Baring’s Bank Failure

Barings Bank was one of the oldest British merchant banks. It was based in London and after
Barenberg Bank, it was the oldest in Britain, with a lifespan of 233 years. At one point, Queen
Elizabeth II even had an account with it. Sir Francis baring established the bank in 1762. In its
beginnings, the bank provided financial services in international trade, also in slave trade, which
helped significantly in growing the Barings Bank and giving it its name and prestige. In 1774,
the bank’s reach grew outside Britain, making business in North America, and also by creating
links with merchant banks in Amsterdam, especially the most powerful one, Hope and Co. The
Bank has also helped facilitate the buying of the largest land purchase in history: the Louisiana
Purchase, which made it possible for the US to become twice its size. It has also supported the
US during its war in 1812. Barings made a good decision, not investing in Germany after World
War I, possibly saving itself from the collapsing economy of the country during those times. So
how did this bank, so old, so prestigious, having prospered and seen a lot of important history,
even been a part of it, collapse at the hand of one single man?
In 1995 the bank collapsed after one of its traders, Nick Leeson traded 1.3 billion dollars in
unauthorized and illegal actions, causing the fall of this great bank. Barings was one of the most
stable banks in the world, and in February 26, 1995 it was sold to ING for £1. Even though the
Bank of England tried to save it, the Bank’s inability to pay the cash requirements caused its
inevitable downfall.
Let’s start from the beginning. The bank hired Nick Leeson in 1989. He showed great potential
in trading so he was promoted pretty quickly and given his own position as manager in
Singapore, trading on the Singapore Monetary Exchange(SIMEX). He was also trading Nikkei
225 futures contract in Osaka Securities Exchange. Lesson’s tactic was risky and assertive. He
was making a big profit, achieving as much as 10% of the bank’s profits. Because of this, he was
barely supervised, working mostly as a rogue trader. In July 1992, an employee that was under
Leeson’s supervision had a small loss. To save face, instead of reporting this loss, Leeson hid it
by faking the accounting reports. Wanting to hide his error, he tried to win back the loss by
betting using speculative trading, but instead lost more money. He kept trying to bet more and
more money so he could get back his losses, but instead just had more and more losses. It was
like a never-ending cycle, loosing so much money, he could not hide it anymore. “I wanted to
shout from the rooftops…this is what the situation is, there are massive losses, I want to stop.
But for some reason you’re unable to do it. … I had this catastrophic secret which was burning
up inside me—yet…I simply couldn’t open my mouth and say, ‘I’ve lost millions and millions of
pounds.’” Leeson said. In a last attempt to resolve the situation, he bet on the Nikkei index in
Japan. But at the same time a large earthquake hit the city Kobe in Japan, lowering the value of
the index so bad, the loss was gigantic. Barings collapsed immediately and was sold to ING.
According to Ethics Untrapped: “Judith Rawnsley, who worked for Barings Bank and later wrote a
book about the Leeson case, proffered three explanations for Leeson’s behavior once the losses
had started to pile up: 1) Leeson’s loss aversion stemmed from his fear of failure and
humiliation; 2) his ego and greed were exacerbated by the macho trading environment in which
he operated; 3) he suffered from common distortions in thinking patterns that often result from
high levels of stress, including overconfidence and denial” I believe he didn’t mean to take
things to that high level. It’s like that game of dominoes. In an attempt to hide a small loss, he
managed to bankrupt an entire system. Just like that, if you put dominoes in a row, and you push
the first one, the others will come tumbling down, one by one, until nothing is left standing.
The losses of the bank were about $2.2 billion when a senior settlements clerk from the London
office noticed the inconsistency in Leeson’s account and tried to ask him about it. Leeson made
up a lie about visiting his wife and fled the office. The night of February 23rd he and his wife ran
away to Kuala Lumpur, Malaysia and did not respond to the attempts at contacting him. Soon
enough, the bank pieced together what had happened, and unable to continue its activity it was
“forced into administration” ( https://eresources.nlb.gov.sg/infopedia/articles/SIP_1531_2009-
06-11.html). Leeson and his wife went from Malaysia to Sabah to Bangkok and lastly landed in
Frankfurt, Germany. Here he was captured by German authorities and extradited to Singapore on
November 23, 1995, where he underwent local court and was sentenced to 6 years and a half in
prison. Due to being diagnosed with colon cancer he appealed for early release in 1998, but it
was rejected. However, he only did 4 years and was released early for good behavior on July 3,
1999.
The collapse of the bank has a big impact on the industry. One of the biggest mistakes of the
bank was giving Leeson and many others free reign on both the trading and accounting
operations. Today this does not happen anymore, since companies not only have independent
committees overseeing everything and the computerization and technology makes it harder to
hide what Leeson hid. ACA Compliance Chief Services Officer Carlo di Florio said that since
the failure of not only Barings but also Lehman Brothers and Beat Stearns, it has made banks in
the business remake the way they reward traders. “These big institutions won’t reward the trader
until the trade has proven to be successful and effective and well risk managed, and if there is
something that happens, they can go back and claw back the money. That changes the behavior
of the trader.” said di Florio. The financial crisis also forced new rules, making standardized
derivatives to go through clearing, so they can minimize risk.
The story of the downfall of the bank by one person became so famous, Leeson wrote a book
about it while in prison. The book was then adapted into a film in 1999 called Rouge Trader.
This event “shook the financial world” and made the people on the top rethink their management
ways and accounting processes, tightening their security and giving traders less freedom,
creating overseeing systems so they could prevent something as catastrophic as this ever
happening again.
Sources:

https://ethicsunwrapped.utexas.edu/case-study/collapse-barings-bank

https://en.wikipedia.org/wiki/Barings_Bank#In_popular_culture_and_fiction

https://www.investopedia.com/terms/b/baringsbank.asp

https://eresources.nlb.gov.sg/infopedia/articles/SIP_1531_2009-06-11.html

https://www.cnbc.com/2020/02/26/barings-collapse-25-years-on-what-the-industry-learned-after-one-
man-broke-a-bank.html

https://www.rba.gov.au/publications/bulletin/1995/nov/1.html