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... Introduction
The collapse of Barings Bank in 1995 serves to remind us of how lack of compliance, control procedures and unauthorized activities of trader Nick Leeson led to the fall of one of Britain’s oldest financial institutions.This report details the recent history of the Barings Bank Failure, the causes for the collapse and highlights the lessons learnt. The chain of events, which led to the collapse of Barings, Britain’s oldest merchant bank, is a demonstration of how not to manage a derivatives operation. ... The leverage and liquidity offered by major futures contracts – such as the Nikkei 225, the S&P 500 or Eurodollars – means that these obligations, once in place, mount very quickly; thus bringing down an institution with lightning speed. ... At the time of the collapse, the Barings Group comprised an authorised bank in the UK (Baring Bros & Co), a securities company (Barings Securities Limited – BSL) and various subsidiaries and branches operating in the UK and other countries. ... How Leeson Collapsed Barings Bank
The activities of Nick Leeson on the Japanese and Singapore futures exchanges, which led to the downfall of his employer, Barings, are well-documented. ...
Barings collapsed because it could not meet the enormous trading obligations, which Leeson established in the name of the bank. ... But Leeson’s Osaka position, which was public knowledge since the OSE publishes weekly data, reflected only half of his sanctioned trades. ... Because Leeson’s official trading strategy was to take advantage of temporary price differences between the SIMEX and OSE Nikkei 225 contracts. ... That Leeson was able to hide his trading mistakes for so long was due to Barings managerial confusion, according to a Bank of England study. ... Once that operation expanded to include others, including Leeson, the bank failed to recognize that such an intuitive management style was no longer appropriate. ... " The Bank of England concluded that the huge losses were caused by a serious failure of controls and managerial confusion within Barings. ... In relation to the particular circumstances of Barings Futures Singapore
(BFS, an indirect subsidiary of the Barings bank, on Singaporean and Japanese exchange) , where the losses were incurred, the Board found, amongst other things, that:
• there was a lack of separation between the front and back offices within BFS. ... With hindsight, it appeared that no-one carried ultimate
responsibility for monitoring Leeson’s activities in Singapore;
• Barings management did not question, until it was too late, the apparent high levels of profits being generated out of the authorised, but supposedly low risk, arbitrage activity conducted by Leeson. At one point, it was acknowledged within Barings management that over 60 per cent of the revenues of its worldwide derivatives operations was generated out of Leeson’s arbitrage operations;
• Barings management did not question, nor did it control or place limits on, the high, ongoing levels of funding required by BFS from its parent and associated companies. ... Since the foundations for effective controls were weak, it is not surprising that the firm’s flimsy system of checks and balances failed at a number of operational and management levels and in more than one location.
Approximate Word count = 2540
Approximate Pages = 10.2
(250 words per page double spaced)
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