CASE STUDY - BARINGS

1. CASE STUDY - BARINGS

2. RISKS FACED BY BARINGS BANK - SPECULATIVE • Financial • Derivatives (Options, futures, etc) • Equity dealing • Market risks (core business) • Monitoring (Capital allocation) • Closing positions • Positions adequately hedged • Trading limits • Allocation of funding

3. RISKS FACED BY BARINGS - PURE • Human resource risks • Selection and recruitment • Competencies and training • Promotion and Responsibility • Supervision and responsibility • Reward structure • Performance management • Human failings – eg fraud • Stress (e.g. from work pressure) • System design and operation

4. RISKS FACED BY BARINGS - PURE • Other generic risks • System collapse • Computer system failures • Terrorist attack • Natural disasters • Other business interruptions • Security failures Waring & Glendon, 1998, p.222

5. CRITICAL EVENTS • Purchase of team of expert dealers in far eastern stock. This termed Baring’s securities and in 1989 earned 50% of Barings profits. • Everyone in Barings securities received large bonuses. This tore company apart culturally. • By 1992 Barings Securities reporting a loss. They had too many fingers in too many pies.

6. CRITICAL EVENTS • Disagreement about type of business Barings were in began in 1990s leading to infighting. • Leeson join in 1989 and became qualified to trade and operational manager in 1992. • In 1993 exposure to risk was nearly 45% (Limit was 10%). This exceeded event the level for prosecution 25%. • Informal concessions had been allowed by regulators

7. CONSOLIDATION • Occurred in 1993 • Allowed larger loans and led to carrying excessive risk as described earlier. • Consolidation left bankers running a system of far east security they did not understand. • Leeson had opened an account called 88888 in which he hid losses from trading and the new Barings management did not understand how this worked. • The outstanding balances on 88888 grew enormously and nobody spotted it.

8. Baring bros Bankers Long term view Naturally conservative Traditional controls Passive Barings securities Brokers Short term view Gung-ho Opposed to traditional controls Active CULTURES

9. LESSONS LEARNT FROM BARINGS BANK

10. CAUSES OF FAILURE • Leeson had opened a false account which he hid all his losses. • Barings securities were allowed to proceed with very little supervision. • Poor management and regulatory controls • Consolidation of Barings Bank with Barings securities in 1993 led to bankers running something the knew nothing about. • Carrying risk equal to nearly 45% of capital. (limit 10%, prosecuting limit 25%)

11. MANAGEMENT CONTROLS • Inquiry following the collapse of Barings Bank • Management understanding their business • Establishing clear duties and responsibilities • Particular emphasis on top management’s responsibilities • Independent risk management and other internal controls • Rapid resolution of significant weaknesses identified

12. RISK MANAGEMENT – OPPORTUNITIES • Opportunity to integrate all aspects of management within a broader risk management function • Opportunity to involve staff at all levels in the risk management function and responsibilities

13. RISK MANAGEMENT – THREATS • Danger of viewing risk management as being solely or primarily the role of specialists rather than a line management responsibility • Absence of policy on risk or a policy which is not formalized or communicated to employees • Inadequate procedures for management of dealing and dealing limits

14. RISK MANAGEMENT – THREATS 2 • Lack of internal controls including segregation of duties • Lack of reporting systems to identify risks and exposure each day • Computer systems incapable of providing adequate reports and calculating exposure for all product trades • Lack of adequate involvement by directors

15. TEXT • Managing risk by Alan Waring and Ian Glendon