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Management Strategies

12:45 PM
Kathy Burger
Kathy Burger
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Financial Institutions’ Risk Management Systems Are Challenged by Corporate Culture and Human Nature

The Société Générale trading scandal illustrates that the competitive advantage of relying on internally developed risk management systems can be cancelled out by lax management oversight and fraud.

Risk management -- or maybe the lack of it -- already has become the story of the year in financial services, less than two months into 2008. It has not been so much the need for risk management itself, but more the harsh realization that even state-of-the-art risk management technology is no match for human nature and its tendency to succumb to pretty much the whole array of deadly sins, including arrogance, envy, pride and greed.

There have been many questions (and few good answers) as to why financial institutions' IT systems did not clue them in to the dangers lurking in portfolios filled with subprime mortgage-related loans. And, as the saga of how Société Générale rogue trader Jérôme Kerviel had made unauthorized trades that resulted in a $7.2 billion loss unfolded last month, the big question again was why the French bank's risk management systems did not flag his ongoing malfeasance.

I've heard and read a variety of explanations and theories, covering everything from history and sociology to legal, competitive and technical considerations. But for anyone who manages technology and systems -- whether in banking, insurance or any other business -- the key takeaways from the SocGen debacle are these: The bank's risk management systems primarily were developed internally; and Kerviel -- a junior and relatively obscure trader with few prospects for professional growth or visibility at SocGen -- knew these systems, and the processes the systems supported, inside and out.

No doubt the home-grown systems were thought to give SocGen the proverbial competitive advantage. The institution has been portrayed as a highly elitist and insular organization, which no doubt made it difficult for senior management to even imagine, much less investigate, the kind of fraud that was occurring.

Ironically, Kerviel is emerging in many ways as the kind of employee that many financial institutions are seeking as the business becomes ever-more competitive: a self-starter, diligent, curious, dedicated and motivated. Evidently, his actions were more about proving to himself how smart and talented a trader he could be, rather than financial self-enrichment. Still, competence without a moral compass is a terrible combination -- as destructive as pride and confidence untempered by humility. That's why betting against human weakness is a very risky gamble.

Related stories:

How Did the Societe Generale Fraud Happen?

Were People or Technology to Blame for Multibillion Dollar Societe General Fraud?

Soc Gen: Bank's Controls Didn't Work, says report

Soc Gen: Kerviel Messages with Broker Revealed

Societe Generale: Could it Have Prevented $7.2 billion fraud?

Katherine Burger is Editorial Director of Bank Systems & Technology and Insurance & Technology, members of UBM TechWeb's InformationWeek Financial Services. She assumed leadership of Bank Systems & Technology in 2003 and of Insurance & Technology in 1991. In addition to ... View Full Bio

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