DAVOS, Switzerland—Business leaders said on Friday they were aghast at a $7 billion fraud at French bank Societe Generale, which comes just as banks worldwide are reeling from losses inflicted by the subprime mortage crisis.
Bankers gathered in the Alps for the annual meeting of the World Economic Forum feared the scandal could erode confidence.
Socgen, France's second-largest listed bank, said on Thursday a junior employee on its derivatives trading desk had confessed to carrying out a sophisticated fraud, triggering $7.16 billion in losses. It did not know where the trader was.
"It's something that further damages the image of banking at a time when people are already very concerned about risks," Corrado Passera, chief executive of Italian bank Intesa Sanpaolo, told Reuters.
Senior finance officials said the fallout seemed contained and there should be no rush for new regulations.
Angel Gurria, head of the Organisation for Economic Co-operation and Development, said in the current climate of concern over possible economic recession the Socgen affair could have triggered huge stock market losses.
"But it did not. So it's been treated as an isolated incident, it's going to be dealt with, and that means the market is strong, stable," he told Reuters.
"It's a very serious incident to one bank. Other banks have been suffering incidents of other nature, subprimes. This is a different kind and this does not show a systemic problem."
Astonishment over the scandal dominated the Davos gathering in the mountains of Switzerland where top corporate executive had already been asking what had gone wrong with the world's financial system after several banks were hit by huge subprime mortgage losses. The losses undermined banks' confidence to lend to each other and put a brake on credit markets.
A top central banker said on Friday there was no end in sight to fallout from the credit squeeze that may trigger a big slowdown in U.S. growth and chill other economies too.
"We don't know how far this deleveraging and weakness in the pricing of risky assets will go," Malcolm Knight, head of the Bank of International Settlements told Reuters.
"If it begins to significantly affect the real economy, in the U.S. in particular, then it creates the risk that there will be a significant period of weak global economic performance."
However, stock prices continued on Friday to claw back losses driven by fears of recession. A U.S. tax stimulus package has helped ease concern, but markets remain vulnerable.
British Prime Minister Gordon Brown, also speaking in Davos, urged governments around the world to take simple steps to head off the risk of future crises.
"There is also a danger, with bad news still to come, of being over-optimistic about what we can achieve and over- emphasising the silver lining at the expense of the clouds," he said, calling for free trade, more transparency in financial markets and sound fiscal policies to keep growth going.
Flood Of Headlines
Mexican central bank chief Guillermo Ortiz said regulators should not rush to impose heavy-handed rules, but a flood of headlines surrounding the scandal and the U.S. subprime mortgage crisis could damage trust in the financial system.
"The worst thing is the damage to confidence," he told Reuters.
The European Union's financial markets chief also cautioned against hasty introduction of new rules to regulate dealing.
"The important point to remember on this is that it was fraud. These things happen. They happened before and unfortunately they will happen again," European Internal Market Commissioner Charlie McCreevy told Reuters in Davos.
European Central Bank President Jean-Claude Trichet said the scandal should lead to better internal risk controls in banks.
"The lesson we need to draw from it, as on previous big frauds, we drew lessons on the absolute necessity to really reinforce internal controls and risk controls of all establishments," Trichet told France's LCI television.
In the corridors of the Davos meeting, some veteran bankers embarked on a round of soul-searching.
"Is there something wrong with banking? I think so," said an investment banking head at a major European group. "There is no longer a culture of banking. There's a culture of prima donnas. They all just want the power, they want it bigger and faster."
"It's all about these big giants who've gotten ahead of themselves," the banker said.
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