The Committee of European Banking Supervisors (CEBS) has published a summary of the results of its stock-take of banks’ and supervisors’ reactions to the rogue trading loss at Société Générale in January 2008. CEBS 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 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.
- 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.
- 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.
Banks generally considered that the extent of Société Générale’s losses is the direct consequence of a widespread internal control systems failure. Other survey findings are that:
- The "human factor" is a key driver of operational risk. Strong governance and controls across all businesses (particularly those able to generate high profits, but also big losses) are vital.
- Greater fraud awareness and detection and management of internal fraudulent activity is necessary at various levels.
- Supervisory authorities have recently required banks to perform ad hoc assessments of their operational risk frameworks and internal controls (particularly in respect of trading areas).