Question

Research the 1990s case of Nick Leeson and Barings Bank. How is this an example of the principal-agent problem? Be specific, identifying both the agent and the principal. How could Barings Bank have prevented such a disaster?

Answer 1

In the given case of Nick Leeson and Barings Bank, Nick Leeson is agent and Baring Bank is principal. The given case acts as an example of principal-agent problem, because Leeson as a trader was authorized to make trading in derivatives in Asian Market. Here, the Barings bank completely trusted upon him, but Leeson adopted highly speculated trading activities, hid the losses in other accounts and took decisions that could benefit him more than the Barings Bank as principal. So, Leeson acted as agent that did not consider to act to make the best interests of the Barings Bank. It represents a principal-agent problem or agency conflict in the case.

Barings Bank could prevent the disaster, if Barings bank could align the growth of Leeson as a trader with the growth of the bank. In this regard, bank should offer benefits that could grow as the bank was getting profits from the trade. Besides, Barings Bank could verify each trade placed by Leeson so that losses could be limited and disaster could be prevented.