Bloomberg News

Basel Seeks to Curb Banks’ Risk From Rogue Traders, Fraud

June 30, 2011

(Updates with analyst comment in fourth paragraph.)

June 30 (Bloomberg) -- Banks should bolster their defenses against losses caused by rogue traders, client fraud and other so-called operational risks, global regulators said.

The Basel Committee on Banking Supervision endorsed updated principles on how banks should protect themselves from risks not directly linked to lending or market movements, the group said today on its website.

The measures add to beefed up capital and liquidity rules to toughen regulation of banks following the worst financial crisis since the Great Depression. Rogue traders such as Jerome Kerviel at Societe Generale SA and Nick Leeson at Barings Plc can also wreak havoc on individual institutions, said Nicolas Veron, a senior fellow at economics research group Bruegel.

“Barings was killed by operational risk, and Societe Generale came very close to a near-death experience in 2008,” Veron said in a phone interview from Brussels.

“Does operational risk generally cause systemic crises? No. But it can have a major impact on individual institutions when things go wrong,” said Veron.

Today’s changes build on rules from 2004 that require lenders to hold reserves against risks including natural disasters, computer hacking, systems failures, theft, fraud and unauthorized trading.

Banking System

“Supervisors expect banks to continuously improve their approaches to operational risk management,” the Basel group said in a statement. The committee “desires to promote and enhance the effectiveness of operational risk management throughout the banking system,” it said.

Banks should have “close monitoring of adherence” by staff “to assigned risk limits or thresholds,” the Basel committee said.

Lenders engaging in mergers and acquisitions should ensure that deals don’t lead to weakened risk management, the Basel group said.

“Mergers and acquisitions resulting in fragmented and disconnected infrastructure, cost-cutting measures or inadequate investment can undermine a bank’s ability” to manage its operational risks, the committee said.

The Basel group approved plans on June 25 forcing lenders whose collapse would roil the global economy to hold as much as 2.5 percentage points in additional core capital.

--Editors: Peter Chapman, Anthony Aarons

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net.


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