A Case Study of Barings Bank

Abstract

With economic globalization, enterprises are faced with huge competition from various aspects, and business risks have increased sharply. How to make enterprises evade risks and achieve stable and rapid development is the core issue of enterprises. Starting from the bankruptcy of The Barings Bank, this paper reflects on the role and significance of effective internal control to avoid risks and improve business efficiency and profitability. With the mirror of the Bank of Bahrain, we have changed and improved the development of the internal control mechanism of today's Enterprises.

Overview

Barings Bank, founded in 1762, manages more than £27 billion of assets worldwide. It was one of the world’s oldest merchant banks, famous as having facilitated the Louisiana Purchase. At that time，Queen Elizabeth, relies on its financial management standards and was its loyal customer.

In 1995, the Bank of Baring has been brilliant. However, because of internal control is not in place, results in the bank declared bankruptcy and losing £827 million. The immediate cause was the head of Barings Futures Singapore (BFS), Nick Leeson not responsible, unauthorized trading in derivative financial products and speculation failed. After the bankruptcy, the Bank of Bahrain was sold to the Dutch bank International Nederland Group (ING) at a symbolic price of £1 and became a member of the group.

Bankruptcy Process

From 1992, Leeson started made unauthorized speculative trades, in the beginning, it made great contributions for Barings Bank which is up to 10% of the bank's profits at the end of the year. At that time, he became to the Barings group’s star, getting unlimited trust from Brings Headquarters bosses. (Monthe, 2007)In 1995, Nick Lesson became the executive manager of the BFS, also the chief trader and liquidation supervisor.

However, he soon lost money due to his operational mistakes and he created an error account, 88888 to hid the losses. He claimed the account was used to correct an error made by inexperienced staff.

Over time, the vicious circle after the use of the error account has caused the company to lose more and more money. In order to recover the loses, in 1995, Lesson believed that the Japanese economy will start to uptrend and the stock market Will rises sharply. He bought some Nikkei index futures contracts and call options. However, on January 16, 1995, the unexpected earthquake of Kobé shattered his strategy, the stock market plummeted. He tried to recoup his losses by taking more risky positions, betting that the Nikkei Stock Exchange would make a rapid recovery but he lost his bet, worsening his losses. The long-established Barings Bank was destroyed by a young man who is only 28 years old. (Monthe, 2007)

The reason for the bankruptcy of Barings Bank is ridiculous and ironic, it has aroused heated debate in the world, and people began to realize the importance of internal control in the complicated and changeable international environment.

Analysis of the reasons the bankruptcy of Bahrain Bank

1.Dereliction of duty of the management of Barings Group.

At the beginning of 1995, the Singapore International Financial Exchange had discovered some anomalies in the BFS' s transactions and made some inquiries to Barings Group. If the management of the Barings Group proper reviews and values the concerns of the Singapore International Financial Exchange, maybe the bankruptcy might not happen. (Brennan, 2015)

Leeson's invest is not a general financial product, but a financial derivative product. The financial derivative product is characterized by it has the ability to make large transactions with a small amount of deposit, and if it is properly, it can obtain high returns. Improper use will result in heavy losses.

The reason for the Barings Bank incident is not the complexity of the derivative business, but it must have strict authorization and institutional constraints. (Reserve Bank of Australia Bulletin, 1995) Leeson participation in financial derivative product speculation is carried out in an unauthorized and unsupervised state.

2.Loose internal control.

Some financial regulatory agencies and international financial organizations believed that in institutions internal management of finances is the core issue of risk control. From the process of bankruptcy in Barings Bank, it is very clear that their internal control is very loose. (Monthe, 2007)According to the report, before the bankruptcy, the Barings Bank's investment securities had exposed great risks, but it did not cause the senior management to be vigilant.

In fact, the head of Barings Group is completely unaware that what Leeson did is impossible. Leeson said in prison: He thinks it's incredible for nobody to stop him. Group people who are in London should know that his numbers are fake, and those people should know that it is wrong for him to always ask London headquarters for cash, but they still pay the money.” It can be said that the bankruptcy of the Barings Bank is not caused by one person, but by an organizational structure that is full of loopholes and internal management is out of control.

3. The duties of the business transaction department and the administrative financial management department are unclear.

At the BFS, Nick Leeson himself is the system. He is in charge of transactions and settlements, which gives Leeson many opportunities to make his own decisions. This is a fatal factor why the Barings Bank was bankruptcy. Let Leeson directly engage in transactions and as the person in charge of the transaction. These two functions were not separated. He is responsible for all of the work both front-office and back-office.

The company's headquarters was clear about