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Barings Bank Disaster

It was founded in 1762 and was owned by the Baring
family of German origin.
Barings Bank was an English merchant bank based
in London, and one of the world's oldest merchant banks.
The bank collapsed in 1995 after suffering losses of 827
million ($1.3 billion) resulting from poor speculative
investments, primarily in futures contracts, conducted by an
employee named Nick Lesson working at its office
in Singapore.
Focal points addressed in
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 and
was the Singapore operations managed effectively?
How certain deficiencies in internal controls and risk
management systems impacted the bank and
ultimately led to its collapse?

Good old days
Barings Bank was founded in 1762 as the John and
Francis Baring Company by Francis Baring, with his older
brother John Baring.
in 1802, Barings and Hope were called on to facilitate the
largest land purchase in history - the Louisiana Purchase.
in the 1880s, daring efforts in underwriting got the firm into
serious trouble through overexposure to Argentine and
Uruguayan debt. Through the organizational skills of the
governor of the Bank of England, William Lidderdale, a
consortia of banks was arranged to bail Barings out and
support a bank restructuring.
The company established ties with King George V, beginning
thus a close relationship with the British monarchy. Termed
as Queens bank by Elizabeth II
Introducing : The Rogue Trader
Nicholas Leeson Worked for Morgan Stanley after
graduating university
Leeson had been the star trader of the bank.
Leeson then joined Barings (Jakarta) to sort
through back-office mess involving 100 million of
share certificates
Successfully rectified the situation in 10 months
Then transferred to Singapore and worked with a
lot of power & freedom

Lesson Doubling Strategy
An attribute of doubling strategy is that the inevitable &
devastating loss is preceded by a period of high returns with
low volatility.
Leesons trading activities mainly involved three futures
Futures on the Nikkei 225 stock index
Futures on 10-year Japanese Government bonds
Euro yen futures
Leesons main assignment was to arbitrage between SIMEX
and Japanese exchanges in the futures contracts.
Instead of arbitraging, he was speculating, financing SIMEXs
margin requirements by selling options & borrowing huge
amounts of money from Barings head office in London.
Kobe earthquake of January 17, 1995 led to the crash of
Nikkei and his investments

Lessons Deceptive strategies
Use of Cross Trade
Breaking down the total number of contracts into
several different trades
Changed the trade prices thereon to cause profits
Profits credited to 'switching' accounts & losses to
be charged to account ' 88888
Details of this account were never transmitted to
the treasury or risk control offices in London
The 1995 Collapse
Nicholas bought a substantial number of contracts, 11,000 on
the 20th of January 1995, just three days after the
earthquake in Kobe.
Probably, he thought that the market had overreacted and
that the fall of the Nikkei 225 from 20,000 to 18,950 was only
But the Nikkei 225 dropped even further and by Monday 23rd
1995, the Nikkei 225 was around 17,950. At the end of
February 1995, Nicholas Leeson had leveraged his position
to $7bn, holding about 61,000 contracts.
The margin calls were enormous and Barings Tokyo London
had to transfer urgently a massive $835 m to Barings
Singapore in January and February to cover the margin calls
on Simex. These calls made finally Barings bankrupt as its
reported capital was only of $635m.
Management Failure
Effectively let Leeson settle his own trades by
putting him in charge of both the dealing desk and
the back office
He had the final say on
ingoing and outgoing confirmations and contracts
reconciliation statements
accounting entries
position reports
Leeson was considered perfectly placed to relay
false information back to London

Regulation in Response
The Board of Banking Supervision conducted an inquiry
Did not necessitate any change to the framework of
Some existing arrangements needed to be improved
Like better understanding of non-banking businesses
undertaken by the banking groups they were responsible for
SIMEX assumed that Barings was hedging and not
speculating when it granted an exemption on the number of
contracts that Barings could hold.
In addition, the speculative position of Barings was hidden
due to use of an omnibus account to clear trades. With an
omnibus account, the identity of the brokers account is
hidden from the exchange and clearing house.
Observation and Lesson learnt
Raised the standards of internal controls and compliance.
Banks are better capitalized which makes them less likely to
collapse in case of future rogue trader strikes.
Stronger competition in search additional profits gave so
much control only to the one person
Front and back office operations are carried out
independently from each other. Although lessons have been
learnt there are loopholes. The market is always changing in
terms of products , complexity, and vulnerability to fraud
within and supervision from outside.
It seemed that the management were satisfied with the short
term profit; they were unaware of important activities of the
The institution was in funding risk due to enormous
unhedging position

Maximizing the Wealth
There are certain things a financial manager can do
to maximize the wealth:
Assess risk appetite of firm and capital base
Aggressive yet ethical trading
No doubling policy
Maintain a system of checks and balances in
Define limits and credit profiles
Conduct unannounced spot audits