Barrings Bank Fall
BARINGS – A CASE STUDY IN RISK MANAGEMENT AND INTERNAL CONTROLS
Introduction:
In 1995 Britain’s oldest merchant bank of two hundred years came to a dramatic and fatal halt. The bank was Barings. The demise of the bank was brought about as a result of the actions of a derivative trader, Nick Leeson, stationed in Singapore. Without a careful and considered review one may be tempted to conclude that the blame rests solely on Nick Leeson. But if you think with analytical mind, you will ask: how is it possible that this one man was able to cripple a financial giant? What was the role of senior management in this situation and did they contribute to the demise? How effective were the internal control systems, Risk management system and was the Singapore operations managed effectively?
The answer to these and similar questions would be indeed interesting and insightful in analyzing the debacle of Baring Bank. Reported on very widely in the nineteen- nineties, this bank collapse still holds significant lessons for those involved in the management of financial institutions.
The objective here is not to prove definitively the exact cause of the collapse but to show, by way of a very narrow discussion, how certain deficiencies in internal controls and risk management systems impacted the bank and ultimately led to its collapse.
When Barings collapsed it had a capital of approximately $600 million. Contrast this with notional futures position of Japanese equity and interest rates of $27 billion, Nikkei 225 equity contracts of $20 billion and put and call options with nominal values of over $6 billion that the bank held. Given the level of capital it is incomprehensible that the bank could have created this level of exposure. It is certainly worth asking where were the mechanism and limits that should ordinarily be in place to signal that its capital was at severe risk.
In an analysis (see http://newrisk.ifci.ch) on the incident the author stated:
Introduction:
In 1995 Britain’s oldest merchant bank of two hundred years came to a dramatic and fatal halt. The bank was Barings. The demise of the bank was brought about as a result of the actions of a derivative trader, Nick Leeson, stationed in Singapore. Without a careful and considered review one may be tempted to conclude that the blame rests solely on Nick Leeson. But if you think with analytical mind, you will ask: how is it possible that this one man was able to cripple a financial giant? What was the role of senior management in this situation and did they contribute to the demise? How effective were the internal control systems, Risk management system and was the Singapore operations managed effectively?
The answer to these and similar questions would be indeed interesting and insightful in analyzing the debacle of Baring Bank. Reported on very widely in the nineteen- nineties, this bank collapse still holds significant lessons for those involved in the management of financial institutions.
The objective here is not to prove definitively the exact cause of the collapse but to show, by way of a very narrow discussion, how certain deficiencies in internal controls and risk management systems impacted the bank and ultimately led to its collapse.
When Barings collapsed it had a capital of approximately $600 million. Contrast this with notional futures position of Japanese equity and interest rates of $27 billion, Nikkei 225 equity contracts of $20 billion and put and call options with nominal values of over $6 billion that the bank held. Given the level of capital it is incomprehensible that the bank could have created this level of exposure. It is certainly worth asking where were the mechanism and limits that should ordinarily be in place to signal that its capital was at severe risk.
In an analysis (see http://newrisk.ifci.ch) on the incident the author stated: