July 14, 2023

Barings Bank was founded in 1762 in London by brothers Francis and John Baring, which was initially involved in financing trade deals with the Netherlands. By the beginning of the 19th century, it had become one of the major banks, primarily for financing transactions related to the United States. In particular, Barings Bank was involved in the Louisiana purchase, in financing the delivery of Indian corn to Ireland for famine relief as well as it was chosen as the exclusive agent for the U.S. government during the period 1843-1871. At one time it was said that there were six great powers in Europe: Great Britain, France, Austria-Hungary, Russia, Prussia and Baring Brothers.

However, in 1995 Barings' greatness came to an end and it was sold to ING Group of the Netherlands for the symbolic price of 1 pound sterling because of the accumulated losses of the Singapore branch of the bank. Nick Leeson, a trader in the bank's Singapore branch, was known for buying and selling futures contracts on stock indices on the Tokyo and Singapore exchanges (buying them on the Japanese exchange at one price, he immediately sold them on the Singapore exchange at a slightly higher price), making good money for the bank. In 1993, about 20% of Barings' total profits came from its Singapore branch, represented by Nick Leeson. Soon Nick Leeson began buying futures in large volumes and holding them for a longer period in the hope of making much bigger profits. However, the Japanese stock market was not showing growth. And since Nick Leeson was both the head of the bank's Singapore branch and the head of its back office, which dealt with the accounting of transactions, he did not show losses to the bank's headquarters in London. In order to recoup his losses, Nick Leeson began buying more and more futures on the rise of the Japanese stock market. Unfortunately for him, the Japanese stock market was showing a decline and it completely collapsed in February 1995 after the big earthquake in Kobe. The weight of the bet became so great that Nick Leeson could no longer hide his losses. When the situation was revealed, it turned out that Barings Bank's losses totaled 1,5 bln. USD. This was more than twice the amount of its total Equity. The bank could not cope with such losses and announced its insolvency three days after the disclosure of the situation. This case established the need to strengthen the system of risk management and internal audit in banks, so that a derivatives trader could not combine the position of an employee in the accounting of trading securities. In addition, all standardized derivatives contracts began to be traded through a clearinghouse that acted as buyer for each seller and seller for each buyer. This was done to prevent the temptation for companies not to show losses from securities trading on their financial statements in the hope of "winning back" in the future.