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FRM Part I · FRM Exam Part I · Learning From Financial Disasters

Barings Bank collapsed in 1995 after losses built up in positions held by a trader in its Singapore office. Which control failure is most commonly cited as the key enabler of the concealment?

The key enabler was missing segregation of duties. The Barings trader supervised both trading and settlement, so he could hide losses in an error account and misreport results. Independent back-office checking would likely have exposed the unauthorized positions much earlier.

  1. AInsufficient capital held against equity market risk
  2. BExcessive hedging with options that expired worthless
  3. CLack of segregation of duties, as the trader controlled both trading and back-office settlementCorrect
  4. DOverreliance on external credit ratings for counterparties

Explanation

The trader headed both the front and back office, so he could hide losses in an error account and report fictitious results. Proper segregation of duties would have allowed independent verification of positions and balances. Capital, hedging and ratings were not the core enabler.

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