Barings Bank’s Failure

When establishments, vexationes and organizations be prosperous and very successful, barely anyone anticipates that someday they would fall down. Instead, people function to envision a to a greater extent dynamic, booming and more successful business whose position would seem stable that no problem gouge evoke it down. This is exactly the case with the Barings Bank. After its share of success, the curse failed due to organisational architecture.The debacle of the Barings Bank, also called the Queens Bank (FundingUniverse, n. d.), became one of the hot topics when it comes to avering, finance, economics and steering. The case shows an example of how one powerful beau monde go off be ruined by its shortcomings.The Barings Bank achieved success for a want time and was even respected as it was the United Kingdoms oldest merchant bank (Sungard, 2009). It was established by a team of brothers, Francis and John, in London during the 1700s. During the Napoleonic Wars, the partic ipation financed military campaigns in Britain and helped France to rec everywhere financially.The company was also known for assisting America in buying Louisiana from France. successfulness also rained down when the bank went into international trade (FundingUniverse, n. d. ). Barings Bank has $900 one thousand million in capital, but its share of success suddenly went to a quit in 1995 when it suffered from unauthorized trading losses which amounted to $1 billion (Sungard, 2009). some(a) experts say that the losses showed the ineffective looks and inappropriate incentives within the company (Hentschel and Smith, 1996).Others believe that the decease was a result of financial risk steering that went defame (Riskglossary. com, 1996). For whatever reason, the person responsible behind the banks demise was Nick Leeson, a trader promoted as general manager in the Singapore branch. Although he was capable of making millions for the company, he got involved in unauthorized trading activities that initially went unnoticed because he handled trading and okay office functions (Sungard, 2009). Leeson traded and made mistakes which the banks management did not notice. The more bets Leeson made, the more money he lost.This bear witnesss that Leeson, who has gained much power and authority, has acted outside the banks official authority and worked not in the best interests of the banks owners (Hentschel and Smith, 1996). This kind of problem occurs in different settings wherein employees, shareholders and senior management have different interests. It occurs when an agent such as Leeson enjoys private incentives to rank from things that would maximize the companys value. Also, the structure of the organization eject come to employees incentives. Thus it can worsen or control the problems.Three facets of organisational architecture that have effects are reward systems, decision rights and control systems. In reward systems, a compensation package must be readil y available and must have strong incentive components. In Leesons case, however, the objective is to arrive profits and not to stabilize degraded value. Compensation based on the contracts payoff can have bad side effects. Decision rights, on the other hand, indicate that decision rights must be allocated to treasury employees so that internal controls at low cost will be improved.However, traders and dealers like Leeson have extensive decision rights over their positions. Meanwhile, control systems in the Barings Bank case failed because a difficulty in monitoring within the company existed. The senior management at Barings Bank claimed that they were unaware of Leesons activities. To prevent such cases thither should be strict control and supervision on business activities. The company could have set position limits so that traders and dealers will not be able to abuse their positions. Another shortcoming of Barings Bank was that it did not disclose settlement and trading res ponsibilities.Otherwise the company could have monitored all sorts of activities because the separation can facilitate agreement with the set position limits (Hentschel and Smith, 1996). The failure of Barings Bank was attributed to its organizational architecture. Nick Leeson, a trader whose losses caused the bank to go into bankruptcy, worked to generate profits. The power and authority that came with his position blinded him into making bets that he did not win. The bank, on the other hand, failed to make careful control and monitoring over the activities done on its part. References FundingUniverse.(n. d. ). Barings PLC. Retrieved January 8, 2009, from http//www. fundinguniverse. com/company-histories/Barings-PLC-Company-History. html Hentschel, L. and Smith, C. W. (1996). Derivatives regulation Implications for Central Banks. Retrieved January 8, 2009, from http//www. simon. rochester. edu/fac/Hentschel/PDFs/DRICB. pdf Riskglossary. com. (1996). Barings debacle. Retrieved Janu ary 8, 2009, from http//www. riskglossary. com/link/barings_debacle. htm Sungard. (2009). Barings Bank. Retrieved January 8, 2009, from http//www3. sungard. com/bancware/default. aspx? id=4704