Risk Financing and Treasury Management Report - Barings Bank Case

This report provides a comprehensive analysis of the Barings Bank collapse, examining the events leading to its failure, the risks faced, and the risk management techniques employed. It details the unauthorized trading by Nick Leeson, the falsification of records, and the inadequate internal controls that contributed to the bank's downfall. The report explores what went wrong, suggesting alternative risk management techniques and evaluating the performance of the existing strategies. It also highlights the lessons learned from the experience, emphasizing the importance of internal control, qualified management, and effective supervision. Furthermore, the report provides recommendations for improved risk management practices, including enhanced communication between regulators, the use of internal audits, and the implementation of robust risk assessment models. The analysis underscores the significance of proper oversight, the dangers of unchecked trading activities, and the need for continuous improvement in risk management within financial institutions.

Running head: RISK FINANCING AND TREASURY MANAGEMENT
Risk Financing and Treasury Management
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Table of Contents
(i) Description of the facts, including background.....................................................................2
(ii) Explanation of the risk that each was subject to and detail RM techniques used................4
(iii) Explanation of what went wrong in detail;.........................................................................5
(iv) Suggestions regarding alternative RM techniques that could have been used;...................5
(v) Evaluation of the RM performance;.....................................................................................6
(vi) Lessons learned from the experience.................................................................................6
References..................................................................................................................................8

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(i) Description of the facts, including background
Sir Francis established the Barings Bank during the year 1762. The primary functions of the
Barings Bank include banking, security brokering, management of asset and many others.
Impact analysis reflects that there are six different powers particularly in Europe that includes
England, Prussia, Austria, Russia, France as well as Baring Brothers (Bessis, 2015). The bank
collapsed during February 1995 as a consequence of actions of one of the traders of the
company names Nick Lesson who necessarily lost around $1.4 billion by way of investing in
particularly Singapore International Monetary Exchange (abbreviated as SIMEX) with
chiefly derivative securities. In essence, this was the second time the bank encountered
bankruptcy. Subsequent to the period of collapse, Barings Bank was purchased by ING that is
a Dutch Bank as well as insurance corporation.
Background Information on Barings Bank

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(ii) Explanation of the risk that each was subject to and detail RM techniques used
The risks encountered by the Barings Bank were mainly due to unauthorised trades
undertaken in Singapore, falsification of records, sold straddles, doubling system, use of
88888 account for covering up margin calls and margin call stories.
The collapse of the Barings Bank recognized three basic limitations in a bid to establish a
revised framework:
-During the late 1993, Barings Bank had a capital ratio that was over and above Basle
Agreement that is 8%. During the period January 1995, it was considered a safe as well as
secured bank. In fact, the Barings Bank discovered itself in receivership that was only two
months after. This could not raise serious doubt regarding adequacy of particularly the
regulatory system for diverse capital necessities (Lee & Zhong, 2015).
- The collapse reflected that internal controls at the bank were entirely inadequate to uphold
actions of the traders
- There are substantiation regarding the fact that regulators in diverse nations failed to
communicate with one another to a certain degree to lessen information asymmetry that
essentially globalization has generated.
Risk Management Techniques that were used:
- Barings Bank had a Board of Banking Supervision for review and analysis of risk within
operations. However, there was inadequate separation between both the front as well as back
offices. The trader Leeson effectually controlled both sides of trading. In that position, the
trader succeeded to undertake unauthorised trading and consequently manipulate transactions,

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conceal the deals and maintain secret accounts that were utilized to park losses stemming
from various unauthorised transactions (Hopkin, 2017).
- Management of Barings Bank used a matrix based system of reporting
-Business concerns utilize technique of hedging for the purpose of alleviation of risks.
Business concerns can avert unpredictable losses and remain competitive in the business
environment by means of hedging as a part of the risk stratagem. This is necessarily an
investment arrangement that can equalize potential losses otherwise gains that might be
incurred by companion investment.
- Var Model is a specific statistical technique that can be particularly utilized to enumerate
and at the same time quantify financial risk level within a specific corporation or else
investment portfolio over a particular frame of time.
(iii) Explanation of what went wrong in detail;
Nick Leeson, a rogue trader at Barings Bank carried out unauthorised trades undertaken in
Singapore. The things that went wrong include falsification of records, manipulation of
documents and use of 88888 account for covering up margin calls, margin call stories sold
straddles, doubling system (Fabozzi, 2015). Due to this the gap between reported earnings
and the actual losses widened. Arbitrage began during the year 1993. By the end of the year
1993, reported earnings were £ 8.3 million actual losses were recorded to be £ 21 million.
Again, by the end of the year 1994, reported earnings were £28.8 million whole actual losses
were £185 million.
(iv) Suggestions regarding alternative RM techniques that could have been used;
Recommendations include the following:

