Dec. 10 (Bloomberg) -- Banks should improve 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 is seeking to bolster its principles for how banks should protect themselves from risks not directly linked to lending or to market movements.
“Supervisors expect banks to continuously improve their approaches to operational risk management,” the Basel committee said on its website. Bank directors should set “the tone at the top” to ensure “a strong operational-risk management culture exists throughout the whole business.”
Regulators are attempting to curb operational risks that may derail banks’ recovery from the worst financial crisis since the Great Depression. Basel rules from 2004 require lenders to hold capital against risks including natural disasters, computer hacking, systems failures, theft, fraud and unauthorized trading.
A Paris court on Oct. 5 sentenced former trader Jerome Kerviel to three years in prison after his activities caused Societe Generale SA to suffer a 4.9 billion-euro ($6.5 billion) trading loss.
Banks should have “close monitoring of adherence” by traders “to assigned risk limits or thresholds,” the Basel committee said today.
Out of Line
“Ongoing processes to identify business lines or products where returns appear to be out of line with reasonable expectations,” should be set up, according to the draft principles. The committee also published draft guidance for supervisors on assessing banks’ management of operational risk. The group is seeking views on both sets of proposals until Feb. 25.
Michel Barnier, the European Union’s financial-services commissioner, said Dec. 8 that he’s considering proposing tougher sanctions for financial crime because a lack of deterrents in some EU nations had left lenders and markets vulnerable.
Operational risks are “unlimited, without end,” Karel Lannoo, chief executive officer of the Centre for European Policy Studies, said in a telephone interview in Brussels. He said it was not clear whether regulators could impose rules that would protect banks from unauthorized trading and fraud.
“These things can always happen,” he said. Mitigating these risks is to a large extent “a matter of common sense” and of performing due diligence, he said.
Bank boards should “establish a code of conduct or an ethics policy that sets clear expectations for integrity and ethical values of the highest standard,” the Basel committee said. Senior management should “ensure the identification and assessment of the operational risk inherent in all material products, activities, processes and systems.”
Bonus policies should be aligned to a bank’s agreed “risk appetite and tolerance,” the committee said. “They should also appropriately balance risk and reward.” Sound management practices also include that employees should get “not less than two consecutive weeks” of vacation time, the Basel group said.
The Basel committee published separate guidance today for banks on how to test models that they use to measure their risk of incurring losses on their assets. Bank capital rules give lenders the possibility to use models rather than ratings from agencies to assess potential losses.
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