On 26 February 1995 Barings Bank collapsed as a result of 860m of losses accumulated by Nick Leeson, a Singapore trader. Leeson had been successful in the low-risk arbitrage of Nikkei stock index futures between the Osaka and Singapore exchanges. During 1994 and through to the collapse, he took ever larger risks as he atempted to surpass past performance. In January and February 1995, he was effectively making a massive bet that the Japanese stock market would rise. Instead it fell by 13.5 per cent in those two months. Barings lost money in standardised exchange-traded Nikkei stock index futures for which there is an active secondary market, public pricing, efficient clearing, margining systems and daily mark-to-market." 

1.1 Name and define the type of risk evident above in the case of Barings Bank? (3) 

1.2 What types of activities (technical or organisational) can give rise to this type of risk in a bank? Mention at least two examples. (2) 

1.3 The management of Barings Bank gave Leeson so much free rein that he both traded and managed back-office operations. Barings appeared to violate many well-known rules of risk management. Name 3 of these rules. 

 "Risk management is both a set of tools and techniques, and a process that is required to optimise risk-return trade-offs. The aim of the process is to measure risks in order to monitor and control them. " 

2.1 Name the four stages that are usually followed in risk management. 2.2 The risk management process can be viewed from both top-down and botom-up perspectives. Explain these two perspectives by including examples of each. 

3.1 Provide a detailed explanation of the term "economic capital" with respect to the risk management process of banks? In your explanation provide of what this term is, how it is measured and how it differs from regulatory capital.