Barings Bank

Model Answer:

Q1.

a. Credit Risk
a. Funds advanced from London Treasury without documentation

b. Market Risk
a. Nick Leeson trading decision to sell option straddles (a short volatility trade)

c. Operational Risk
a. People
i. External auditor questions a claim of funding source leading to the fax ‘from Nick &
Lisa’
ii. Barings Bank board ignoring internal audit report highlighting non-segregation of
duties
iii. Peter Baring in Bank of England meeting, saying one cannot help but make profits in
derivatives
iv. Internal strife between General Manager’s two senior managers
v. Trading activities going beyond the charter to solely carry out arbitrage and execute
client business

b. Processes
i. Non-segregation of duties
ii. Failure to define responsibilities for the General Manager role, other than to ‘set up
the office’
iii. Trading clerk mistake not sanctioned
iv. Barings Bank changes external auditors
v. Dual reporting lines for the General Manager – matrix organization
vi. Barings Bank senior management bonuses tied to front office profits

c. Systems
i. n.a.

d. External Events
i. The Kobe Earthquake
ii. Bank of England leaks news to press on the weekend before a final solution is found
iii. Simex Clearing House unaware that market losses have exceeded Barings Bank
capital
iv. Simex Clearing House does not act to force Barings to reduce Open Interest at over
50%

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Barings Bank
Model Answer:

Q2.

a. Regulatory reports

b. Audited accounts

c. Management accounts

d. Internal risk reports

e. Internal audit reports

f. Transcripts/minutes of bank board meetings

g. List of external auditor enquiries

h. Minutes of regulatory review meetings

i. Minutes of interviews with bank staff

j. List and summary of news broadcasts

k. List and summary of social network mentions

l. Develop an informal network of contacts – at all levels – within the regulated bank

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Barings Bank
Model Answer:

Q3.

a. Document breaches by senior bank staff, even when apparently benign

b. Alert senior bank regulator personally

c. Request further documentation of senior bank staff – a hint to management

d. Request further documentation of bank internal audit – a hint to internal audit

e. Request further documentation of bank board of directors – a strong hint to the board

f. Request further documentation of bank external auditors – an extremely strong hint to auditors

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Barings Bank
Time Line

1989-07 Nick Leeson joins Barings in London as a settlements clerk from Morgan Stanley

1992-04 Nick Leeson seconded to Barings Securities Singapore as Derivatives Operations

Manager. He passes the Institute of Banking and Finance's Futures Trading Test in
June 1992, starts trading in July 1992, opens the 88888 account in July and books
losses to this account by September 1992.
An application for a trading license had previously been rejected by SFA in London
due to an outstanding CCJ.

1992-12-31 Acct 88888 - £2m losses

1993-09-13 Meeting between Brian Quinn, Deputy Governor, Supervision, Bank of England and
Peter Baring, Chairman, Barings Bank: “…not actually terribly difficult to make
money in the securities markets”

1993-12-31 Acct 88888 - £23m losses

1994-01-01 Coopers-Lybrand takes over from Deloitte-Touche as Barings Futures Singapore

auditors

1994-08-01 Barings Bank Internal Audit report warning of non-segregated duties in Singapore

1994-12-31 Acct 88888 - £208m losses

1995-01-17 Kobe earthquake, Nikkei225 drops more than 1000 points on the day, ultimately
bottoms out 3 months later 5000 points down

1995-02-23 Nick Leeson resigns and escapes from Singapore. Irregularities discovered at
Barings Bank, Simex futures and options positions not closed out

1995-02-25 BBC reports Bank of England not successful finding a buyer for Barings

1995-02-26 Barings Bank defaults losing £830m

1995-03-02 Nick Leeson arrested at Frankfurt Airport

1995-03-05 ING bv buys Barings for £1

1995-03-21 Bank of England Deputy Gov. (Supervision) Rupert Pennant-Rae resigns

1995-04-04 Peter Baring, Chairman and Andrew Tucker, Deputy Chairman resign from Barings

1995-11-23 Nick Leeson extradited from Hoechst Prison, Germany to Singapore to face 11
charges

1995-12-02 Nick Leeson pleads guilty to 2 charges and sentenced to 6.5 years prison in
Singapore

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1996-06-08 Coopers-Lybrand and Deloitte-Touche sued for negligence in Singapore by Barings
liquidator for more than S$1bn (£460m) each

1999-07-03 Nick Leeson released 2 years early from Changi Prison, Singapore

2001-10-08 PWC (formerly Coopers-Lybrand) settles with KPMG to pay £65m

2003-06-11 Deloitte-Touche found negligent for its part in the Barings collapse by the High
Court and liable for £1.5m. Firm also fined £250k and the lead-partner £25k
personally.