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 Barings 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
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

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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 managements
  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