This case study consists of the “Report of the Board of Banking Supervision Inquiry into the Circumstances of the Collapse of Barings, 18 July 1995.”

Events

• Massive Losses incurred by Nick Leeson, the General Manager and Head Trader of Barings Financial Services (BFS) by reason of unauthorised and concealed trading activities within BFS.
• The true position was not noticed earlier by reason of a serious failure of controls and managerial confusion within Barings.
• The external auditors, supervisors or regulators of Barings had not detected the true position prior to the collapse.

Risks Incurred

• Operational Risk – A lack of segregation between front and back office. Leeson was permitted throughout to remain in charge of both front office and back office at BFS.
• Operational Risk – The lack of understanding of BFS’s trading activities, the lack of reconciliation to client records of the funding provided by Barings in London to BFS and the lack of verification of the (false) information provided by BFS, the deficiencies and inaccuracies in large exposure reporting to the Bank of England.
• Operational Risk – The system of checks and balances necessary for the proper management and control of a financial institution failed in the case of Barings with regard to BFS in a most serious way, at a number of levels and in more than one location.

Potential Mitigation

• Management teams have a duty to understand fully the businesses they manage.
• Responsibility for each business activity has to be clearly established and communicated.
• Clear segregation of duties is fundamental to any effective control system.
• Relevant internal controls, including independent risk management, have to be established for all business activities.
• Top management and the Audit Committee have to ensure that significant weaknesses, identified to them by internal audit or otherwise, are resolved quickly.

PRM Official Reading

The Official Reading for Barings Bank case for PRM exam can be downloaded from here.

Barings Bank Video

The following documentary titled "25 Million Pounds" is a study of Nick Leeson and the collapse of Barings Bank. Won the Best Science and Nature Documentary in the 1998 San Francisco International Film Festival.