Effects of Barings Collapse on the Banking Industry
Effects of Barings Collapse on the Banking Industry
The uncovered loss of GBP 830 million led to a liquidity crisis for the Barings Bank , the collapse of the bank, which shocked all people, not only the financial world. Over the weekend of February 25 and 26, the management of Barings tried to arrange for a bailout by the Bank of England. Several investment banks gathered to discuss the possibility of raising enough private money to recapitalize Barings before the Tokyo market reopened on Monday morning. This attempt failed because of the size of Barings’s positions in Japenese derivatives contracts, many of them still open and liable to incur still bigger losses. None of the banks wanted to take on these contracts without a large fee or a guarantee from the Bank of England that it would cover these losses. The Bank of England decided that it was not prepared to put the British taxpayers’ money at risk.
On March 3, the Dutch financial group ING offered to purchase the majority of its assets and liabilities for one single pound sterling. As there were no other options available, Barings’ directors accepted the offer of ING. This action allowed for the protection of the bank’s depositors and creditors. However, shareholders suffered the majority of the loss.
Immediately following the collapse, for instance, there was no sense of crisis in Singapore even though the ill-fated bets had been made there. SIMEX, which traded the futures and options that made up Leeson’s positions, limited the effects of the crisis by taking over Barings’s contracts and managing their liquidation, thereby keeping losses at a minimum. Other effects of the collapse such as the damage done to London’s reputation for safe financial dealing and personal losses incurred by a number of Barings’s investors, is considered as a price paid for taking part in risky financial games. Moreover, February 26, 1995 was not the first time when Barings had ’gone bust’. The first ’Barings Crisis’
The uncovered loss of GBP 830 million led to a liquidity crisis for the Barings Bank , the collapse of the bank, which shocked all people, not only the financial world. Over the weekend of February 25 and 26, the management of Barings tried to arrange for a bailout by the Bank of England. Several investment banks gathered to discuss the possibility of raising enough private money to recapitalize Barings before the Tokyo market reopened on Monday morning. This attempt failed because of the size of Barings’s positions in Japenese derivatives contracts, many of them still open and liable to incur still bigger losses. None of the banks wanted to take on these contracts without a large fee or a guarantee from the Bank of England that it would cover these losses. The Bank of England decided that it was not prepared to put the British taxpayers’ money at risk.
On March 3, the Dutch financial group ING offered to purchase the majority of its assets and liabilities for one single pound sterling. As there were no other options available, Barings’ directors accepted the offer of ING. This action allowed for the protection of the bank’s depositors and creditors. However, shareholders suffered the majority of the loss.
Immediately following the collapse, for instance, there was no sense of crisis in Singapore even though the ill-fated bets had been made there. SIMEX, which traded the futures and options that made up Leeson’s positions, limited the effects of the crisis by taking over Barings’s contracts and managing their liquidation, thereby keeping losses at a minimum. Other effects of the collapse such as the damage done to London’s reputation for safe financial dealing and personal losses incurred by a number of Barings’s investors, is considered as a price paid for taking part in risky financial games. Moreover, February 26, 1995 was not the first time when Barings had ’gone bust’. The first ’Barings Crisis’
References: ▪ Rosaceous Study: The Main Reason for Recent Banking Crises: http://vivian.seo-blog.org/ ▪ Promoting Confidence and Stability in Financial Markets: Capitalizing on the Downfall of Barings: https://www.law.duke.edu/journals/djcil/downloads/djcil7p651.pdf#search= 'fall%20of%20British%20pound%20%20Barings ' ▪ Risky Business: Nick Leeson, Global Derivatives Trading, and the Fall of Barings Bank: http://highered.mcgraw-hill.com/sites/dl/free/0072873957/121268/Hill3e_369_374.pdf