Question

Barings Bank collapsed about two decades ago as a result of derivative trading. Identify any other high profile corporate bankruptcy attributable to derivative trading and. Describe the events that created the problem outlining the differences and similarities between Barings Bank and your chosen institution. What are the lessons that financial institutions, investors and regulators can learn from the occurrence of such events.

Answer 1

The high profile corporate bankruptcy attributable to derivative trading is of ENRON BANK.

(I) The events that created problems in Barings Bank and Enron Bank are:

• Employees actions are always needed to be monitored. In Baring bank, Leeson employee(former derivative broker) at Baring bank was having no trading license and was not be supervised by anyone which makes him to allow fraud in the company. This issimilar to the case of Enron as in Enron also Chief executing officer take advantage of his position at the expense of the company which results in bankruptcy later.
• Lack of supervision, transparency, accountability, strict rules. As these features were lacked in Barings Bank and Enron bank and it leads to the bankruptcy therefore after this tragedy there are much more stricter rules, supervision of international firms and transparency and accountability is introduced in both the countries UK and USA. So this is also a similarity in both the case.
• Barings bank management activities towards derivative trading was not good and in Enron's case this was not a problem. Here both the case differs.

(II) The lessons that financial institutions, investors and regulators can learn from the occurrence of such events is that not to belivethe companies so much by its way of presenting itself. For that, every aspect related to the financial conditions of the company should bereviewed by the regulatory authorities. And the policies should be made by the government of the countries to maintain transparency and accountability to customers, employees and regulatory authorities. To maintain balance in financial market, information and disclosuresshould be collected wholly from the company to avoid any loopholes later.