Prudent Banking

"Some three years ago, a major Australian bank was hit by an episode of irregular or ‘rogue’ foreign currency options trading.  Four options traders took a large position in the US dollar and were able to conceal this position, rather than close it out, asthe market moved against them.  The fall-out from this episode was a substantial financial loss for the bank, a shake-out of the board and senior management and a serious dent in the bank’s reputation.In our report ('RISK MANAGEMENT IN BANKING') we noted that the episode: “… was, first and foremost, due to the collusive behaviour of the traders themselves.  However, it can also be attributed to an operating environment characterised by lax and unquestioning oversight by line management; poor adherence to risk management systems and controls; and weaknesses in internal governance procedures...

The control failures had more to do with poor implementation than poor design. On paper, the existing control framework  should have been able to identify and contain the risk position of the traders.  In practice, however, the internal control systems failed at every level to detect and shut-down the irregular trading activity."

'RISK MANAGEMENT IN BANKING – A PRUDENTIAL PERSPECTIVE JOHN F LAKER'  (6 September 2006)

Chairman - Australian Prudential Regulation Authority 59th International Banking Summer School Melbourne 

What we have here is a failure to learn. The aforementioned paper (see attachment below) was produced 2 years before Storm collapsed. The major banks involved, namely the CBA, the Macquarie Bank and the Bank of Queensland "did not identify and contain the risk position" of the Storm investors. Their "internal control systems failed at every level to detect and shut-down the irregular credit lending practices". These words are particularly prophetic, "...it can also be attributed to an operating environment characterised by lax and unquestioning oversight by line management; poor adherence to risk management systems and controls; and weaknesses in internal governance procedures.”

Nothing changes, it seems! When will they ever learn? When will we ever learn for that matter and not entrust them with our money!