Take a break or go broke

The simplest solutions usually work best. The axiom, not surprisingly, holds true in the case of Socit Gnrale and Jrme Kerviel, its now infamous rogue trader. Better password protection, safeguards against fabricated hedges and counterparty risk controls all help. But the best way to catch a bank thief might just be something more mundane: a forced break.

The French bank said it tried on several occasions to make Kerviel take a few weeks off, but that it ultimately went along with his excuses for staying at work. If he had been gone, his frauds would probably have been spotted. The cost of Kerviel's extra days on the job: €4.9 billion.

Most banks generally have a rule of thumb that traders be required to take a holiday for at least five work days in a row, and often ten. That's not an effort to undercut the work ethic. It's just hard to keep a fraud going when the day-to-day management of an order book is being handled by someone else.

Many bosses are lax about enforcing that rule, however. Traders are a temperamental bunch, and they don't like to get too far away from the markets. There is already a precedent that should have provided ample warning – that of the Daiwa Bank bond trader who lost $1.1bn in 1995. He reportedly hadn't taken an extended break for more than a decade.

That case renewed discussions about requiring time off. Still, regulators don't mandate vacations. In the UK, the Financial Services Authority simply considers obligatory time off a "best practice”.

A forced holiday isn't a panacea for detecting fraud, of course. But compliance officers will be revisiting many facets of their internal controls in the aftermath of SocGen's experience. And it's a good bet that one consequence will be more traders sipping daiquiris on the beach.

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