Daiwa Bank - Lessons in Risk Management

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Case Details:

Case Code : FINC033
Case Length : 8 Pages
Period : 1996-2006
Pub. Date : 2004
Teaching Note :Not Available
Organization : Daiwa Bank
Industry : Banking
Countries : Japan / US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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"Sound internal controls are a source of competitive advantage for the entire system. The industry should encourage all banks, both domestic and foreign, to toe the line." 1

- Edward P. Rogers III, Deputy Superintendent and Counsel, New York State Banking Department.

"It's the ABC of risk control that you don't let your traders do the back-office work." 2

- Hal Scott, Banking Expert, Harvard Business School.


Daiwa Bank (Daiwa), Japan's 12th largest commercial bank, announced on September 26, 1995 that its New York branch had lost more than $1 billion (bn) over a 11-year period. These losses were the result of forgery and fraud committed by Toshihide Iguchi (Iguchi), the Executive Vice-President of Daiwa's New York branch.

Daiwa was one of the top 20 banks in the world in terms of asset size. The New York branch was managing the custody of the US treasury bonds that it had bought on its own account, and those that it had bought on behalf of its customers, via a sub-custody account held at the Bankers Trust New York Corporation (BTNYC).3

The scam was exposed soon after another major banking scam4 involving Barings Bank was exposed on February 26, 1995.

These scams raised serious doubts about the risk management policies followed by the banks.

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Moreover, industry experts and the media were shocked at the way the loss had been first covered up by Iguchi over a period of 11 years and then by the senior managers at Daiwa after Iguchi had confessed his crimes to the president of Daiwa in a letter on July 13, 1995.

Analysts commented that Daiwa would not go bankrupt as Barings had because Daiwa's $200 bn of assets and $8 bn of reserves meant that it had enough cushion to bear the losses. However, the scam gave a massive blow to Daiwa's reputation as US regulatory authorities ordered Daiwa to put an end to most of its trading activities in the US. This proved to be a major setback for Daiwa, which wanted to become a global player. Blaming lack of control in trading rooms, Marc Cohen, managing director of Hermes Capital, a hedge-fund firm said, "This scandal brings to light a culture on Wall Street. In all trading rooms - in banks, in securities firms - when people make money, you leave them alone. No one wants to upset the apple cart"5...

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1] 'Securities Failings Lead to Stricter Regs,' Mcguire, Miles, Thomson's International Banking Regulator, September 22, 1997.

2] 'Billion Dollar Bath,' Levinson, Marc and Meyer, Michael, Newsweek, October 09, 1995.

3] BTNYC is a global financial services company offering a broad range of financial services to businesses and individuals.

4] Barings Bank, the UK's oldest and most reputed bank, declared bankruptcy on February 26, 1995. This was due to the $1 bn loss suffered on account of the unauthorized trading in derivatives by Nick Leeson, the General Manager of Barings Future in Singapore.

5] 'A Blown Billion,' Greenwald, John, Desmond, Edward W., Time, October 9, 1995.


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