Barings Bank Collapse 5m2m3j

Barings Bank Collapse

ANURAG CHATERJEE-6 KHILESH MAJITHIA-30 PUSHKAL MITRA-31 SHRIKANT ZANWAR-56

Introduction Founded in 1762 by Sir Francis Baring The oldest mercantile bank in London until its

collapse in 1995 Nick Leeson in 1990’s lost $1.4 billion speculating –

primarily on futures contracts.

The Collapse Barings was brought to its knees by Nick Leeson in a

Singapore office He was employed by Barings to profit from low risk

arbitrage opportunities between derivatives contracts on the SIMEX and Japan’s Osaka Exchange Leeson left a $1.4 billion hole in Barings’ balance

sheet due to his unauthorized derivatives speculation,causing the 233-year-old bank’s demise

Leeson’s Activities Was supposed to be arbitraging Instead of hedging, gambled on the future direction of the Japanese markets Had long futures positions on OSE Was not short on SIMEX Kobe earthquake of January 17, 1995 led to the crash of Nikkei and his investments Used no. 88888 for unauthorized speculation to cover losses Ended with huge losses(GBP 827 MM) The activities of Nick Leeson led to the fall of Barings Leeson after being arrested

for his activities

Management’s failure to control Leeson Effectively let Leeson settle his own trades by putting

him in charge of both the dealing desk and the back office He had the final say on     

payments, ingoing and outgoing confirmations and contracts reconciliation statements ing entries position reports Leeson was considered perfectly placed to relay false information back to London

Recommendations A number of important lessons for senior bank

managers including the importance of internal controls & audit processes We think the following should be avoided by banks    

Lack of internal checks and balances Lack of understanding of the business Poor supervision of employees Lack of a clear reporting line

Recommendations & Conclusion Management wanted to enter a new market but Bank

was not prepared for the activity on a derivate market Stronger competition search additional profits gave so much control only to the one person Derivates in recent years a powerful tool in the hands of traders Strict regulations are needed in order to avoid the next Barings