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CASE STUDY - BARINGS. 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.

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risks faced by barings bank speculative
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
risks faced by barings pure
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
risks faced by barings pure4
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

critical events
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.
critical events6
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
consolidation
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.
cultures
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
causes of failure
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%)
management controls
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
risk management opportunities
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
risk management threats
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
risk management threats 2
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
slide15
TEXT
  • Managing risk by Alan Waring and Ian Glendon