Finance Case Study - The Fall of Barings Bank|Finance|Case Study|Case Studies

The Fall of Barings Bank

            
 
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Case Details:

Case Code : FINC025
Case Length : 11 Pages
Period : 1992 - 2003
Pub. Date : 2004
Teaching Note :Not Available
Organization : Barings Bank
Industry : Banking and Financial Services
Countries : UK

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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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Excerpts

Events Leading to the Fall

Soon after joining BSL, Leeson applied and got a transfer to Jakarta, Indonesia. Due to his excellent performance, Barings management promoted Leeson to General Manager of BFS in Singapore in April 1992.

In BFS, Leeson's job was to leverage on the arbitrage opportunities on similar equity derivatives between SIMEX and the Osaka stock exchange (OSE). To take the advantage of the arbitrage opportunity, Leeson had to adopt the following strategy - if Leeson was long on the OSE, he had to be short twice the number of contracts on SIMEX . The arbitrage trading strategy required Leeson to buy at a lower price on one exchange and sell simultaneously at a higher price on the other, reversing the trade when the price difference had narrowed or become zero. The market risk in arbitrage was minimal because positions were always matched. Leeson was not given any authority to trade in options or maintain any overnight un-hedged positions...

Finance | Case Study in Management, Operations, Strategies, Finance, Case Studies

Why Did it Happen?

Industry analysts felt that the fall of Barings served as a classic example of poor risk management practices. The bank had completely failed to institute a proper managerial, financial and operational control system.

Due to the lack of effective control and supervision, Leeson got an opportunity to conduct his unauthorized trading activities and was able to reduce the likelihood of their detection. Analysts felt that this disaster happened for the following reasons.

SEPERATION OF FRONT AND BACK OFFICE DUTIES

The back office is responsible for recording and settling trades transacted by the front office, by accepting/releasing securities and payments for trades, and reconciling them with details sent by the bank's counterparties and assessing the accuracy of prices...

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