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The Barings Bank Scandal: What happened?

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by

Amy Yek

on 14 November 2013

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Transcript of The Barings Bank Scandal: What happened?

The Barings Bank Scandal:
What happened ?

Barings Bank History
The Downfall
Barings' Structure
Nicholas Leeson:
The Rogue Trader
Governance at Barings
- Oldest investment bank in England

-Founded by Francis and John Baring in 1762

- Was the first equipment financier in the world e.g Napoleonic wars

-Helped the financing of the port of Louisiana

-Trustee of the personal wealth of the British monarchy- investment adviser to Queen Elizabeth II
Sir Francis Baring (left), with brother John Baring and son-in-law Charles Wall
- Worked as a clerk at several other banks before ending up at Barings in 1989 quickly gained fame within the company.

- In 1992, he was appointed as general manager of a new operation in futures markets on the Singapore International Monetary Exchange (SIMEX).

-His profits in 1992 (10 mil. £) accounted for 10 % of Barings total profit.

- He was in charge of both the front and back office, only Nick himself knows if the trades match the actual account as he was the one to make the sales AND the one to report them).
Account 88888
Used by Leeson to reverse or cover the losses of trades, which Leeson claimed it is used for corrections on errors done by his teammates during trades.
-
Barings Bank went bankrupt on 26 February 1995

- Sold for 1 pound sterling to ING





-Nicholas sentenced to six and a half years prison in Singapore court
The consequences
The Collapse
1. Barings hold U.S. $ 7.7 billion in futures contracts on Nikkei

2. Japanese stock market index fell after the earthquake in Kobe on 17th January 1995
Meet the Presenters:
Barings Bank Structure Before Merging
Barings Bank Structure After Merging
Hisyam Jamal
Tatenda Johannes Gunda
Yek Shiaw Yien
News article on March 8, 1995 by Toronto Star:
Critical Analysis
Recommendations
e-Governance
Branch Level Risk Management
Management Rotation & Secondment
Fractional Reserve Banking
3. Nick Leeson faced losses and decided to buy even more positions, betting on the recovery of the Japanese stock market but he increased the risk.

4. The stock market kept declining resulting in a total loss of £827m
What lead to the Collapse of Barings Bank?
Objectives:

1. To identify the governance issues that led to the demise of Barings Bank.

2. To explain the importance of governance on a company's operations and

3.Recommend on how should other companies especially in finance and banking sectors avoid the same blunder made by Barings Bank.
Lack of Internal Checks and Balances (Poor Risk Management)
No segregation of duties- Nick Leeson is in charge in front, middle and back office all at once when these tasks should be held by different employees.

Even when segregation of duties was suggested by internal audit, the concentration of power in the Leeson's hands was scarcely diluted.
Lack of Understanding on the Business
If Barings' auditors and top management had understood the trading business, they would have realized that it was impossible for Leeson to be making the profits that he was reporting without taking on undue risks, and they would have questioned where the money was coming from.
Poor Supervision on Employees
Although Leeson had never held a trading license prior to his arrival in Singapore, there was little supervision on his activities and no individual in the company was directly responsible for monitoring his trading strategies.
Vagueness in Reporting Line
Leeson's fraud may have been facilitated by the confusion caused by two reporting lines: one to London, for proprietary trading, and another to Tokyo for trading on behalf of customers. He reported to the head of settlement operations, which short-circuited normal accounting and internal control/audit safeguards.
Board Nomination Committee
Asset & Liability Committee
Risk and Audit Committee (BRACO)
Conclusions
News article on March 5,1995 by Toronto Star:
Barings Bank was warned on its inadequate supervision on Leeson's trading decisions dated back to year 1992. Leeson claimed that it is a political scandal and that the government and a few top management parties know what was being carried out within Barings. Leeson's anonymous friend said that someone wants Leeson to be silenced and he is afraid for his life in prison. It is suspected that Barings Bank collapsed due to criminal conspiracy and Leeson is not solely to be blamed.
Critical Question: If someone offers you an amount of money to spend one year in prison, for how much would you accept?
Leeson threatened that he will not be silenced if he is to face trial in Singapore, he will involve his former boss and will ensure the world aware that the collapse is a Barings Bank scandal, not a Nick Leeson scandal.
-The nomination committee apart from facilitating the appointment of new directors

-Also looks at the appointment of SBU heads who are shadow directors by law.

-In Barings case, Leeson's appointment was above board although he technically held 4 de facto positions at once thus showing failure in the committee
- A risk-management committee in a bank or other lending institution that generally comprises the senior-management levels of the institution.

- The ALCO's primary goal is to evaluate, monitor and approve practices relating to risk due to imbalances in the capital structure.
- The Risk and Audit Committee shall assist the Board of Directors in fulfilling its responsibilities for corporate governance and overseeing the company's financial reporting.


- In doing so, the Committee has the responsibility to maintain free and open communication with the external auditor, internal auditor, and management of the Company.
- Although the Barings Bank issue has been put across as a governance driven failure, media as well as banking minds dispute this. Barring was rather a cocktail of fraud, politics and to some extent governance which was weakened by the first 2 issues.

- Lastly if a mere Strategic Business Unit (SBU) managing director or general manager can cause the collapse of major banking concern, then the board is liable because they chose a chalatanic person to run the unit and also are aware of the activities but ignore as long as there is money being produced.

- The Barings issue is however non-conclusive as only one person was brought to book and the rest were and are free.
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