, could be the present normal of very best practice for management of operational threat.

The Basel II definition of operational risk is "... the danger of loss resulting from inadequate or failed internal processes, individuals and systems or from external events. This definition involves legal threat, but excludes strategic and reputational risk."

Apart from the specific particulars of how capital would be to be allocated against operational risk Basel II requires that apart from the "Basic Indicator Approach" (whose customers are anyhow necessary to comply with "Sound Practices for the Management and Supervision of Operational Risk" regular in the BIS), those more sophisticated banks making use of either the "Standardized Approach" or the "Advanced Measurement Approaches" need to satisfy its neighborhood banking supervisor that, as a minimum;