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Last Friday, the Committee of European Banking Supervisors (CEBS) issued a summary of banks’ and supervisors’ reactions to the rogue trading loss at SocGen last January – “Reactions to the Société Générale loss event: results of a stock-take”. This survey took in the impact of this incident on operational risk practices, governance and internal control environment, as well as the internal models used for calculating capital requirements for operational risk.
Supervisors participating in the survey asked banks under their supervision about (i) the types of controls relevant to preventing rogue trading and whether events similar to the SogGen event would have been possible in their organisations; (ii) possible or actual improvements to their operational risk frameworks and/or internal control systems; and (iii) how this loss event has been included in their AMA modelling framework and its impact on the operational risk capital charge.
All respondents said that “events of such magnitude would be very unlikely in their firms”! Their views were that this was a massive internal control systems failure and highlighted the human factor as one of the most important drivers of operational risk. Most of the banks questioned believed there was insufficient understanding by senior management of operational risks embedded in operations in general and in trading areas in particular. There was also a general lack in risk awareness and controls and in the incentives that motivate the necessary risk culture. More generally, there is a need for greater fraud awareness within all organisations. Some banks including SocGen-type events in their AMA modeling, others only in stress testing scenarios. The impact of such events, from those that supplied these estimates, varied from a few percentage points to almost 20%.
Supervisors throughout Europe have been specifically testing such risks and reviewing their supervisory rules/guidelines. The CEBS is also looking into the adequacy of its Standards and Guidelines.
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