First place in the Managing Risk Category, in the 2005 European Foundation for Management Development (EFMD) Case Writing Competition

Allied Irish Banks - The Currency Derivatives Fiasco

Allied Irish Banks - The Currency Derivatives Fiasco
Case Code: FINC032
Case Length: 11 Pages
Period: 1997 - 2004
Pub Date: 2004
Teaching Note: Not Available
Price: Rs.500
Organization: Allied Irish Banks
Industry: Banking
Countries: Ireland, US
Themes: Risk Management
Allied Irish Banks - The Currency Derivatives Fiasco
Abstract Case Intro 1 Case Intro 2 Excerpts


On February 06, 2002, Allied Irish Banks (AIB) revealed that its US subsidiary - Allfirst Financial Inc. (Allfirst) had incurred a loss of US $750 million (mn) in foreign exchange trading operations.

The losses incurred were the result of fraudulent trading activities of John Rusnak (Rusnak), a trader in foreign currency operations at Allfirst. Rusnak's job was to make arbitrage profits by taking advantage of discrepancies in the price of currencies in the cash, futures and options markets.

During the period 1997 to 2001, Rusnak incurred heavy losses in foreign exchange transactions. However, he was able to successfully conceal these losses by constructing fictitious option trades that offseted those that were genuine.

He manipulated bank records and documents and reported false profits.

Due to the senior management's carelessness, and lack of knowledge and experience in foreign exchange trading, Allfirst finally landed up in a financial mess.

Analysts said that though AIB would be able to bear this loss as it amounted to less than 10% of its equity capital, it could also make the bank more vulnerable to future takeover attempts.

They commented that this scam had once again sent across a strong message that inadequate risk management control systems and improper supervision of traders' activities could lead to massive financial losses with a negative impact on even the most successful companies...

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