A Case Study of Barings BankEssay Preview: A Case Study of Barings BankReport this essayAbstractWith economic globalization, enterprises are faced with huge competition from various aspects, and business risks have increased sharply. How to make enterprises evade risks and achieve stable and rapid development is the core issue of enterprises. Starting from the bankruptcy of The Barings Bank, this paper reflects on the role and significance of effective internal control to avoid risks and improve business efficiency and profitability. With the mirror of the Bank of Bahrain, we have changed and improved the development of the internal control mechanism of todays Enterprises.
OverviewBarings Bank, founded in 1762, manages more than £27 billion of assets worldwide. It was one of the world’s oldest merchant banks, famous as having facilitated the Louisiana Purchase. At that time，Queen Elizabeth, relies on its financial management standards and was its loyal customer.
In 1995, the Bank of Baring has been brilliant. However, because of internal control is not in place, results in the bank declared bankruptcy and losing ÂŁ827 million. The immediate cause was the head of Barings Futures Singapore (BFS), Nick Leeson not responsible, unauthorized trading in derivative financial products and speculation failed. After the bankruptcy, the Bank of Bahrain was sold to the Dutch bank International Nederland Group (ING) at a symbolic price of ÂŁ1 and became a member of the group.
Bankruptcy ProcessFrom 1992, Leeson started made unauthorized speculative trades, in the beginning, it made great contributions for Barings Bank which is up to 10% of the banks profits at the end of the year. At that time, he became to the Barings group’s star, getting unlimited trust from Brings Headquarters bosses. (Monthe, 2007)In 1995, Nick Lesson became the executive manager of the BFS, also the chief trader and liquidation supervisor.
However, he soon lost money due to his operational mistakes and he created an error account, 88888 to hid the losses. He claimed the account was used to correct an error made by inexperienced staff.
Over time, the vicious circle after the use of the error account has caused the company to lose more and more money. In order to recover the loses, in 1995, Lesson believed that the Japanese economy will start to uptrend and the stock market Will rises sharply. He bought some Nikkei index futures contracts and call options. However, on January 16, 1995, the unexpected earthquake of Kobé shattered his strategy, the stock market plummeted. He tried to recoup his losses by taking more risky positions, betting that the Nikkei Stock Exchange would make a rapid recovery but he lost his bet, worsening his losses. The long-established Barings Bank was destroyed by a young man who is only 28 years old. (Monthe, 2007)
The Future
By this time, the market is trading at a high level that can push the yen or ruble. This is because, as the Japanese economy slowly recover on their own, their stocks are in trouble, despite their long-standing promise to keep their high level over many years. However, the risks are not being shared. The value of the stock market has remained essentially at pre-bubble levels at the time of the earthquake, which took place a few months later but, despite its short standing, has seen an inflation rate of around 11%. In contrast, Japan is actually facing inflation at a much higher level than it did during the previous Japan earthquake. Since this rate of inflation was caused by an increase in oil prices, a similar situation in Japan is likely to occur.
The only change in monetary policy since its early days in Japan, was the shift toward more government spending during the previous era. The U.S. military has largely withdrawn the Army as part of a return of troops, but in the 1990s, after Japan’s second-largest economy imploded, it began paying back more and more troops to the army as it entered a new, faster global war. The U.S. Congress agreed to fund the government and make appropriations out of the Treasury and other Federal sources only, which eventually led to the Japanese government having to cut back spending a year or two after the war. Japan’s recovery is now at a state of its own due to a mix between government stimulus, the use of foreign resources, and fiscal consolidation. When the U.S. government and Congress are at loggerheads or have come to a deal, it is hard not to believe their intentions for the world. This is probably the case since Japan’s government has become the main source of foreign investment into Japan. It is very possible that the government is merely giving its approval for more foreign investment, without actually helping the economy through policy.
The Bottom Line
With an increasing reliance on foreign monetary policy, a growing body of empirical evidence suggests that a fundamental shift in monetary policy is underway. While Japan’s monetary policy rate must always remain artificially low, the amount of inflation at the end of the past decade has been about 2%, and by the third quarter, Japan’s economy was in full swing. The same economic data show that the Japanese economy’s growth has been somewhat lackluster, with inflation rates running about 2% higher than in the second quarter. The Japanese economy has been the major market driver going back to 2007, but its main driver in recent public statements has been stagnation of the yen, which was about 25% above its pre-crisis level. Japan’s unemployment rate has been running at about 70%. This has helped to lower the yen to its peak of about 15 cents
The Future
By this time, the market is trading at a high level that can push the yen or ruble. This is because, as the Japanese economy slowly recover on their own, their stocks are in trouble, despite their long-standing promise to keep their high level over many years. However, the risks are not being shared. The value of the stock market has remained essentially at pre-bubble levels at the time of the earthquake, which took place a few months later but, despite its short standing, has seen an inflation rate of around 11%. In contrast, Japan is actually facing inflation at a much higher level than it did during the previous Japan earthquake. Since this rate of inflation was caused by an increase in oil prices, a similar situation in Japan is likely to occur.
The only change in monetary policy since its early days in Japan, was the shift toward more government spending during the previous era. The U.S. military has largely withdrawn the Army as part of a return of troops, but in the 1990s, after Japan’s second-largest economy imploded, it began paying back more and more troops to the army as it entered a new, faster global war. The U.S. Congress agreed to fund the government and make appropriations out of the Treasury and other Federal sources only, which eventually led to the Japanese government having to cut back spending a year or two after the war. Japan’s recovery is now at a state of its own due to a mix between government stimulus, the use of foreign resources, and fiscal consolidation. When the U.S. government and Congress are at loggerheads or have come to a deal, it is hard not to believe their intentions for the world. This is probably the case since Japan’s government has become the main source of foreign investment into Japan. It is very possible that the government is merely giving its approval for more foreign investment, without actually helping the economy through policy.
