Barings Bank: Its Collapse, Acquisition, Lessons Learned

What Was Barings Bank?

Barings Banks was a British merchant bank that collapsed in 1995 after one of its traders, 28-year-old Nick Leeson operating in its Singapore office, lost $1.3 billion in unauthorized trades. Barings was one of England's oldest merchant banks and at one point, even Queen Elizabeth II had an account with it.

Understanding Barings Bank

Founded in 1762, Barings was among the largest and most stable banks in the world. However, thanks to unauthorized speculation in futures contracts and other speculative dealings, it ceased operations on February 26, 1995. The direct cause was its inability to meet its cash requirements following those unauthorized trades. Even efforts by the Bank of England to arrange a rescue package could not avert the inevitable collapse.

Before the bank's collapse, it was making money by taking advantage of arbitrage and making investments in foreign economies. One of the greatest decisions Barings made as a bank was to not invest heavily in Germany after World War I, saving them an enormous amount of money while the German economy faltered.

The bank had been engaged in significant geopolitical moves as well, financing the Louisiana Purchase in 1803 and supporting the United States during the War of 1812.

Barings Bank Collapse

Leeson's reputation since then was one of a rogue trader, operating without supervision or oversight. At the time of the loss, he was assigned to an arbitrage trade, buying and selling Nikkei 225 futures contract in both the Osaka Securities Exchange in Japan and the Singapore International Monetary Exchange, in Singapore. However, instead of initiating simultaneous trades to exploit small differences in pricing between the two markets, he held his contracts, hoping to make a larger profit by betting on directional moves of the underlying index.

Making matters worse, Leeson hid his losses with accounting tricks. Had the bank discovered this earlier, it would have taken large but not devastating losses and remained solvent. Unfortunately, the firm was declared insolvent less than a week after Leeson's trading losses were finally discovered. After this episode, Leeson was arrested and sentenced to six and one-half years in a Singapore prison. However, he was released in 1999 after a diagnosis of colon cancer.

Barings Bank Acquisition

The Dutch bank ING Group, purchased Barings Bank in 1995 for the nominal sum of £1.00, assuming all of Barings' liabilities and forming the subsidiary ING Barings. A few years later, in 2001, ING sold the U.S.-based operations to another Dutch bank, ABN Amro, for $275 million. ING's European banking division absorbed the rest of ING Barings.

The Barings name lived for a while in only two divisions, both of which were subsidiaries of other companies. Baring Asset Management (BAM) is now part of MassMutual. BAM's Financial Services Group became part of Northern Trust until taken private in 2016.

Hollywood Movie

In 1996, and while in prison, Nick Leeson released his autobiography entitled, "Rogue Trader: How I Brought Down Barings Bank and Shook the Financial World," in which he detailed his acts leading to the collapse of Barings. The book was later made into a fictionalized film starring Ewan McGregor as Leeson.

Lessons From the Barings Bank Collapse

The collapse of Barings sent a shock through the investment banking and trading industry. Although there was significant overlapping of Leeson's duties and the fraud should have been discovered much earlier, the fact that it happened in the amount that it did, prompted both investigations into banking and new rules being put into effect.

The banking sector learned that there should never be a trader managing their own accounting books. New layers of security also ensured that a trader was not able to adjust their trades after they were placed and that all derivatives trades are placed through a clearinghouse. This adds another record of the trade, now in the hands of a third party.

However, even despite the new regulation and oversight, a rogue trade named Jerome Kerviel racked up losses totaling much more than Leeson's.

Question & Answer

The Bottom Line

Barings Bank used to be one of the world's most powerful financial institutions. However, one single trader bankrupted the institution, and it ceased operating in 1995 as Barings Bank. The lack of oversight for the managerial trader, Nick Leeson, has taught a valuable lesson to banks all over the world—keep a watchful eye on your traders.