Skip to content

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

In the Barings Bank collapse of 1995, Nick Leeson was able to conceal large losses in an error account (account 88888) largely because of which governance weakness?

The key weakness was lack of segregation of duties: Leeson ran both trading and settlement operations in Singapore, so no independent function checked his positions or reported losses. This let him hide losses in the error account until they became fatal.

  1. AHe controlled both the trading and the back-office settlement functions in SingaporeCorrect
  2. BThe bank's capital was below the regulatory minimum
  3. CThe bank used only exchange-traded futures, which are not marked to market
  4. DSenior management imposed strict position limits that were ignored by regulators

Explanation

Leeson headed both front-office trading and back-office settlement at Barings Futures Singapore, so no independent party reconciled his positions or verified his reports. Exchange-traded futures are marked to market daily, and capital shortfall was not the root cause, so those options are wrong.

Did you get it right without looking?

One question tells you little. A timed set on Learning From Financial Disasters shows your real accuracy, how long you take and where you lose marks.

Practise Learning From Financial DisastersFree diagnostic mock

More Learning From Financial Disasters questions