18 July 2008
The Committee of European Banking Supervisors (CEBS) today publishes a summary of the results of its stock-take of banks' and supervisors' reactions to the rogue trading loss at Société Générale (reported in January 2008).
CEBS has conducted a stock-take with the EEA banking supervisory authorities of how this event affected other banks, their operational risk practices, governance and internal control environment, and the internal models used for calculating capital requirements for operational risk (Advanced Measurement Approaches, AMA).
Supervisors participating in the survey asked banks operating in their jurisdiction first to express their opinions on the types of controls relevant to preventing rogue trading and whether events similar to the Société Générale event would have been possible in their organisations; second, to outline possible or actual improvements to their operational risk frameworks and/or internal control systems as a result of the lessons learnt from this or other rogue trading events which have occurred in recent years; and, finally, to explain how this loss event has been included in their AMA modelling framework and the consequences, potential or actual, of its inclusion for the operational risk capital charge. The last part of the survey focused on the nature and type of supervisory reactions to this event.
The results of the stock-take are fully consistent with the outcome of reports on the topic recently issued by some supervisory authorities (e.g. the reports of the French Commission Bancaire and UK FSA MarketWatch).
In particular, while banks believe that some of the distinctive elements of the Société Générale event can be found in other rogue trading cases, the extent of the damage is generally felt to have been the direct consequence of a widespread internal control systems failure. The analysis of the results also highlights the human factor as one of the most important drivers of operational risk, especially in the case of very severe events.
A strong governance, operational risk and control culture across all businesses, and especially those potentially able to generate high profits, but also big losses, is deemed crucial to significantly mitigate such risks. Most of the banks questioned believe, on the one hand, that senior management should increase its understanding of the operational risks embedded in banks' operations, in general, and in trading areas in particular. While on the other hand that there is the need to foster a sound culture and appropriate incentive mechanisms in both the front office and the control functions of trading rooms in order to prevent such events. More generally, there is acknowledgement of the need for greater fraud awareness at various levels within the organisation and a greater ability to manage and detect fraudulent activity.
It is evident that the Société Générale loss event affects the supervisory community on a broad scale and is not limited to the bank where the loss occurred. In reaction to this and other similar events, supervisory authorities have asked banks in their jurisdictions to perform ad hoc assessments of their operational risk frameworks and/or internal control environments in general, and of trading areas in particular. In some cases supervisors have planned (or already started) reviewing their supervisory rules/guidelines in order to assess the need to enhance or introduce additional qualitative requirements on operational risk management and control.
From its side CEBS is looking into the adequacy of its Standards and Guidelines with regard to the qualitative aspects of operational risk and internal controls, and will review and update them if necessary. CEBS also continues working on technical aspects related to implementation issues of operational risk frameworks and will address certain topics highlighted by the Société Générale loss event in its future work.