Financial Risk Manager Part 1
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In the realms of financial calamity, the Barings incident stands as a stark reminder of the consequences of unchecked risk-taking. Emerging in the mid-1990s, this debacle shook the financial world to its core, uncovering glaring vulnerabilities in risk management practices. The Barings incident came up mainly due to:
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A
The actions of a single trading official
B
The lack of adequate control systems and the failure of management to exercise even the basic oversight roles
C
Collusion between back-office staff and a junior level manager
D
The massive earthquake that hit Japan in 1995, triggering unprecedented losses in the stock market
Explanation:
The Barings Bank collapse was primarily due to the lack of adequate control systems and the failure of management to exercise even the basic oversight roles. The bank allowed Nick Leeson, a junior trader, to take on the dual role of head of trading and settlement operations. This was a clear violation of the segregation of duties principle, which is a basic tenet of internal control systems. This allowed Leeson to hide his trading losses and misrepresent the financial position of his trading activities. Furthermore, the management failed to heed the warnings of auditors and did not question the unusually high profits reported by Leeson. This lack of oversight and control ultimately led to the collapse of the bank when Leeson's hidden losses were eventually revealed.
Why other options are incorrect:
- Choice A: While the actions of a single trading official, Nick Leeson, did contribute to the collapse of Barings Bank, it was not the main cause. His actions were only able to bring about such disastrous consequences due to the lack of adequate control systems and failure of management oversight.
- Choice C: There is no evidence or record suggesting that there was collusion between back-office staff and a junior level manager leading to the collapse of Barings Bank. This choice seems more like an assumption rather than a fact based on historical events.
- Choice D: The massive earthquake in Japan in 1995 is unrelated to the Barings collapse, which was primarily caused by internal control failures and unauthorized trading activities.
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