Financial Risk Manager Part 1

The collapse of Barings Bank was primarily due to largely unchecked speculative trades by Nick Leeson, who was the general manager and head trader at Barings. Leeson initially earned massive profits for the bank through unauthorized trades in 1992, but his speculative trading eventually led to losses of over $1 billion in company capital. He hid these losses from his superiors, which further exacerbated the situation. When the losses were eventually discovered, they were so substantial that they led to the bank's collapse. This case highlights the dangers of unchecked speculative trading and the importance of proper risk management and oversight in financial institutions.

Choice A is incorrect: While a bank run can indeed lead to the collapse of a financial institution, it was not the primary cause in the case of Barings Bank. The bank's downfall was primarily due to internal factors rather than external panic among depositors.

Choice B is incorrect: Although the Kobe earthquake did have an impact on financial markets in Asia, it was not directly responsible for Barings Bank's failure. The bank's collapse was largely due to internal trading activities.

Choice D is incorrect: There was no total overhaul of the board of directors that resulted in loss of investor confidence. The collapse was primarily due to unauthorized speculative trading activities.