BARINGS BANK

BARINGS BANK

Barings Bank was a very old traditional British bank. In the 1980s and early 1990s the banking industry was going through a period of change as a result of deregulation. British banks had previously been very tightly controlled but gradually the British government allowed British banks to enter into new markets.

In the early 1990s, Barings expanded into “new” products such as options and futures trading. Nick Leeson, a British banker, was given the new Singapore branch to manage.

In trading operations, the bank has a front office where the trades are organised and a back office, where the trades are recorded and accounted for. There should always be segregation of duties between those trading and those accounting for the trades. This should stop fraudulent traders doing one thing and recording another.

However, at Barings, Leeson had total control of both the front office and the back office. He controlled how his trades were being recorded.

When members of Leeson’s team made a few mistakes, Leeson did not want his staff to be blamed so he hid their mistakes in an account (88888). He could do this because of the lack of segregation of duties which allowed him to trade and then to record those trades. Additionally, there was a lack of understanding of the trades being entered into both by the UK directors and the auditors.

Leeson used the bank’s money to gamble on the markets, making speculative trades. The 88888 account was used to hide any losses. By the end of 1994, losses in that account amounted to more than £200 million.

The bank allowed him more money to continue trading, although it was unlikely they knew what he was doing.

The fraud reached a climax in January 1995 when he gambled that the Japanese stock exchange, the Nikkei, would not move significantly overnight. Unfortunately the Kobe earthquake hit Japan and the stock exchange fell significantly. Leeson aimed to recoup losses by betting that the stock exchange would recover quickly. It didn’t and Leeson knew that millions were going to be lost and he fled. By the time the bank understood the position he had created it was too late and he had created a massive loss exceeding £800m. This was big enough to wipe out Barings bank. The bank was eventually sold for £1.

The bank was wiped out by one trader because the directors didn’t understand the business they were in or what Leeson was doing. There was a serious lack of internal control over the operations. Again, there was too much control in one person’s hands and to some extent the auditors failed to properly understand the situation at the bank.