France Said to Suggest New Controls for Its Banks

Posted On February 5, 2008

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 By KATRIN BENNHOLD and JAMES KANTER

Published: February 4, 2008 – NEW YORK TIMES

PARIS — A French government report to be released Monday calls for tighter risk-control measures at Société Générale and a broad review of the rules at other French banks in response to huge losses from a trading scandal, French officials with direct knowledge of the findings said on Sunday.The report by the finance minister, Christine Lagarde, comes less than two weeks after Société Générale accused a single trader, Jérôme Kerviel, of the biggest trading fraud in history.Ms. Lagarde’s report, which was described by two officials who had seen it, urges the banking regulator investigating the fraud to focus its attention on three areas where risk controls failed at Société Générale, said the French officials, who insisted that they not be named because the report had not been made public.The three areas are the lack of controls preventing employees from being reassigned to the trading floor after spending time working in the back office, which is responsible for detecting fraud; security problems with the internal computer system; and the lack of a mechanism to alert management about abnormal transactions by individual traders.The report says that compliance officers checking up on traders should look at the entirety of an employee’s trading activity, or the person’s gross positions, rather than only the net positions, which show account balances but not the positions that may have offset one another. This, the report says, would improve the chances of identifying the kind of falsified hedges that Mr. Kerviel is accused of using to cover a fraud, the officials said.France’s banking regulator “should verify these points particularly at Société Générale,” one of the officials said, describing the contents of the report. “But they should be reviewed at other banks to make sure this cannot happen somewhere else.”The report also praises the rapid undoing of the 50 billion euro ($74 billion) in holdings that Société Générale said it discovered on Jan. 18, and says other European stock market regulators had found no fault with the process, the officials said. It further says the unwinding of the investments was not the cause of the steep decline in financial markets on Jan. 20 and Jan. 21, when the bulk of the holdings was sold.The other official stressed that Ms. Lagarde’s report aimed to identify the lessons from the debacle, rather than determine with whom the responsibility lay; that, she said, was the job of the ongoing investigations by the banking regulator and by judges.Over the weekend, French investigators questioned several executives at Société Générale as part of its investigation, a judicial official told The Associated Press on Sunday.The finance minister’s report praises cooperation between Société Générale, the French stock market regulator, the Bank of France and the banking regulator. But it criticized the fact that the French government was informed five days after the fraud was discovered and four days after the financial authorities were alerted, the officials said.Société Générale has said that the trades needed to be undone with maximum secrecy to minimize the chances that its huge exposure would become known to other traders. The bank still posted a loss of 4.82 billion euros ($7.13 billion) from the unwinding, leading to speculation that the bank was vulnerable to a takeover by rivals like BNP Paribas and Crédit Agricole, or to foreign bidders.President Nicolas Sarkozy’s chief of staff, Claude Guéant, on Sunday repeated that the government would prefer any bid for Société Générale to be friendly rather than hostile — and to be French. “It would be better if it was French rather than foreign,” Mr. Guéant told the Europe 1 radio station.But in an apparent bid to ease anxiety among European Union officials that France would unfairly interfere in the future of Société Générale, Mr. Guéant added that France would have no legal means to oppose a bid by a foreign bank.Last week, the European internal markets commissioner, Charlie McCreevy, warned French officials to avoid favoring their companies in mergers after French officials vowed to protect Société Générale from unwelcome predators.Over the weekend, Société Générale appeared to be seeking support to fend off bidders by asserting in newspaper ads that the losses did not pose any dangers to its solvency and that investors were showing strong interest in the bank’s plans to raise capital  

One Response to “France Said to Suggest New Controls for Its Banks”

  1. bonbon78

    i was reading tis article too!

    goes to show tat control & corporate governance is vital to business

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