Banks Must Boost Risk Oversight After Trading Scandals, FSB Says

Global regulators called on banks to strengthen risk management and boost oversight in response to recent scandals that have shaken faith in the financial system.

A survey of lenders by the Financial Stability Board found that “significant gaps” persist in risk management, the group said on its website. Nearly half of the companies in the study don’t meet all the “fundamental” criteria for sound risk governance, the FSB said.

Banks including JPMorgan Chase & Co., UBS AG and Barclays Plc have been hit by scandals ranging from rogue traders to interest rate fixing. U.K.-based HSBC Holdings Plc and Standard Chartered Plc both paid fines in the U.S. over failures to halt the laundering of money in sanctioned countries such as Iran.

“These gaps need immediate attention by both supervisors and firms,” the FSB said. “Recent headline events surrounding activities at some large financial institutions underscore the importance of promoting and implementing a sound risk culture.”

JPMorgan’s chief investment office lost more than $6.2 billion in the first nine months of 2012, the company’s biggest- ever trading loss. The lead trader responsible was nicknamed the London Whale because his positions were so big.

The bank’s investigation into the affair found that its employees were overwhelmed by the complexity of their bets, and that the lender had an “error prone” risk modeling system that involved cutting and pasting electronic data into a spreadsheet.

A trader at UBS was sentenced to seven years in prison on Nov. 20 for fraud tied to a $2.3 billion loss, the largest from unauthorized trading in U.K. history.

The FSB survey covered 36 banks and broker dealers including Deutsche Bank AG, Banco Santander SA, and Goldman Sachs Group Inc.

The need for improvement in risk management is especially pronounced at smaller banks and those based in emerging and developing country economies, the FSB said.

To contact the reporter 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