Barings Bank, founded in 1762, collapsed on February 26, 1995, following unauthorized speculative trading by trader Nick Leeson, which left the bank unable to meet its cash requirements. Key reasons for the failure included operational risks, internal fraud, and management negligence, particularly the lack of segregation of duties and oversight. The incident highlights the necessity for clear accountability, robust internal controls, and management's responsibility to understand their business operations.

1. Barings Bank
Treasury & Risk
Management
Roll No: 103

2. Sr.
No.
Topic Slide No.
1. Introduction 3
2. Chronology of events 4
3. Reasons for failure 9
4. How it could have been avoided 14
5. Key learnings 16
INDEX

3. INTRODUCTION
▫ The Bank was founded in 1762 by Sir Francis Baring
▫ Barings was among the largest and most stable banks
▫ However, thanks to unauthorized speculation in futures contracts
and other speculative dealings, it ceased operations on Feb 26, 1995
▫ The direct cause was its inability to meet its cash requirements
following those unauthorized trades
3

4. Chronology of events
▫ In the early 90s, Barings decided to get into the expanding
futures/options business in Asia
▫ They would look to open a Singapore office for trading on the SIMEX.
▫ Leeson requested to set-up the accounting and settlement
functions there and direct trading floor operations
▫ His request was granted and initially, he could only execute trades
on behalf of clients and the Tokyo office for "arbitrage" purposes
4

5. Chronology of events
▫ After a good deal of success, he was allowed to pursue an official
trading license on the SIMEX.
▫ He was then given some freedom to place orders on his own but at
the same time continued to supervise accounting & settlements
▫ In July 1992, a new Barings employee suffered a small loss on
Leeson’s watch. Leeson did not want to tarnish his reputation, so he
hid the loss in an error account.
5

6. Chronology of events
▫ Leeson attempted to make back the loss through speculative
trading, but this led to even bigger losses
▫ Instead of initiating simultaneous trades to exploit small differences
in pricing between the two markets, he held his contracts, hoping to
make a larger profit by betting on directional moves of the
underlying index
6

7. Chronology of events
▫ Leeson took out a short-term, highly leveraged bet on the Nikkei
index in Japan
▫ At the same time, a severe earthquake in Kobe, Japan sent the index
plummeting, and his loss was so huge that he could no longer hide it
▫ Barings, a 233-year old bank, collapsed overnight and was bought
by ING for £1
7

8. Chronology of events
8
▫ Leeson fled to Malaysia, Thailand, and
finally to Germany, where he was
arrested and extradited to Singapore
▫ He plead guilty to two counts of
deceiving bank auditors and cheating
the SIMEX
▫ Leeson was sentenced to six and a half
years of prison in Singapore

9. Reasons for Failure
There were a number of reasons why the bank failed
I. Operational risks that the bank failed to keep in check
▫ People risk: Incompetency or wrong posting of personnel as well as
misuse of power like Leeson
▫ Process-related risks: Possibilities of errors in information
processing, data transmission, data retrieval, and inaccuracy of
result or output.
9

10. Reasons for Failure
▫ Internal fraud: Losses from fraud inside a financial institution
can stem from misappropriation of assets, forgery, compliance
etc.
▫ Other operational risks such as accounting and financial
disclosure risk, natural hazard and environmental risk; fraud
and embezzlement risk and legal risk
10

11. Reasons for Failure
II. Top Management’s failure to control the situation
▫ Incompetence and negligence of the people at the forefront
▫ People who didn’t have the direct or requisite experience to look
after that particular part of the organisation (Barings Securities)
were put in the senior positions
▫ Superiors didn’t ask questions because they didn’t understand the
business itself
11

12. Reasons for Failure
III. Market risk - Risk reports were
misrepresentations as Leeson was
in charge of both back and front
office
▫ This meant that he was in charge of
the trading as well as settling the
trades
12

13. Reasons for Failure
▫ Credit risk - When the Barings London office used to send the funds
for margin requirements of their clients in the SIMEX, lending money
to these clients to trade at the exchange
▫ Leeson kept on asking for more and more funds, while increasingly
less and less clients seemed to be closing their positions
13

14. How it could have been avoided
A few steps that could have been taken to avoid such a situation:
▫ Segregation of front and back office – Would have effectively
reduced the kind of activities that Leeson was involved in
▫ Involvement of senior management – It seemed that the
management were satisfied with the short term profit, they were
unaware of important activities of the company
14

15. How it could have been avoided
▫ Tougher poor control procedure – One of the main reasons as to
why this entire debacle happened was because the management
were not accountable to certain activities
▫ Increased supervision – Management did not step in and were
mostly unaware of the activities that Leeson was involved in
▫ Adequate capital - The institution was in funding risk due to
enormous unhedging position
15

16. Key learnings
Keeping in mind the case study, a few learnings which should be
adopted:
▫ Management teams have a duty to understand fully the business
they manage
▫ Responsibility for each business activity has to be clearly established
and communicated
16

17. Key learnings
▫ Clear segregation of duties is fundamental to any effective control
system
▫ Relevant internal controls, including independent risk management,
have to be established for all business activities
▫ Top management and audit committee have to ensure that
significant weaknesses, identified to them by internal audit are
resolved quickly
17

18. 18
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