Section C(Case Study 2 - Barings Bank: 35 marks) Answer ALL questions in this case. Nick Leeson's adolescence was spent at Watford, UK where he attended high school. After that, he began to work at Coutts & Company and then spent two years at Morgan Stanley, taking up a position as an operation assistant. The experience allowed him to become familiar with the financial markets. Leeson then joined Barings. Founded in 1762 by Johann Barings, the Barings Bank was part of England's history and even the Queen of England was among its clients. Barings was later considered one of the most prestigious financial institutions in the world. Leeson quickly made an impression within the respected establishment. In 1990, at the age of 25, Leeson was appointed manager of the Singapore operation to oversee the "futures" operation in SIMEX (Singapore International Monetary Exchange). Leeson quickly became a well-known operator of the derivative market on the SIMEX. From 1992, Leeson made trades that brought in huge contributions for Barings - up to 10% of the bank's profits at the end of 1993. The profits instilled confidence in the directors who lacked knowledge in subtle trading techniques and financial markets. He became a star within the organisation, earning unlimited trust from the headquarters. He enjoyed unlimited freedom within the Singapore office: he was head of the dealing desk (front office) but he also supervised the back office. Page 3 of 4 Nonetheless, Leeson was in fact losing money and was hiding his losses in an error account, Z88888. He claimed that the account had been opened in order to correct an error made by an inexperienced member of the team. At the same time, Leeson withheld documents from auditors of the bank. By the end of 1994, his total losses amounted to almost half of the capital of Barings. On January 16th, 1995, with the aim of "recovering" his losses, he took even more risky positions. However, the unexpected earthquake of Kob shattered his strategy. As a result, the losses amounted to more than double the bank's capital which the bank were unable to absorb. Leeson decided to flee Singapore and was later arrested in Europe. He was extradited back to Singapore and sentenced to 6.5 years of imprisonment. In March 1995, the bank was bought by a Dutch insurance company at a very low price. Required: 1. Are there any problems with the internal control system of Barings? Explain. (5 marks) 2. Are there any problems with corporate governance in Barings? Explain. (5 marks) 3. What is risk management? Why is it needed? What should be the risk management strategy of an international bank like Barings? (5 marks) 4. What are the major risks faced by an international bank? What are the major risks involved in this case? (5 marks) 5. Explain risk appetite, risk tolerance and risk profile. (5 marks) 6. What are the responsibilities of the internal audit function regarding risk management? Who (or which function in an organization) should ultimately be held responsible for risk management in a listed company? (5 marks) 7. Outline the risk management regulatory requirements imposed to international banks after the Barings (5 marks) case
