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.
I.Describe the events that created the problem outlining the differences and similarities between Barings Bank and your chosen institution
II.What are the lessons that financial institutions, investors and regulators can learn from the occurrence of such events.

Answer 1

Barings bank collapse was one of the front runners in the 'Too big to fall' series of collapse that the Financial world have seen in the past few decades. Another one in this series in the recent times is the Lehman collapse in 2007-2008 which has left the entire world in a state of shock till today.

For Barings Bank their fall was due to excessive investing in Argentina based projects without sufficient analysis on the liquidity risk, currency risk and the possibility of sovereign risk involved. Several decades later, the same greed, aggressiveness and risk taking nature of people have set the path for Lehman collapse. New innovative financial products were introduced to less knowledgeable retails customers through new credit derivative products packaged in SPVs. Again, the same mistake of ignoring the need to analyze all the inherent risks in the newly introduced financial products drove the Lehman brothers to their fall in 2008. Also as these financial products were further purchased by other financial institutions due to globalization, the impact of Lehman crisis was spread around the world causes many other institutions to fall.

The main lessons from these crisis are;

1. Analyze all the risks involved in any current or new product ts introduced or traded

2. Diversify and limit the exposure to any region/product/firm/risk/sector

3. Keep sufficient capital and buffer to avoid liquidity crunch

All these have too considered for the introduction of Basel norms which have been introduced by BCBS at the aftermath of these crisis.