Barings Bank Fraud

When did the bank collapse

1995

Why did the bank colapse

unauthorized trading activities
(fraudulent investments), primarily in futures
contracts during 1993 to 1995 conducted by
its employee Nick Leeson, a single, junior
trader working at its office in Singapore.

What was the result

The size of the losses relative to Barings
Bank’s capital (twice Barings' available
trading capital), along with potential
additional losses on outstanding trades
forced Barings into bankruptcy in 1995.

What was nick supposed to be doing

Leeson was supposed to be running a low-risk, limited return
arbitrage business for Barings in Singapore.
 He actually took increasingly large speculative position in Japanese
stocks and interest rate futures and options.
 He disguised his speculative position by reporting that he was taking
the positions on behalf of fictitious customers

Managements Incompetence

The most blatant of management failures was an attempt to save money
by allowing Leeson to function as head of trading and the back office (i.e.
settlements, clearances, record maintenance, regulatory compliance, and
accounting) at an isolated branch.
 Even when auditors’ reports warned about the danger of allowing Leeson to
settle his own trades, thereby depriving the firm of independent check on his
activities, Barings’ management persisted in their folly.
2. Equally surprising was management’s failure to inquire how a low-risk
trading strategy was able to generate such a large profit.
3. Even when covering these supposed customer losses on the exchanges
require Barings to send massive amounts of cash to the Singapore branch,
no inquires were launched.

Operational Risk Management

A large part of this failure can be attributed to the very poor
structuring of information management so that the different risk
control areas overlooked at reports that are not tied together.
 The funding area would see a report indicating that cash was required to
cover losses of a customer, not the bank.
 A logical consequence is the supposed covering of customer losses would
technically equal to a loan from Barings to the customer (the bank
increased the customer’s credit exposure by an amount as large as the
covered losses)
 However, the information in the credit risk area was not integrated with
information provided to funding area. The funding should have been
showed there was no such credit extension.

Lessons to be learned

 The absolute necessity of an independent trading back
office
 The need to make thorough inquiries about unexpected
sources of profit (or loss)
 The need to make thorough inquiries about any large
unanticipated movement of cash.
 The need to improve/change the very poor structuring of
management information