There are lessons to be learned from SG

All have centred on inadequate risk management systems, compliance and controls - no doubt in line with the pressure to generate ever-greater profits for shareholders. The fact that regular risk messages alerting the junior trader, Jérôme Kerviel, that he had far exceeded his nominal cover didn't sound alarm bells is questionable, not least because he was generating profits. According to Kerviel, he first began taking unauthorised positions in 2005, and by December 31 last year his gains had reached €1.4 billion.

The issue of risk and how much banks are willing to take on to achieve the demanding objectives set by shareholders has been in the spotlight since the spark of the credit crisis last summer. Latest statements of losses resulting from exposure to the US subprime mortgage market, for example, include UBS's $12 billion (with further $2 billion hit on other positions related to the US residential mortgage market) in the fourth quarter. The end result for UBS, the former poster child of conservative banking and stability, is a net loss of approximately Sfr4.4 billion for full-year 2007 and a net loss of the Sfr12.5 billion in the fourth quarter.

By comparison, Société Générale's €2.05 billion in writedowns for the fourth quarter, including €1.1 billion related to US mortgage risk exposure and €550 million in exposure to US monoline insurers, seems a drop in the bucket.

Perhaps it was Société Générale's equity derivatives business line in and of itself that was more prone to fraud than any other of its businesses. In 2006, the bank's equities activities accounted for 44% of the corporate and investment banking arm's revenues, and more than 50% in the first half of 2007. The success of this business line not only brings concentration risk to this division but also, and more importantly, operational and compliance risk.

Also, as has been seen in the foreign exchange market, there is the real likelihood that when the equity derivatives business experienced rapid growth and success, the ability of the middle and back office to keep pace faltered. Or perhaps it was simply the willingness of the lower-paid middle- and back-office staff to keep up that wavered.

Saima Farooqi, Editor