Analysing operational risk failure of Barings bank

At the heart of the devastating scam was a person with a huge appetite for risk-taking but hardly any accountability towards the bank, Nick Leeson. Overnight, the unscrupulous futures’ trader from London who was previously the poster boy for Barings’ high-growth earnings from Singapore’s premium monetary exchange, SIMEX (In 1993, he documented nearly 10% of the bank’s profits in futures’ trading), took special advantage of the bank’s vulnerability in not being able to hedge the risks that come with dealing in a concern as sensitive as this.
This is what happened. Nick Leeson’s job as Chief Trader at SIMEX was to buy and sell the simplest kind of derivatives pegged to the Nikkei-225 stock exchange of Japan. This job entails the methodology of a skilled bookie who basically, bets on what people are likely to bet on in the future course. Despite booking profits on various occasions, some of Leeson’s predictions proved incorrect. The idea to fool the bank management in covering up details of unsuccessful tradings came from devising an unaudited bank account, called error account 88888, to fix 20,000 goofed up by an inexperienced team member, which was later to serve as Leeson’s personal getaway in covering up failed investment strategies. Even as the entire audit team of Barings’ was kept in dark about what was the tip of the iceberg then, Leeson managed to document account losses which were initially at 2 million in 1992 to an astronomical figure of 208 million by 1994.
The final blow came when Leeson pulled out a short-selling stunt by compromising derivatives at the Japanese and Singapore stock exchanges. An earthquake in Japan in Jan, 1995 upset his apple cart, the Nikkei plummeting by 7.7% overnight, the repercussions being felt across much of the Asian markets. Leeson desperately hoped for a recovery post-quake but, the trouble grew deeper as Barings’ liabilities upward of 1 billion came to the fore. Before the bank authorities could take corrective action, the worst had happen, and one of the most glaring financial scams of recent history captured our imagination.
Leeson later served a 4-year prison sentence in Singapore, eventually returned to the UK as a "celebrity", and ironically today, is a much sought-after speaker in guiding corporations and banks to manage risk in their financial dealings. While the Barings’ episode is painfully over, the chances of another scam of this magnitude should not be ruled out. It is with this objective in mind that we must understand the mechanics of operational-risk management when applied to financial tradings. While analysing the basics of this study, we will simultaneously try to picture what happened in Barings, and what could have been done to arrest the ugly development.
To understand the guidelines of