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

In the Barings Bank collapse of 1995, a trader in Singapore both executed trades and supervised the back-office settlement of those trades, and was able to hide losses in an error account. Which control weakness was most central to the failure?

The central weakness was the lack of segregation of duties. One individual controlled both trading and back-office settlement, so no independent check existed on positions or the hidden error account, allowing large losses to be concealed until the bank collapsed.

  1. ALack of segregation of duties between front office and back officeCorrect
  2. BExcessive use of collateral in OTC derivatives
  3. CInsufficient capital held against credit exposures
  4. DOver-reliance on external credit ratings

Explanation

The trader controlled both trading and settlement, so no independent party verified positions or reconciled accounts. This allowed concealment of losses. The other options do not describe the core failure in this case.

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