Barings bank collapse
Barings Bank was one of the oldest and most renowned merchant banks in the United Kingdom, until its collapse in 1995 due to a loss of over £800 million.
Barings Bank was founded in 1762 to finance the trade of textiles. Barings financed a number of public projects in Europe, North and South Americas in the 19th century. During the years 1880-1890 Barings offered large loans to the governments of Uruguay and Argentina. In subsequent years the largest banks of these countries got into financial trouble, which in turn lead to suspension of withdrawals and an ensuing panic in the banking sector. This is when the total value of Barings assets fell by a third and its solvency was at stake. To the rescue came the Bank of England, which along with other London merchant banks financed Barings' recovery. During the 1980s Barings was known for its strong position on the emerging markets. Its brokerage, Barings Securities Limited, played a crucial role in Asia and Latin America.
Activities of Nick Leeson
Nick Leeson started at Barings in 1989 as a futures and options trader. In March 1992 he relocated to Singapore where he took over as head of office, which worked on an OTC market in London and arbitraging in Tokyo and Hong Kong. Leeson was directly responsible for the purchase and setting termination dates for futures as well as settlements. This allowed him to avoid internal auditing.
His arbitraging activity involved taking advantage of price differentials between the Japanese and Singapore markets on future contacts. While the London office saw these as free of risk, due to Leeson's practice of gambling on unauthorised positions, the Bank lost £827 million.
Leeson first losses started at £2 million in 1992, which two years later reached £208 million. All this time losses were reported to a special account 88888, which the London office had no access to. The profits on authorised positions were reported on other accounts.
The real trouble started in January 1994, when Leeson put at one point about 40000 contracts on the market. The gamble would have been profitable, had it not been for the earthquake in Kobe which resulted in a downturn on the Japanese market. The losses had been discovered and Leeson fled to Germany, where he was arrested. The control over Barings' was handed over to commissary administration. On March 6, 1995 Barings' was purchased by ING bank for a nominal sun of £1.
The collapse of Barings was due to unauthorised and ultimately catastrophic activity of Leeson. The following conclusions were drawn:
- management has a duty to understand their area of business,
- responsibility for each business activity has to be clearly established,
- internal controls are necessary, including independent risk management,
- management and the audit committee needs to ensure that weaknesses identified by an internal audit are resolved.
- Brown, A. D. (2005). Making sense of the collapse of Barings Bank. Human Relations, 58(12), 1579-1604.
Author: Anna Opalińska