Question

Does Jerome Kerviel's incident shed any light on the causes of the 2008 financial crisis and the failure of banks to adequately manage and price risk? If so, what are the implications for bank regulations? 

Answer 1

Jerome Kerviel's incident provided some insight into the causes of the 2008 financial crisis and banks' inability to manage appropriately and price risk. Société Générale lost roughly €4.9 billion in January 2008 when it closed its positions over three days of trading starting January 21, 2008, during which the market saw a significant collapse in stock indexes (Hugie, 2021). According to the bank, these holdings were established by Jérôme Kerviel, a trader with the firm. The police said they didn't have enough evidence to prosecute him with fraud, so they charged him with breach of trust and unauthorized computer access instead. Kerviel claimed that his activities were known to his bosses and that the bank's losses were caused by panic selling. Following the discovery of Société Générale's wrongdoings by a French court, the Cour de cassation overturned Kerviel's €4.9 billion penalties. The 2008 Société Générale trading loss had some potential economic effects.

On January 21, 2008, European stock markets saw a 6% drop in value. The steep drop occurred when Société Générale attempted to close off positions set up by Kerviel. An emergency reduction followed this in the federal funds rate by the United States Federal Reserve the following Tuesday (US markets were closed on Monday for Martin Luther King Jr Day). This has led to suspicion that the Federal Reserve Board reduced the rate due to stock market volatility. Bank regulation aims to keep banks afloat by preventing them from taking on too much risk. Reserve requirements, capital requirements, and limitations on the kinds of investments banks may undertake are all examples of the regulation (Magalhaes & Tribo, 2016). 

 

 

 

 

 

Bank regulations are intended to promote and improve market infrastructure safety and soundness while also safeguarding financial consumers from the danger of financial institutions failing to fulfill their commitments and helping in the maintenance of financial stability.