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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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"I think it shows the financial markets world is a good deal less efficient than we believe. If we look at our bank statements, we can see computer errors, for example. And at the same time, there's negligence. A lot of people turned a Nelsonic blind eye to what he (Leeson) was doing because he seemed to be bringing in the profits." 1

- David Frost, Executive Producer, Rogue Trader.

"It could happen again because the incentives are the same, if not greater. The rewards are very great and that's a temptation for people." 2

- Neil Wilson, Editor of Futures and Options Week.

Introduction

On February 26, 1995, Barings Bank (Barings) - the United Kingdom's (UK) oldest and one of its most reputed banks - declared it was bankrupt.

The bank with a total net worth of $900 mn had suffered losses in excess of $1 bn.

These losses were result of the gross mismanagement of the bank's derivatives trading operations by Nicholas William Leeson (Leeson), the General Manager of Barings Future in Singapore (BFS).

BFS had been established to look after the bank's Singapore International Monetary Exchange (SIMEX) trading operations. Leeson's job was to make arbitrage profits by taking the advantage of price differences of similar contracts on the SIMEX (Singapore) and Osaka stock exchanges.

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In spite of not having the authority, he traded in options and maintained un-hedged positions. He acted beyond the scope of his job, and was able to conceal his unauthorized derivatives trading activities.

Due to the senior management's carelessness and lack of knowledge of derivatives trading, the bank landed up in a major financial mess.

When Barings finally went into receivership3 on February 27, 1995, it had an outstanding notional futures position on Japanese equities and bonds of US$ 27 bn (US$ 7 bn on Nikkei 225 equity contracts and US$ 20 bn on Japanese government bond (JGB) and Euroyen contracts).4

Analysts said that the situation demanded that banks the world over must tighten their internal control procedures.

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1] 'Leeson scandal could happen again,' BBC Online Network, June 22, 1999. David Frost is the executive producer of the film 'Rogue Trader' based on Nick Leeson.

2] 'Leeson scandal could happen again,' BBC Online Network, June 22, 1999.

3] Receivership is a form of bankruptcy in which a company can avoid liquidation by reorganizing with the help of a court-appointed trustee.

4] Euro yen contracts are yen-denominated futures or option contracts entered into by the institutions to hedge their yen interest rate or yen foreign exchange exposure.

 

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