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    Nick Leeson was a trader at Barings Bank who was responsible for both trading and accounting, allowing him to conceal his losses for years. In 1995, after the Kobe earthquake caused large losses in his bets on the rising Nikkei 225 index, margin calls exceeded the bank's capital. Leeson's unauthorized speculative trading and lack of risk controls ultimately caused Barings Bank to collapse with total losses over $1 billion. The case demonstrated the dangers of giving a single trader control over both trading and accounting without proper oversight.

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    Nick Leeson was a trader at Barings Bank who was responsible for both trading and accounting, allowing him to conceal his losses for years. In 1995, after the Kobe earthquake caused large losses in his bets on the rising Nikkei 225 index, margin calls exceeded the bank's capital. Leeson's unauthorized speculative trading and lack of risk controls ultimately caused Barings Bank to collapse with total losses over $1 billion. The case demonstrated the dangers of giving a single trader control over both trading and accounting without proper oversight.

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    17 views2 pages

    Barings Bank Case Study

    Uploaded by

    mike
    Nick Leeson was a trader at Barings Bank who was responsible for both trading and accounting, allowing him to conceal his losses for years. In 1995, after the Kobe earthquake caused large losses in his bets on the rising Nikkei 225 index, margin calls exceeded the bank's capital. Leeson's unauthorized speculative trading and lack of risk controls ultimately caused Barings Bank to collapse with total losses over $1 billion. The case demonstrated the dangers of giving a single trader control over both trading and accounting without proper oversight.

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    Case Study – Barings Bank Collapse Case Study – Barings Bank Collapse

    • Baring Futures (Singapore) – BFS


    – traded for clients • Leeson starts proprietary trading
    – settlements intermediary for a number of non- • Nick supposed to engage in switching
    Singaporean financial institutions
    – Nikkei 225 index futures
    – made money on commission
    – 10-yr JGB
    • 1992 Nick Leeson manages back-office accounting • Both traded in SIMEX and OSE
    and settlements
    • Low risk activity
    • 1993 Nick starts trading as well. – Nick actually speculated on Nikkei price
    movements
    • Nick in charge of both accounts and trades!

    Case Study – Barings Bank Collapse Case Study – Barings Bank Collapse

    • Annually, Nick would report profits • Cross-trading


    – Year Reported Actual – As accounts & settlements clerk he:
    – 1993 £8.83 £ -21 • Pooled profits into arbitrage accounts
    – 1994 £ 28.5 £ -185 • Pooled losses into account ‘88888’
    – 1995 £ 18.6 £ -827

    • How did he do this?

    1
    Case Study – Barings Bank Collapse Case Study – Barings Bank Collapse

    What led to his downfall?


    • Kobe earthquake (January 1995)
    • He gambled on Nikkei 225 rising
    – Nikkei dived 1,500 points
    – He went 1,000 Nikkei contracts long
    • What does Leeson do?
    • He also gambled on low volatility
    – He goes further long on Japan futures
    – He held short straddles, also called ‘sell’
    • 61,000 March and June 1995 contracts
    straddles
    – 49%, 24 % of open interest
    • Short 38,000 Nikkei calls
    • 26,000 long 1995 June JGB’s
    • Short 33,000 Nikkei puts
    Profit
    – 88% open interest
    Stock Price
    X

    Case Study – Barings Bank Collapse Case Study – Barings Bank Collapse

    • It was the margin calls that led to Nick’s


    downfall Moral of story
    – Total February margin calls > £ 700 million • Don’t give a trader authority over accounting
    and settlements ~no risk management
    • Notional positions in Feb 1995
    – US$27B in Nikkei 225 and JGB futures • Derivatives trading can be highly risky
    – US$9B in Nikkei and JGB – Particularly
    – US$6.7B in short straddles • Taking futures positions
    • Writing (selling short) options
    • Barings reported capital was only US$615m – Limitless risk exposure

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