The collapse of Barings bank

Events leading to losses:

Conclusion

• From 1992, Leeson made unauthorized speculative trades that at 1st made huge contributions for Barings - up to 10% of the bank's profits at the end of 1993.
• Soon, he lost $$ in his operations and hid the losses in an error account, 88888. He claimed that the account had been opened in order to correct an error made by an inexperienced member of the team.
• At the same time, Leeson hid documents from statutory auditors of the bank, making the internal control of Barings seem completely inefficient.
• At the end of 1994, his total losses amounted to more than £208million, almost half of the capital of Barings.
• On 16th Jan 1995, with the aim of "recovering" his losses, Leeson places a short straddle on Singapore Stock Exchange and on Nikkei Stock Exchange, betting that Nikkei would drop below 19000 points. But the next day, the unexpected earthquake of Kobe shattered his strategy. Nikkei lost 7% in the week.
• Chairman Peter Barings had received a confession note from Leeson, but it was too late. Leeson's activities had generated losses totaling £827million (US$1.4billion), twice the bank's available trading capital.
• Barings was declared insolvent on 26th Feb 1995.

As conclusion, people management is an important element in a corporate because senior management need to understand about the particular risks faced by the company and finding out the best way to solve the problem, but not just using a new lie to cover the existing lie.

Besides that, financial control and system is very significant to a corporate too. The financial analysis should be done in an ordering way to ensure that investment is safety and worth.

Risk:

Financial risk

- in nature derivatives very profitable, only fraction of the cost of buying in the cash market. But when involve leverage derivatives are greater than with most other securities and add volatility have potential to create losses on a large scale than securities.

Market risk

- The possibility for an investor to experience losses due to factors that affect the overall performance of the financial markets. Market risk, cannot be eliminated through diversification, though it can be hedged against. The risk that a major natural disaster will cause a decline in the market as a whole is an example of market risk.

Human resources risk

- Lesson free carry out its work without monitored by managers, as a result from lack of experience, lesson make a mistake when he invest in large amounts which cause company get huge losses, the top manager also does not monitor the activities of its subsidiary carefully cause lesson managed to fool them.

The collapse

of Barings Bank

Issue :

Why the collapse of Barings Bank will happen?

• People management
• Human weakness – guilt, shame, greed
• Solo-consolidation – “engine room of the collapse”

Members

Warning signs:

1. Deficiencies in organizational culture, structure and functioning.

• Solo-consolidation (merge of Barings Securities & Baring Brothers -> BIB
• No one concerned with training like selection and recruitment.
• Confusion whom Leeson should report to

2. Malevolent environments

• Savage office politics
• Greedy

3. Management failure to adopt basic financial control systems

• 1993, £15m account deficit - no effective internal system
• Bet the firm speculative without anyone’s knowledge & perhaps it was even possible to do so without understanding.

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Objective

Role of management:

The Barings Bank must made procedures in their bank. This is because if anything happen it can refer to the procedures. For example, in cases of the collapse of Barings Bank is when he used an “error account” to hide the true nature of his contracts.

The Barings Bank management must separate the duties in the bank. For example, Leeson was in charge of the dealing desk and also had control over the back office operations. This provided him with much opportunity to falsify the reporting aspect of the business and skip critical regulatory and compliance requirements. Any useful internal control system must recognize and acknowledge the potential for fraud or errors should there be inadequate segregation of duties.

1. To identify the factors of Barings Bank's failure.

2. To explain how importance of managing financial and human risks for a corporate.

Role of regulator:

The Bank of England should explore ways of increasing its understanding of the non-banking businesses undertaken by those banks for which it is responsible..

It should prepare explicit internal guidelines to assist its supervisory staff in identifying activities that could pose material risks to banks and ensure that adequate safeguards are in place.

It should work more closely with the Securities and Futures Authority, the agency responsible for regulating the domestic operations of British-based securities firms, as well as with regulators from other nations.

It should address deficiencies in the implementation of rules dealing with large exposures.

Knowledge from the case:

The way to avoid the similar

event/crisis/disaster to occur in the future:

The understanding of the business strategies and having the same direction among the employees are very important in order to achieve the business’s goal.

The hierarchy of the management should be clear and understand by all the employees so that the supervision on bottom department by senior management can implement strictly.

The significance of internal checking account balance is very important for a company to manage their financial health.

• Improve the internal communication, control and channel of accountability as well as regulatory oversight in the institutions.
• An upgrading of the clearing system and procedures to incorporate real-time.
• Influence organizational culture positively and empower the employees.
• Regulating higher position limits through explicit hedging, arbitrage, risk management and another qualitative and financial exposure criteria.
• The enhancement of customer protection rules