British firm Barings Bank was one of the most venerable and respected banks in the world until its unexpected collapse in 1995 thanks to the actions of a single rogue trader, Nick Leeson. Within a year, the firm went from being a financially stable institution with substantial holdings to being worth a single pound sterling, the price paid for it by Dutch bank ING after the collapse. The fate of Barings Bank is an infamous tale in the financial industry with some sobering lessons for financial regulators and governments concerned with the activities of financial companies.
This bank was established in 1762. Barings Bank successfully weathered a number of financial crises in Britain and abroad, provided funding for wars, and even served the British royal family. Like many financial institutions, Barings Bank was involved in a variety of investment activities all over the world, including speculation in a number of markets, overseen by experienced financial officers in various overseas branches.
Nick Leeson, working in the bank's Singapore office, took advantage of unusual circumstances to conduct substantial numbers of unauthorized trades. He found himself in a unique position of authority that allowed him to take risky speculative positions without being detected. Unfortunately for Leeson, he speculated unwisely, and Barings Bank began to take losses. Initially, these losses could be concealed, but eventually the truth surfaced. Leeson's unauthorized speculative trades successfully gutted Barings Bank, generating an outcry and considerable concern in the financial industry.
The lessons learned from the Barings Bank failure continue to be applied in the financial industry today. Banks take steps to reduce the development of rogue trading, limit the actions of rogue traders, and identify unauthorized trades quickly. These steps include creating clear chains of command with checks and balances to eliminate the possibility of allowing a bank officer to develop what amounted to a private fiefdom in Leeson's case.
The failure of Barings Bank is of historical interest for a number of reasons, including the sheer size of the failure, over one billion United States Dollars at the time. The bank's age and reputation also make the failure remarkable, as did the abrupt nature of the collapse. Investors and other members of the financial community had minimal warning that the bank was about to fail and the bank itself was unaware of Leeson's trading activities until they had already brought the bank to its knees and made it impossible to recover.