Ronald Greenidge, who managed Kweku Adoboli from 2008 until April 2011, was also accused by defence lawyer Charles Sherrard of being aware of a secret "umbrella fund" used to hold the unauthorized profits.
During combative exchanges in the hearing, adjourned for a short time after Greenidge was taken ill, the former banker strenuously denied he had tolerated Adoboli's deals that exceeded the bank's trading limits.
Adoboli, 32, earlier appeared upset when the court heard "glowing appraisals" which Greenidge had written in 2009 and 2010.
Sherrard presented details of an April 2011 electronic chat between Adoboli and Greenidge in which the defendant admitted he had exceeded the desk's overnight risk limit of $25 million by $15 million.
Greenidge, who was in charge of the Exchange-Traded Fund desk, replied "again?", leading the defence to suggest limits were regularly ignored in order to maximize profits.
The former supervisor refuted the claims, saying "we've seen three examples in two years."
He also insisted that the bank would have sacked Adoboli if it had known about the secret fund, even if the trader was delivering profits, because it would have exposed the bank to too much risk.
But he did admit that Adoboli's huge trades should have been picked up by the bank's automatic warning system.
Greenidge on Wednesday said he had no idea the trader had been using fake trades to hide his unauthorized trades until presented with a "bombshell email" on September 14th last year.
In extracts of Adoboli's email presented to the court, the defendant explained that he had exceeded his trade limit and created fake "hedge" trades to hide his true exposure.
The London-based trader regularly asked Greenidge for advice even after he was no longer direct supervisor, and also revealed to him that he had amassed huge credit exposure.
Greenidge told Adoboli "you do know you are properly mad?" when told that he had built up $200 million by late April 2011.
However, Greenidge told the court that he did not know what the desk's trading limits were at the time as he was no longer in charge.
The defence also suggested Greenidge knew Adoboli was conducting unauthorized deals due to the profits he was posting.
After Adoboli reported one-day profits of $1 million in August 2011, Greenidge told him in an electronic message "that's not possible, you must have a book the size of a small planet," the jury at Southwark Crown Court heard.
When told directly that he was aware of Adoboli's $40 million umbrella fund, allegedly used as a holding mechanism to smooth out the official accounts, Greenidge replied "no, I was not".
Greenidge was fired from the bank for gross negligence.
The trial has heard that Adoboli caused "chaos and disaster" at Switzerland's largest bank when he "gambled away" $2.3 billion in trades at its London offices.
Adoboli denies two charges of fraud and two of false accounting between 2008 and September last year.