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- Liaison along with diverse other regulators along with supervisors need to be inspired as
well as enhanced
-Higher usage of information could have acquired internal audits of the bank
- Bank of England’s decision to institute traded markets team to assess risk models of banks
was also commended. The entire board recommended that an assessment need to be
undertaken in the light of Barings Bank (Chance & Brooks, 2015). Wider issue of extension
of use of particularly on-site mechanisms together with lines taken on by US supervisors, the
board became less passionate.
-The board of the firm concluded that there was no foundation, stemming out of Barings
Bank to recommend wholesale alterations
(v) Evaluation of the RM performance;
Competent Management
Analysis of case study on Barings Bank reflects that senior management was not apposite in
the field of derivatives. A fitting qualified management team would have been able to
recognize the risks related to high profit acquirement and assisted prevention of looming
failure (Lam, 2014).
Risk Management and inadequate internal checks as well as balance
By maintaining a check as well as balance on activities of employees, the company Barings
Bank could have averted or mitigated different circumstances that directed to the collapse.
inadequate check as well as control had inspired Leeson to undertake higher risks, cover up
the losses and at the same time report profits (Lam, 2014).
Supervision System

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There was an issue related to system of supervision. Appropriate supervision of workforces
along with senior management could have permitted appropriate record of fraudulent actions
of then firm
(vi) Lessons learned from the experience
The lessons learned from this study are as mentioned below:
Inadequate internal control is an important lesson learned from the experience of Barings
Bank. In itself, analysis of operation reveals that there was ineffective as well as ineffective
system of control (Fabozzi, 2015). Also, no evaluation on diverse unrealistic facts as well as
figures was undertaken. In addition to this, there was inadequate knowledge among different
senior managers of the company Barings Bank. Critical evaluation of the case under
consideration also replicates the fact that there were several warning signs that were entirely
ignored by the management of the firm (Fabozzi, 2015). Over and above the warning signs,
recommendations presented by auditors, signals as well as indication of particularly SIMEX
were also entirely ignored that led to the mishap. Thorough analysis of operations of the case
of Barings Bank also helps in identifying the fact that inquiries from particularly Bank of
England along with Bank for International Settlement were disregarded. The given
experience also helped in comprehending the importance of Enhancement of rules for
customer protection, significance of Upgrading clearing system along with processes to
integrate real time settlement and important risk management schemes. Also, individuals also
could comprehend the importance of Promotion of scheme of information sharing among
different exchanges (Hopkin, 2017).
Particularly, risk financing and experience of the case on Barings Bank helped in
understanding employment of a requirement that clearing corporations register different
senior officers with particularly SIMEX, designing comprehensive internal risk evaluation

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processes to recognize different high risk accounts as well as members that are in need of
close monitoring (Hopkin, 2017). Barings business case helps in acquiring deep insights
regarding the significance of enhancing monitoring potential, counting notification by
different member corporations at the time when margin call is issued and enhancing power of
control of SIMEX or direct diverse operations of member corporations in highly vulnerable
situations. Furthermore, regulating position restricts by means of explicit hedging, risk
management as well as arbitrage among many others.

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References
Bessis, J. (2015). Risk management in banking. John Wiley & Sons.
Chance, D. M., & Brooks, R. (2015). Introduction to derivatives and risk management.
Cengage Learning.
Fabozzi, F. J. (2015). Capital Markets: Institutions, Instruments, and Risk Management. MIT
Press.
Hopkin, P. (2017). Fundamentals of risk management: understanding, evaluating and
implementing effective risk management. Kogan Page Publishers.
Lam, J. (2014). Enterprise risk management: from incentives to controls. John Wiley & Sons.
Lee, C. W., & Zhong, J. (2015). Financing and risk management of renewable energy
projects with a hybrid bond. Renewable Energy, 75, 779-787.