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British firm Barings Bank was one of the most venerable and respected banks in the world until its unexpected collapse in 1995 thanks to the actions of a single rogue trader, Nick Leeson. Within a year, the firm went from being a financially stable institution with substantial holdings to being worth a single pound sterling, the price paid for it by Dutch bank ING after the collapse. The fate of Barings Bank is an infamous tale in the financial industry with some sobering lessons for financial regulators and governments concerned with the activities of financial companies.
This bank was established in 1762. Barings Bank successfully weathered a number of financial crises in Britain and abroad, provided funding for wars, and even served the British royal family. Like many financial institutions, Barings Bank was involved in a variety of investment activities all over the world, including speculation in a number of markets, overseen by experienced financial officers in various overseas branches.
Nick Leeson, working in the bank's Singapore office, took advantage of unusual circumstances to conduct substantial numbers of unauthorized trades. He found himself in a unique position of authority that allowed him to take risky speculative positions without being detected. Unfortunately for Leeson, he speculated unwisely, and Barings Bank began to take losses. Initially, these losses could be concealed, but eventually the truth surfaced. Leeson's unauthorized speculative trades successfully gutted Barings Bank, generating an outcry and considerable concern in the financial industry.
The lessons learned from the Barings Bank failure continue to be applied in the financial industry today. Banks take steps to reduce the development of rogue trading, limit the actions of rogue traders, and identify unauthorized trades quickly. These steps include creating clear chains of command with checks and balances to eliminate the possibility of allowing a bank officer to develop what amounted to a private fiefdom in Leeson's case.
The failure of Barings Bank is of historical interest for a number of reasons, including the sheer size of the failure, over one billion United States Dollars at the time. The bank's age and reputation also make the failure remarkable, as did the abrupt nature of the collapse. Investors and other members of the financial community had minimal warning that the bank was about to fail and the bank itself was unaware of Leeson's trading activities until they had already brought the bank to its knees and made it impossible to recover.
@BoniJ -I remember reading about this in the newspaper. After the collapse of the Barings Bank, other large bank failures have happened. Of course, rogue trading isn't the only cause of bank failure, but it still happens.
Changes in regulations and government policies have helped to make rogue trades not so easy. Also, banks have started setting up a hierarchy so employees in financial institutions have to have their decisions approved by other employees.
Yet, there's always going to be creative people who are masters at getting around rules and regulations.
It's hard to believe that such an old, established bank as Barings Bank could actually fall on its face and collapse mostly because of the actions of one of its financial officers.
It's amazing how one person could invest and trade such large amounts of money without any kind of approval or knowledge from other bank employees.
How could these people, like Nick Leeson, take such a big risk to show himself or others, what a great investor he was. He must have lost any loyalty he had to his employer, the Barings Bank.