Answer to Question #166057 in Management for Manyela

Question

b) Give an analysis of risk management failures and corporate governance that led to the collapse of Barings Bank in 1995. What do you think could have been done differently to avoid the collapse of the bank? (50 Marks)

Answer 1

Give an analysis of risk management failures and corporate governance that led to the collapse of Barings Bank in 1995. What do you think could have been done differently to avoid the collapse of the bank?

The collapse of the Britain’s oldest investment bank was caused by multiple risk management failures like colossal losses incurred by a single rogue trader. The heads lacked integrity and were unethical in their profession. For example, Nick Leeson, the head of derivatives in Singapore gambled more than $1 billion in unhedged, unauthorized speculative trades, an amount which dwarfed the venerable merchant bank’s cash reserves. Leeson’s role was to execute trade generating small profits from buying and selling futures contracts on the Japanese Nikkei 225 in both the Osaka Securities Exchange and the Singapore International Monetary exchange.

Conversely, rather than initiating concurrent trades to capitalize on small differences in pricing between the two markets, he retained the contracts in the hope of creating much larger profits by betting on the rise of the underlying Nikkei index. Through manipulating internal accounting systems, Leeson was able to misrepresent his losses and falsify trading records. This enabled him to keep the bank’s London headquarters, and financial markets, in the dark until a confession letter to Baring’s Chairman Peter Baring on 23^rd February 1995 that fled Singapore and kickstarted an international manhunt.

One of the most glaring regulatory errors the bank made was having the same man at the helm of both the derivatives trading desk and the clearing, settling and accounting operation. This would not be permitted either by regulators or the financial institutions themselves. The financial institution could have a robust governance system, risk management and compliance programs with independent committees and senior executives responsible for its oversight.

Trade surveillance systems with a whole bunch of triggers could be installed to continuously look at what kind of activity trading desk operators engage in, and red flag anything that seemed potentially volatile of internal policies or regulatory requirements. Besides, cybersecurity, privacy, and data security could be the likely target of any related attacks.