France ordered an audit of all its banks after Caisse d'Epargne, which is merging with Banque Populaire to become the country's second-largest retail bank, disclosed a €600 million trading loss.
Savings bank Caisse d'Epargne (CdE) said the loss on share derivatives earlier this month was detected during normal controls. It took immediate action to close the position.
The loss spurred French Finance and Economy Minister Christine Lagarde to ask for a special audit of all banking institutions in France. "I am particularly frustrated and discouraged by what happened," Lagarde told reporters.
A spokesman for Caisse d'Epargne said the loss was caused by a "small team" which had been punished for exceeding its trading risk limit. The bank said an assistant of finance head Julien Carmona had been dismissed.
Both Caisse d'Epargne and Banque Populaire said that the loss would not affect their tie-up.
The incident echoed losses of 4.9 billion euros announced in January by Societe Generale, France's second-biggest listed bank, and blamed on junior dealer Jerome Kerviel.
Lagarde was due, later on Friday, to attend the first board meeting of a special bank refinancing company that has a maximum of 320 billion euros at its disposal to refinance bank loans.
Former International Monetary Fund managing director Michel Camdessus will be chairman. The state has a 34-percent stake and veto power, while the banks own the rest.
The fund is France's contribution to a Europe-wide plan to provide liquidity to banks and restore confidence after interbank funding dried up due to mutual distrust over hidden toxic debts and the spreading credit crisis.
France also has a 40 billion-euro fund to help banks with capital increases, if and when needed.
France, Belgium and Luxembourg staged a public bail-out of stricken bank Dexia earlier this month while Belgium, the Netherlands and Luxembourg came to the rescue of Fortis which was faced with a cash drain by big clients.
The European Commission said on Friday it intends to make proposals to control risks in the $60 trillion credit derivatives market, seen as one of the causes of the worst financial crisis in 80 years.
"Regulators need to have a much better view of where the real risks in these instruments lie," EU Internal Market Commissioner Charlie McCreevy said.
Rumours of a big derivatives loss at a large bank spooked the share market this week, forcing Societe Generale and Dexia to issue denials.
Today, the DJ Stoxx European banking index was up 2.24 per cent in afternoon trade. SocGen was UP 4.2 per cent and BNP Paribas, France's biggest bank by market capitalisation, was down 0.70 per cent.
Credit rating agency Standard & Poor's said the trading loss would increase "negative pressure" on its ratings for Caisse d'Epargne. It currently has a AA- rating on the bank, and recently cut its outlook on it to "negative" from "stable."
Caisse d'Epargne said that, because of its assets of more than €20 billion, the loss would not impact its financial solidity and would have no effect on its clients.
Caisse d'Epargne and Banque Populaire own 70 per cent of investment bank Natixis which was hit hard by the credit crisis and needed a capital increase to boost its solvency ratio.
A source close to the merger talks between Caisse d'Epargne and Banque Populaire told Reuters on Wednesday that the two banks will each put assets of some 5 billion euros into the merger and a deal was due to be signed in two to three weeks.
The merger was announced on October 8th and will likely create France's second-biggest retail bank after Credit Agricole. In 2003, Credit Agricole bought rival Credit Lyonnais to give it the dominant position.
The merged bank would leapfrog BNP Paribas and Societe Generale in the French retail bank sector.
Banque Populaire and Caisse d'Epargne said last week the new group would have assets of €40 billion and €480 billion of savings and deposits. It would also have revenue of €17.5 billion and a combined network of 8,200 bank branches in France.
Agencies