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.

Key Takeaways

  • Barings Bank was a UK-based merchant banking firm that failed after a trader named Nick Leeson engaged in a series of unauthorized and risky trades that went sour in 1995.
  • Barings, having lost over one billion dollars (more than twice its available capital) went bankrupt.
  • The bank's assets were subsequently acquired by the Dutch ING Groep, forming ING Barings. This subsidiary was later sold to ABN Amro in 2001.
  • Following the trading debacle, Leeson wrote his aptly titled Rogue Trader while serving time in a Singapore prison.
  • The Barings Bank crisis would have been avoided if the bank had abided by its own risk management procedures and not allowed a trader to also have access to their own trade logs and accounting paperwork.

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.

Diana, Princess of Wales, was the great-granddaughter of Margaret Baring.

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

What Were the Risk Management Failures at Barings Bank?

Barings Bank failed to monitor its traders close enough. They allowed a rogue trader not only to place trades that directly violated their trading rules, but the lack of a third-party supervisor checking the trading logs let Leeson take advantage of the system for years.

What Could Have Been Done to Prevent the Barings Bank Collapse?

Preventing the collapse of Barings Bank comes down to oversight. If there were one or two astute managers monitoring the trades of their trading departments, Leeson probably would have never taken the chance. His ability to place the speculative trades was based on the ease in which he could hide the trades and, in the end, the enormous losses.

What Was the Baring Crisis of 1890?

The Baring Crisis of 1890 was a minor and acute recession. The bank was facing bankruptcy after making substantial investments based on the prospering nation of Argentina. However, due to inflation and a bad harvest in 1889, a coup ensued in 1890. Barings tried to cover their losses by borrowing money from other banks but they ended up overextending themselves. The Bank of England along with other banks essentially bailed Barings out in order to avoid a more systemic financial crisis.

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.

Article Sources
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  1. Digital Library. "The Financial History of the War of 1812."

  2. Rutgers University and NBER. "How to Prevent a Banking Panic."

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