Ireland's EU Commissioner Charlie McCreevy has castigated Société Générale (SocGen) over its lax risk controls which allowed rogue trader Jerome Kerviel (31) to build up losses of €4.9 billion.
Speaking to the Society of Business Economists in London last night, Mr McCreevy said it was "inexcusable that the market value of a financial institution can be placed at risk by such abject carelessness on the part of a leading European bank".
He said he was amazed that a top financial institution had "once again been exposed as having fundamental control weaknesses and having failed to learn some of the lessons from previous rogue trader experiences".
Recent events have shown how vulnerable parts of the banking industry were to the "phenomenon of the rogue trader". Shares in France's second largest bank rose yesterday amid talk about a potential bid by HSBC ahead of SocGen's planned capital increase.
Speculation rose about a possible approach for SocGen after analysts at Merrill Lynch said that combining London-based HSBC and SocGen, creating the world's largest bank, would give HSBC higher revenue in emerging markets and investment banking.
SocGen rose 3.2 per cent to €81.75, valuing it at €38 billion.
SocGen is trying to conclude a €5.5 billion fundraising to shore up its capital base. The French bank says it can and wants to remain independent, but is vulnerable to takeover before its capital-raising deal is completed.
Judges in Paris investigating the rogue trading scandal interviewed the bank's chairman Daniel Bouton yesterday.
They are examining the affairs of the bank, which revealed last month that it had lost €4.9 billion on rogue trades carried out by Mr Kerviel, a junior trader at the bank.
Mr McCreevy said it was inexcusable that the French bank had "failed to heed the warnings of a significant market counterparty, and failed to learn the lessons that rogue traders have taught us about the checks, balances and controls that must be in place for risk to be effectively managed and controlled".
He said financial institutions and their investors needed to review whether management rewards, and particularly the timing of those awards, are "appropriately aligned" to the interests of shareholders.
"The appropriateness of disproportionate short-term reward is an issue that needs to be addressed notwithstanding the competitive pressures for talent," he said. The risks associated with using "broker channels to source mortgage transactions, and how those risks are managed, is another issue that requires attention".
He called for greater supervision of major cross-border banking groups and a review of Basel II regulations, which aims to provide greater stability for banks, and accounting rules, including the valuation of assets in illiquid markets.
"We have to face up to the fact that some of the rules that have been introduced in recent years risk aggravating market fragilities most at a time when we can afford to least."
