The Fall of Barings Bank
In 1995 Nick Leeson's hidden losses of £827 million destroyed Barings, Britain's oldest merchant bank. Learn how it happened and the control failures behind it.
Barings Bank, founded in 1762, was Britain's oldest merchant bank, a firm that had financed the Louisiana Purchase and counted the royal family among its clients. In February 1995, it collapsed because of the unauthorised trading of one employee, Nick Leeson, in its Singapore office. Leeson had hidden mounting losses in a secret account for more than two years, and when a Japanese earthquake sent markets tumbling, the losses reached about £827 million, more than the bank's entire capital. Barings was sold to the Dutch bank ING for £1. The case remains the textbook example of operational risk and failed controls.
How it happened#
| Period | Event |
|---|---|
| 1992 | Leeson starts running Barings' futures operations in Singapore, handling both trading and back office settlement |
| 1992 to 1994 | He hides losses in error account 88888, reporting large fictitious profits to London |
| 17 January 1995 | The Kobe earthquake hits Japan; the Nikkei falls sharply |
| January to February 1995 | Leeson doubles down, buying more Nikkei futures and selling options betting on stability |
| 23 February 1995 | Leeson flees Singapore |
| 26 February 1995 | Barings is placed into administration |
| March 1995 | ING buys Barings for £1 and takes on its liabilities |
| December 1995 | Leeson is sentenced in Singapore to six and a half years in prison |
The positions#
Leeson was supposed to run low risk arbitrage between Nikkei futures on the Singapore and Osaka exchanges. Instead, he took large unauthorised directional bets:
- Long Nikkei 225 futures, betting the Japanese market would rise.
- Short straddles on the Nikkei, selling options that profit if markets stay calm and lose heavily on big moves. See Straddle and Short Put.
The Kobe earthquake caused exactly the large downward move that hurt both positions.
The control failures#
| Failure | Explanation |
|---|---|
| No separation of duties | Leeson controlled both trading and settlement, so he could hide trades. See Operational and Model Risk |
| Unreconciled accounts | The error account was not properly investigated. See Trade Accounting and Reconciliation |
| Unquestioned profits | Large reported profits from "low risk arbitrage" did not raise enough suspicion |
| Funding without understanding | London sent large sums to Singapore to meet margin calls without understanding why |
| Weak risk oversight | No effective independent limits or monitoring. See Risk, Position, Loss and Drawdown Limits |
| Ignored warnings | Internal audit had raised concerns that were not acted on |
Aftermath#
The Bank of England's investigation criticised Barings' management for serious control failures. The case led banks worldwide to strengthen separation between front and back offices, independent risk management and reconciliation. Similar patterns appeared in later rogue trading cases, including Jérôme Kerviel at Société Générale in 2008 and Kweku Adoboli at UBS in 2011. See Lessons From Market Failures.
Lessons for traders#
- Losses hidden grow larger: acknowledging a loss early limits damage.
- Never double down to win back losses. See Loss Aversion.
- Independent checks matter, even for individuals: compare your records with broker statements. See Record Keeping for Traders.
- Profits that seem too good for the stated strategy deserve scrutiny.
- Selling options for steady income can hide catastrophic risk. See Fat Tails.
Frequently asked questions#
Who was Nick Leeson?#
A Barings Bank trader in Singapore whose unauthorised trading and hidden losses of about £827 million caused the bank's collapse in 1995.
How did Nick Leeson hide his losses?#
He controlled both trading and back office settlement and recorded losses in a secret error account numbered 88888, while reporting false profits.
What happened to Barings Bank?#
It collapsed in February 1995 and was bought by ING for £1.
Next, learn how one trader's natural gas bets sank a hedge fund in Amaranth Advisors.
3 quick questions on this lesson. Get them all right to finish it.
Turn on JavaScript to take the quiz.
Mentioned in
- The Collapse of LTCMMarket History