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French bank loses 600 million euros in bad trades

PARIS - The French bank Caisse d'Epargne lost around 600 million euros (800 million dollars) in a derivatives trading "incident" during last week's market turmoil, the company said Friday in a statement.

The dramatic loss suffered by the mutual bank, one of France's biggest and generally regarded as a safe haven for cautious small savers, was the latest blow to confidence in a sector already ravaged by the credit crunch.

It came in the same week as directors of Caisse d'Epargne approved plans to merge it with another company, Banque Populaire, and become France's second-largest retail bank.

"Because of the extreme volatility in the markets and the stock market crash of the week of October 6, the Caisse d'Epargne group underwent a major incident in the derivatives market," the statement said.

A company official, speaking on condition of anonymity, told AFP that a finance director from the group had been sacked and "half a dozen" members of the team that made the losing trades had been disciplined.

"The necessary steps to close this position and end this activity were taken. Sanctions have been decided upon and the necessary regulatory bodies have been informed," the company statement said.

The bank insisted the loss did not effect its stability.

"Given the level of its equity capital -- more than 20 billion euros -- and its high level of liquidity, this loss does not effect the group's financial solidity and will have no consequence for customers," it said.

Caisse d'Epargne is a fixture on the French high street and as a mutual bank is popular with small-scale savers.

It has 27 million account holders -- 24 million of whom use its popular "Livret A" personal savings scheme -- and employs 51,500 people.

It is merging with its smaller rival Banque Populaire, with which it owns an investment bank subsidiary, Natixis, which has seen its stock battered during the current global financial crisis.

At the end of last year the Caisse d'Epargne held 358 billion euros in savings. In the first half of 2008 its profits fell by 98.5 percent to 21 million euros from 1.449 billion euros in the same period last year.

The firm said the losses were suffered by the group's central capital fund -- which manages funds for 17 regional mutual banks -- and were discovered during normal internal oversight procedures.

According to a company source, the bank's traders had not respected rules limiting how much they could invest in stock derivatives, despite having been specifically warned about the danger presented by "market conditions".

Last week saw European stock exchanges plunge in their most dramatic crash since the Great Depression of the 1930s and billions of euros were wiped off the values of stocks around the world.

France's Finance Minister Christine Lagarde has been informed of the bank's loss, her spokesman said, adding that it "does not call into question the solidity of the establishment in question".

Nevertheless, the Caisse d'Epargne's expensive error came at a critical time for European banking, when governments haunted by the threat of a run on the bank by nervous savers have been battling to shore up confidence.

It will also revive memories of the disaster earlier this year at another French bank, Societe Generale, which lost 4.9 billion euros to a series of bad investments by alleged "rogue trader" Jerome Kerviel.