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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 Singapore largely because of which control failure?

The key failure was lack of segregation of duties: Leeson ran both trading and back-office settlement at Barings Singapore. With no independent verification of his trades and records, he could hide losses in a concealed error account, so the losses grew undetected.

  1. AHe headed both the trading desk and the back-office settlement functionCorrect
  2. BThe bank had no capital requirements applying to its subsidiaries
  3. CExchange rules prohibited independent reconciliation of positions
  4. DRegulators required all losses to be reported only annually

Explanation

Leeson controlled front-office trading and back-office settlement in Singapore, so no independent party checked his records. This allowed him to hide losses in the error account 88888. The other options do not describe the actual control failure.

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