Finance

The Collapse of Barings Bank

The Collapse of Barings Bank

Britain’s oldest investment bank which listed Queen Elizabeth II among its clients, Barings Bank was a British merchant bank that fell/ became insolvent in 1995 after one of its dealers, 28-year-old Nick Leeson working in its Singapore office, lost $1.3 billion in unapproved trading.

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Established in 1762, Barings was among the biggest and most stable banks on the planet. Nonetheless, because of unapproved speculation in the futures contracts and other dealings, it stopped its operations on February 26, 1995. The reason being its powerlessness to meet its money prerequisites following those unapproved trades. Indeed, even the efforts of the Bank of England to mastermind a rescue package couldn’t turn away the inevitable collapse.

How it all started?

The collapse of Barings Bank was caused by huge misfortunes incurred by a single rogue trader. Nick Leeson, the bank’s then 28-year-old head of its derivatives in Singapore, bet more than $1 billion in unhedged, unapproved speculative trades, a sum which dwarfed the bank’s money reserves.

Leeson’s task in Singapore was to execute “arbitrage” trades, creating small profits from purchasing and selling futures contracts on the Japanese Nikkei 225 in both the Osaka securities exchange and the Singapore International Monetary Exchange.

In any case, instead of starting concurrent trades to benefit from small differences in evaluating between the two markets, he held the agreements in desire for making larger profits by betting on the ascent of the underlying Nikkei index.

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Losses in Singapore:

In July 1992, another bank representative working under Leeson endures a little misfortune. Already an accounting expert had made account 88888 for Leeson, which was a sort of an “error account”. This was at first made for inexperienced traders, who could report their misfortunes from time to time.

Leeson didn’t have the desire to seem clumsy to the administration, so he hid the losses in his error account. In the meantime, he proceeded with his attempts to turn losses around through aggressive futures trading, which led to greater misfortunes. Strangely around this time, he passed the SIMEX trading test, which provided him to trade on the exchange. Here, the bank fails to specify a significant insight about him; he had recently neglected to secure the City of London trading license because of a province legal dispute against him. It would ultimately prove fatal for the bank. By the end of December 1994, losses amounted to $373.9 million.

Nick Leeson

How did the Japan earthquake affect?

In January 1995, Nick Leeson was addressed by the audit authorities with respect to the missing pieces in his bookkeeping trail. He concocted stories regarding paper traders brokered by certain customers and brought proof for that. That was the time he got anxious and attempted to turn his losses around. Tragically Japan was hit by a gigantic earthquake in Kobe, which sent the Nikkei index on a dangerous descent. The Kobe earthquake sent the Asian financial markets—–and with them Leeson’s holdings——- into a tailspin. The market didn’t recuperate according to his desires. And he chose to escape Kuala Lumpur.

The whole of misfortunes in the error account remained at around $1.3 billion. The amount was double the valuation of the Bank’s trading capital. A frantic bailout attempt by the Bank of England was also insufficient.

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Aftermath:

On March 6, 1995, the 233-year-old, after the collapse of barings bank, it was officially procured by Dutch Investment Group, ING, for a small £1, to shape the auxiliary, ING Barings. This was later offered to ABN Amro in 2001. Around 1,200 individuals lost their job in Singapore, after the breakdown. The collapse alone cost £100 million. Simultaneously Leeson was captured in Frankfurt, then extradited to Singapore. He confessed to 2 counts – misleading the bank examiners with forged reports and deceiving to SIMEX trading test. He was condemned to six and a half years in jail in Singapore, which he served just 4 years when he was diagnosed with colon cancer. While in jail he published a book called “Rogue Trader”. Today he is an eminent figure in the financial industry. The Barings Bank fiasco is one of the top instances of the requirement for effective inside controls and risk management in financial institutions.

Author – Priyanshu Ahuja

About the author – I’m a first-year student from City Premier College, Nagpur, pursuing BBA. My interest includes financial markets and the investment domain.

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