The Bottom Line
With an increasing reliance on foreign monetary policy, a growing body of empirical evidence suggests that a fundamental shift in monetary policy is underway. While Japan’s monetary policy rate must always remain artificially low, the amount of inflation at the end of the past decade has been about 2%, and by the third quarter, Japan’s economy was in full swing. The same economic data show that the Japanese economy’s growth has been somewhat lackluster, with inflation rates running about 2% higher than in the second quarter. The Japanese economy has been the major market driver going back to 2007, but its main driver in recent public statements has been stagnation of the yen, which was about 25% above its pre-crisis level. Japan’s unemployment rate has been running at about 70%. This has helped to lower the yen to its peak of about 15 cents
Japan’s 2007 level, and the country’s overall government debt in this economy in recent years has stabilized. The Japanese economy and currency is projected to be around $11.55 trillion
in 2010.
As the economy has been expanding, but the political economy has not grown as rapidly as in previous years, and there are still issues about the credibility of Japan ’s leadership.
The current situation with the global financial system and global monetary policy, as well as the timing of other major global economic developments, mean that there is a potential shift in the situation in a non-exogenous way. In the long term, we expect the U.S.$11.55 trillion U.S. government bond rate to fall to around 4% from 5% in 2010. In short, the country’s budget deficit is expected to be in the region of $4 trillion, or about $1.3 trillion in 2012
.
It is therefore not surprising that, given the government’s current budget deficit, foreign monetary policy would be particularly vulnerable to political instability or recession.
For an economic outlook of about $4-5 trillion, if global macro-economic events such as deflation, the U.S.-dominated global financial system, or the rise of an emerging market economy, increase the government debt. Such a scenario in which one party in the political arena and the central bank manage to drive back their own currencies. This scenario, which could take three years until the political process can deal with this financial crisis and avert it, would involve the collapse of a massive global financial system as well as a major international political event or international economic crisis.The current situation with the global financial system and international monetary policy, as well as the timing of other major global economic developments, mean that there is a potential shift in the situation in a non-exogenous way.
The U.S.$11.55 trillion U.S. government bond rate will likely fall to around 4% from 5% in 2010.
With an increasing reliance on foreign monetary policy, a growing body of empirical evidence suggests that a fundamental shift in monetary policy is underway. While Japanese’s monetary policy rate must always remain artificially low, the amount of inflation at the end of the past decade has been about 2%, and by the third quarter, Japan’s economy was in full swing. The same economic data show that the Japanese economys growth has been somewhat lackluster, with inflation rates running about 2% higher than in the second quarter. The same economic data show that the Japanese economyὗs growth has been about 4% higher than in the second quarter.
The Japanese economy is also an emerging market, making Japanὗs GDP a strong economic indicator of investment in the economy.
In terms of the U.S.$8023;s economy, economic growth has been slowing for a few years before it hit the midpoint of its early decline. This is partly due to an outmoded monetary policy, mainly in areas where there are fewer domestic assets or a lower global dollar.
In contrast, economic growth has been strong in emerging market countries and Asia.
In 2014, about 18% of the world economy was
The reason for the bankruptcy of Barings Bank is ridiculous and ironic, it has aroused heated debate in the world, and people began to realize the importance of internal control in the complicated and changeable international environment.
Analysis of the reasons the bankruptcy of Bahrain Bank1.Dereliction of duty of the management of Barings Group.At the beginning of 1995, the Singapore International Financial Exchange had discovered some anomalies in the BFS s transactions and made some inquiries to Barings Group. If the management of the Barings Group proper reviews and values the concerns of the Singapore International Financial Exchange, maybe the bankruptcy might not happen. (Brennan, 2015)
Leesons invest is not a general financial product, but a financial derivative product. The financial derivative product is characterized by it has the ability to make large transactions with a small amount of deposit, and if it is properly, it can obtain high returns. Improper use will result in heavy losses.
The reason for the Barings Bank incident is not the complexity of the derivative business, but it must have strict authorization and institutional constraints. (Reserve Bank of Australia Bulletin, 1995) Leeson participation in financial derivative product speculation is carried out in an unauthorized and unsupervised state.
2.Loose internal control.Some financial regulatory agencies and international financial organizations believed that in institutions internal management of finances is the core issue of risk control. From the process of bankruptcy in Barings Bank, it is very clear that their internal control is very loose. (Monthe, 2007)According to the report, before the bankruptcy, the Barings Banks investment securities had exposed great risks, but it did not cause the senior management to be vigilant.
In fact, the head of Barings Group is completely unaware that what Leeson did is impossible. Leeson said in prison: He thinks its incredible for nobody to stop him. Group people who are in London should know that his numbers are fake, and those people should know that it is wrong for him to always ask London headquarters for cash, but they still pay the money.” It can be said that the bankruptcy of the Barings Bank is not caused by one person, but by an organizational structure that is full of loopholes and internal management is out of control.
3. The duties of the business transaction department and the administrative financial management department are unclear.At the BFS, Nick Leeson himself is the system. He is in charge of transactions and settlements, which gives Leeson many opportunities to make his own decisions. This is a fatal factor why the Barings Bank was bankruptcy. Let Leeson directly engage in transactions and as the person in charge of the transaction. These two functions were not separated. He is responsible for all of the work both front-office and back-office.
The companys headquarters was clear about