What was the Barings Bank Collapse?

Published by Thomas Herold in Banking, Investments, Trading

'Barings Bank Collapse' is explained in detail and with examples in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.

The Barings Bank collapse is a tale of tragedy involving greed, poor banking oversight, and a complete failure of internal checks and balances that ruined the oldest bank in London and banker to the Queen. It took only several weeks for Nick Leeson the Singapore trading head of the bank to amass hundreds of millions of pounds in losses which he camouflaged as profits before fleeing from the law. After the family led management uncovered how severe the losses were, the bank went into bankruptcy protection until the Dutch banking giant ING acquired it for only a single pound.

Barings had originally been founded by brothers John, Charles, and Francis Baring on Christmas of 1762. The company started out as a merchant firm but quickly began to finance other merchants as a true bank. The bank gained fame over the years for financing many historic events. It helped the British government pay for the Revolutionary War in America and then the Napoleonic Wars in France. The bank financed the Louisiana Purchase for America in 1803 so that the fledgling country could double the size of U.S. for $15 million. In 1806, Barings moved to its Bishopsgate office in London which remained its headquarters for nearly 200 years until the Barings Bank collapse.

The banker to Queen Elizabeth had grown its commercial activities successfully for centuries. It floated the renowned Guinness brewery in 1886 and expanded its commercial endeavors after barely surviving collapse through a Bank of England bailout because of an Argentina near debt default. The bank eventually bought a Japanese based securities firm in 1984. In 1991 it obtained a 40 percent stake in Dillon Read the U.S. investment bank.

The negative turning point for the bank came after they put Nick Leeson in charge of Barings Futures Singapore (BFS) in 1992. He had come over from Morgan Stanley three years before as a banker in the back office. His unit’s function centered on only trading futures contracts for customers on the Nikkei 225 and 10 year Japanese bonds. The mistake came in putting Leeson in charge of both the transaction settlement operations and the trading floor. At the time, James Bax the head of Barings’ Asia lamented that the structure they were setting up would lead to both a loss of a huge amount of money and customer goodwill.

Barings Bank collapse was brought on by the BFS group starting to trade with its own account. Leeson was attempting to gain from arbitrage spreads between Singapore and Japanese exchanges. The London management and chairman Peter Baring believed that this was extremely profitable and basically risk free trading. The problems arose from Leeson establishing a secret account called 88888 where he began to make enormous bets on Japanese markets.

At first he appeared to make the company huge amounts of money, including 10 million pounds in 1993 that represented 10% of all the bank’s annual profits. In 1995, the secret account was uncovered, along with losses of 827 million pounds he had wracked up in the name of Barings in only a matter of weeks. Leeson had left a note that said “I’m sorry” in the Singapore office and gone on the run.

Once he was captured and extradited back to Asia, Singapore charged him with fraud and forgery. They sentenced him to jail where he spent four years. Leeson later emerged from prison and sold his story as an autobiography Rogue Trader and the rights to the movie of the same title.

As a result of the Barings Bank collapse, the Bank of England lost banking oversight powers that were given to the newly organized Financial Services Authority. This organization later received criticism for ineffectively overseeing the banks under its charge and making the 2008 financial crisis significantly worse. The name Barings ceased to exist except in an asset management arm that an American life insurance group purchased. The bank’s collapse ended the longest running and most famous banking dynasty in the world.

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The term 'Barings Bank Collapse' is included in the Banking edition of the Herold Financial Dictionary, which you can get from Amazon in Ebook or Paperback edition.