CEO Daniel Bouton in La Defense on Thursday. (Reuters)

Paris, Jan. 24: Société Géérale, France’s second-biggest bank, has revealed that one of its traders in Paris has committed a 5-billion-euro (£3.6 billion) fraud.

The bank discovered that the trader, who was not named, secretly set up positions that will cost one of the most prestigious names in European banking 4.9 billion euros before tax. The trader had gone beyond permitted limits on futures linked to European stock indices.

Société Géérale, which has had its shares suspended this morning, said it had “uncovered a fraud, exceptional in its size and nature” at the hands of one trader.

The trader was employed to make calls on whether global markets such as the CAC in Paris or the DAX in Frankfurt would go up or down on any given day.

He was not employed to make educated guesses on which markets would go up or down, but was supposed to look at the bank’s portfolio and bet in the opposite direction, to minimise risks for the trading book.

As Société Géérale put it, he acted “beyond his limited authority”, taking “massive fraudulent directional positions in 2007 and 2008”.

The trader has confessed to the fraud and has been suspended, and a formal dismissal procedure has started. Société Géérale said his supervisors would also “leave the group”.

The fraud carries echoes of that committed by the infamous “Rogue Trader”, Nick Leeson, who caused Barings to collapse with losses of £725 million in 1995.

Bank chairman Daniel Bouton offered to resign, but the board rejected his proposal. As a result of the fraud and the write-down, SocGen is planning to raise 5.5 billion euros through a rights issue underwritten by JP Morgan Chase and Morgan Stanley.

“The most serious thing is that this puts into doubt the risk management systems at some banks,” said Carlos Garcia, an analyst at Fortis.

“You can’t suddenly announce from one day to the next a hit of $7 billion. In the light of this, what we’ve done is to downgrade banks that are linked to trading income or whose capital base is weak,” he added.