Practice Quiz

FRM Financial Risk Manager Practice Test

Category - Bubble

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The main reason that led to the collapse of the oldest merchant bank in England, Barings Bank, in 1995 after 233 years of existence was...
  1. A bank run.
  2. A change in the board of directors, which caused a confidence crisis among the public.
  3. An unauthorized speculation by one employee on future contracts.
  4. The Kobe earthquake in Japan, which led to a financial crisis in Asia and hence, severely affected the bank’s activities.
Explanation
The main reason that led to the collapse of Barings Bank (1761-1995) was the speculation of one employee, Nick Leeson, on future contracts. After originally earning massive profits for Barings via several unauthorized trades in 1992, Leeson eventually lost over $1 billion in company capital while hiding the losses from his superiors.

Key Takeaway: This financial collapse illustrates how speculation plays a role in financial management. As the speculation led to false belief in the future growth, most of the rogue trades occurred in the future market and losses multiplied quickly.
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