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France Seeks Stricter Bank Controls Post-SocGen

France told banks to get their house in order after a rogue trading scandal cost Societe Generale 4.9 billion euros ($7.3 billion) and said the bank was warned last year that its security systems were not up to scratch.

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Monday's report stated explicitly it did not seek to apportion blame but was merciless in its exposure of shortcomings at SocGen, saying sophisticated risk control procedures were to no avail if "human factors" were ignored.

"There is a risk which is operational risk, as opposed to market risk, which must be taken more seriously into consideration," Economy Minister Christine Lagarde told reporters after handing her report to Prime Minister Francois Fillon.

Operational risk refers to the vulnerability of banks to unpredictable events such as failure of internal systems or rogue behavior by staff.

SocGen blamed the losses on rogue futures trades carried out by a single junior trader, 31-year-old Jerome Kerviel, who is under formal investigation for falsification, computer abuse and breach of trust, though fraud accusations have been disallowed.

Kerviel covered up his tracks in part by posting fake forward deals with phantom counterparties who appeared to be inside the SocGen group itself, the report said.

The finance ministry report also called for a clearer demarcation of roles between regulators and the government in situations where financial stability could be at risk.

The government has clashed with the Bank of France over when it was informed of the scandal, which became public on Jan. 24 when SocGen disclosed the losses, sparking the biggest rogue trading scandal in banking history.

France is also recommending more stringent penalties for fraud and will call for talks soon with its trading partners on fall-out from the scandal.

Security Found Wanting

In what appeared to be one of its most damning conclusions, the report said Banking Commission inspectors from the Bank of France had found SocGen's security procedures wanting and had twice made recommendations to the bank's head Daniel Bouton.

"In March 2007, a mission letter to this effect was addressed to the executive chairman of Societe Generale," said the report. The inspectors followed up with another letter addressing the bank's exposures in derivatives markets, the area in which Kerviel ran up billions of euros in illicit trades.

The Bank of France has separately disclosed it had warned SocGen about its risk control systems for some financial derivatives.

Regulators should also take into account "the importance of human factors when it is a matter ... of forestalling and detecting abnormal and unusual behavior which could lead to operational risk," the report said.

New capital adequacy rules for banks, known as Basel II, allowed banks to make capital provisions for operational risk. The rules came into force in January for European banks.

The finance ministry report is the first of three key reports commissioned after the scandal. Others are pending, by the central bank's Banking Commission, and a third by SocGen's own independent directors.

The report provides little comfort for SocGen's Bouton, who is staying on at the bank for the time being despite offering to resign, but his fate is likely to hang on the findings of the others.

But the report said SocGen acted professionally to unwind the trading positions which Kerviel had secretly built up.

The bank has already faced widespread criticism of its risk control systems since unveiling the trading losses.

Last week, a Paris prosecutor investigating the Kerviel trading case said that in November 2007, derivatives exchange Eurex had already warned SocGen about suspicions it had regarding Kerviel's trading positions.

Capital Increase

The bank is working on a 5.5 billion euro capital increase to repair the trading hole and help offset a 2 billion euro charge for sub-prime losses.

Bankers say the discounted rights issue should be launched well before SocGen's Feb. 21 earnings and will be priced at a 'sizeable' discount to the share price.

SocGen shares were down 2.7 percent at 85.4 euros after a recent rebound as investors expect the company to announce the rights issue later this week. The shares rose last week on speculation of a takeover bid from rival French banks BNP Paribas or Credit Agricole.

French President Nicolas Sarkozy's chief of staff Claude Gueant said at the weekend France preferred any bid for SocGen to be "friendly" rather than hostile and for it to come from a French company rather than a foreign one.

SocGen has a stock market value of around 40 billion euros.

BNP Paribas, France's biggest listed bank, has said it is looking at making an offer for SocGen, the second largest.

SocGen is meanwhile one of four banks due to appear at the Paris criminal court in a trial known as "Sentier 2," due to its links with the capital's Sentier textile district.

The long-awaited trial starts on Monday.