Barings Bank Disaster

Topics: Barings Bank, Futures contract, Derivative Pages: 15 (5353 words) Published: October 31, 2009
The collapse of Barings Bank was one of the biggest financial failures in modern history. The events that transpired changed the way risk management and proper corporate structure would be viewed by the world. This case study will chronicle the events that took place, identify the failures, and recommend how these events could have been avoided. To chronicle the events, books and articles of the event were read to understand how Nick Leeson’s activities caused the fall of Barings Bank. Failures such as risk management were identified throughout the events so that final recommendations like regular monitoring could be made to prevent these disasters from happening again. With this methodical retracing of events our considerations can make a vulnerable company identify the risks and help to plug the holes before a catastrophic outlying event exposes them.

2.About the Bank
Barings Bank had a humble origin compared to the prestige and honor it carried throughout most of its life. The Barings’ family originated from Holland then moved to Bremen in northern Germany and finally migrated to England in 1711. The patriarch of the family, Johann Baring, settled in Exeter where he married a local girl and established a modest business as a wool broker. He raised his family in the quiet countryside but his sons were dissatisfied with this life and wanted to move into the big city. When they were old enough they moved to London where, “Francis Baring expanded the family’s merchant businesses and opened the independent and privately controlled bank with his brother John and son-in-law Charles Wall” (Hunt and Heinrich 1996, pg 7). Barings Bank was initially used to finance the family’s wool trading business, but then expanded to include shipping and all aspects of international trade. As Britain prospered, so did the bank and Sir Francis Baring. “Sir Francis eventually became a director and chairman of the East India Company, was elected to Parliament, and was ultimately created a Baronet under William Pitt in 1793” (Hunt and Heinrich 1996, pg 7). The Barings began as a family of wool merchants and began to entrench themselves in the higher echelon of Britain’s society. Barings rise coincided with the rise of Britain in the world’s ranks. The bank profited from the ascension of the British expansionism and colonialism. Barings Bank filled Britain’s war chest to fight the French emperor Napoleon Bonaparte, and then continued to profit by arranging loans for reparations for the restoration of the Bourbon monarchy after Napoleon was defeated at Waterloo (Hunt and Heinrich 1996, pg 7). The bank continued to extend help and became agents and advisers to the young United States, Russia, China, and Japan. These turned out to be extremely profitable ventures for Barings and gave them high returns for taking on the risk of dealing with these developing countries. The Baring family was even involved in negotiating the Louisiana Purchase. With all those profitable deals under their belt the Baring family and their bank had entrenched and rose in both wealth and social status. With their growing wealth and status Barings Bank had become one of the most trusted and powerful banks in the world. Although the Baring family eventually lost outright ownership of the bank in 1890, they stayed involved with the bank and continue to empower themselves and the bank all the way through until its fall in 1995. This power was aided by the Bank of England (BoE), which had essentially become the British government agency influencing interest and exchange rates and regulating the country’s banks. A very trusting and friendly relationship developed between the two banks that inevitably caused the oversight of many of the rules and regulations that Barings Bank was breaking. The trust of the Bank of England towards Barings and the directors’ inability to understand the complex events happening in a satellite office in Singapore caused...

References: Hunt, Luke, and Karen Heinrich (1996). Barings Lost: Nick Leeson and the Collapse of Barings Plc. Asia: Reed Academic Publishing.
Rawnsley, Judith H. (1995). Total Risk: Nick Leeson and the Fall of Barings Bank. New York: Harper Business.
Zhang, Peter G. (1995). Barings Bankruptcy and Financial Derivatives. Singapore: World Scientific Publishing Co.
Fay, Stephen (1997). Gerstein, Marc S. (2008). The Collapse of Barings. New York: W.W. Norton
Case Study by Lillian Chew. Not Just One Man – Barings. Website of International Financial Risk Institute (IFRI).
Report of the board of banking supervision inquiry into circumstances of the collapse of Barings 18 July 1995 -
McNee, A. 2004. Barings Case Study. February, 2004.
Lim, Michael Choo San Barings Futures (Singapore) Pte Ltd : investigation pursuant to section 231 of the Companies Act (Chapter 50) : the report of the Inspectors appointed by the Minister for Finance / Michael Lim Choo San, Nicky Tan Ng Kuang. Singapore: Singapore Ministry of Finance, 1995. - xi, 183p.
McEachern, Cristina (2007). Exclusive Interview with Nick Leeson: An Inside Look at Rogue Trading. Advanced Trading (March 07, 2008).
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