Daiwa Case Study
An ERisk.com Case Study
Daiwa Bank
O
n July 13, 1995, Daiwa Bank’s Toshihide Iguchi confessed, in a 30-page letter to the president of his bank in Japan, that he had lost around $1.1 billion while dealing in US Treasury bonds. The executive vice president of Daiwa’s New York branch had traded away the bank’s money over 11 years – an extraordinarily long period for such a fraud to run – while using his position as head of the branch’s securities custody department to cover up the loss by selling off securities owned by Daiwa and its customers. The trading loss was one of the largest of its kind in history. But it was the cover-ups by Iguchi over a period of years, and then by senior managers at Daiwa between July 13 and September 18 1995, when the bank eventually reported the loss to the US Federal Reserve Board, that did the real damage. These led to criminal indictments against the bank and its officers and, eventually, to one of Japan’s largest commercial banks being kicked out of the US markets. Unlike Barings Bank, which was swallowed up by similar failures in risk management earlier in the same year, Daiwa’s $200 billion of assets and $8 billion of reserves meant it was big enough to survive the hit. But punishment by US regulators and public humiliation dealt a massive blow to Daiwa’s reputation. The scandal set in train a longterm change in strategy as Daiwa reigned in its international ambitions and concentrated on its core businesses in Japan and Southeast Asia. There were also long-term per-
Lessons learned
G Risk-taking functions must be segregated from record-keeping and risk assessment functions. It's a lesson that's now been largely learned in terms of segregating traders from the back office - but it has much wider applications; G Structural problems in risk management don't put themselves right. Daiwa had many warning signals about the way risk management was organised at the New York branch, but chose to believe that local management
Daiwa Bank
O
n July 13, 1995, Daiwa Bank’s Toshihide Iguchi confessed, in a 30-page letter to the president of his bank in Japan, that he had lost around $1.1 billion while dealing in US Treasury bonds. The executive vice president of Daiwa’s New York branch had traded away the bank’s money over 11 years – an extraordinarily long period for such a fraud to run – while using his position as head of the branch’s securities custody department to cover up the loss by selling off securities owned by Daiwa and its customers. The trading loss was one of the largest of its kind in history. But it was the cover-ups by Iguchi over a period of years, and then by senior managers at Daiwa between July 13 and September 18 1995, when the bank eventually reported the loss to the US Federal Reserve Board, that did the real damage. These led to criminal indictments against the bank and its officers and, eventually, to one of Japan’s largest commercial banks being kicked out of the US markets. Unlike Barings Bank, which was swallowed up by similar failures in risk management earlier in the same year, Daiwa’s $200 billion of assets and $8 billion of reserves meant it was big enough to survive the hit. But punishment by US regulators and public humiliation dealt a massive blow to Daiwa’s reputation. The scandal set in train a longterm change in strategy as Daiwa reigned in its international ambitions and concentrated on its core businesses in Japan and Southeast Asia. There were also long-term per-
Lessons learned
G Risk-taking functions must be segregated from record-keeping and risk assessment functions. It's a lesson that's now been largely learned in terms of segregating traders from the back office - but it has much wider applications; G Structural problems in risk management don't put themselves right. Daiwa had many warning signals about the way risk management was organised at the New York branch, but chose to believe that local management