Could Barings happen again today?

London – 25 February 2005

When one of Britain’s oldest banks went bust 10 years ago, on 23 February 1995, with debts in excess of £1.3 billion it came as a nasty surprise not only to the markets and the regulators, but also the management of Barings itself. Permitting an environment of weak controls through ignorance and poor
management are cardinal sins for company executives who are tasked with ensuring good control and creating profits for their investors.

Although the loss that resulted in the Barings collapse was not the biggest loss ever incurred by a financial organisation, it was catastrophic for the bank. In the post mortem that followed the collapse it was discovered that the underlying causes were down to poor segregation of duties, lack of management
understanding of the business and supervision, poor control design and performance, as well as a lack of capital. This was not a momentary lapse in controls; this was the state of the daily operations.

10 years on, the Barings collapse is still thought of with a high degree of incredulity, yet could the same thing happen again today? With subsequent improvements in compliance and risk control operations as well as regulatory changes, many would say it couldn’t. But are these steps enough?

Phill Robinson-Welsh, a director at Chase Cooper, a Basel II consultancy and systems provider based in London, said, "Of course, a ‘Barings’ could happen again, but whether it would depends on a company’s risk culture, awareness of risks and their causes, and how well they are actually being controlled. This is not a once or twice a year exercise – it is on-going. Risks change in frequency and impact, controls change in design, and especially performance. Management must be aware of these changes and act promptly to plug gaps and strengthen weak controls."

Robinson-Welsh went on to say, "The Basel 2 Accord on Capital Adequacy seeks to provide investors with greater confidence in the international banking system through, among other things, the Pillar 1 capital charge for operational risk. Had Basel 2 been in place 10 years ago, this would still not have saved Barings. However, Pillar 2 – Supervisory Review – requires that a robust and thorough risk management framework is at the heart of any financial institution. Barings could happen again, but it should now be harder to ignore signs of a catastrophic failure. Company executives should now ensure they are ready to comply fully with Basel 2 and all relevant regulations. I believe that despite the cost of compliance, companies will derive value by potentially lowering their capital charge, minimising losses, and keeping
out of the headlines!"

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