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Lord Mackay of Ardbrecknish: My Lords, with the leave of the House I should like to repeat a Statement made earlier today in another place by my right honourable friend the Chancellor of the Exchequer. The Statement is as follows:
"Since receiving the report, I have had to consider very carefully the legal considerations relevant to publication. I am sure that it is right for Parliament to have this report in all its detail, so that its consideration of the Board of Banking Supervision's conclusions, and the lessons to be learned, can be properly informed. I have concluded that the balance of the public interest lies firmly in favour of publishing the full report. The report is being published without any deletions today, and copies are available in the Vote Office.
"The report's main findings are that: the losses were incurred by unauthorised and concealed trading activities within Barings Futures Singapore; the true position was not noticed earlier because of serious failures of controls and managerial confusion within the Barings Group; and the true position had not been detected prior to the collapse by the external auditors, supervisors or regulators of Barings.
"The board was not able to gain access to all the information it would have liked. In particular, it was unable to determine Nick Leeson's motives, or whether he was acting alone, because of serious difficulties in obtaining information from Singapore. The obstacles were, I understand, legal ones, and there were some problems in providing the Singapore investigators with all the information which they in turn sought from London. However, it was clearly important to ensure as complete an exchange of information as possible, and I myself wrote twice to the Finance Minister in Singapore seeking his help in obtaining the co-operation of the authorities there. It is regrettable that there remained serious legal obstacles which prevented all the relevant documents being provided to the board.
"Leeson himself was invited to co-operate with the inquiry, but declined to do so. Through his solicitors, he has been informed of the conclusions the board have reached about his part in the collapse. His solicitors wrote to the board on 22nd June saying that the report's conclusions were inaccurate in various respects, but they did not provide any further details of his response.
"The report describes how the concealment of the true nature of dealings in Singapore and the build-up of losses from unauthorised trading began almost as soon as Nick Leeson joined Barings Futures Singapore as general manager and head trader in 1992. By the end of 1993 the cumulative loss was over £20 million, and by the end of 1994 it was over £200 million. Losses leapt spectacularly in the first few weeks of 1995, and after the collapse on 26th February the cumulative loss was a staggering £827 million. Leeson successfully sought to conceal those huge losses throughout by a complex and systematic process of deception and false reporting.
"Such a massive unauthorised position could not have been established if there had been an effective system of management, financial and operating controls within Barings. The report details a great number of failings. I will give the House some examples.
"The money required to fund the losses came primarily from London. It was advanced to Singapore with no independent check on the validity of the requests or any attempt to reconcile them to any known trading position. If management in London had sought to examine the information from Singapore to support the requests for funds, it should have discovered that the information was meaningless.
"Barings management in London seem generally to have believed that the money being sent to Singapore was being lent to clients to facilitate their trading. However, the credit aspects of these advances were never formally reviewed or considered by the credit committee. Barings' management did not question why it was apparently lending over £300 million to clients to trade when it had collateral of only some £31 million from clients for those trades.
"The management of Barings did not question the extraordinarily high levels of apparent profitability of supposed arbitrage dealings in Singapore, which were regarded as being without risk. In the Board of Banking Supervision's view these profits should have been viewed as abnormal and questionable, and the extraordinary profitability reported in 1994 should have attracted the close and thorough attention of the management long before the collapse.
"Despite Leeson's efforts at concealment, some information on the account he used to hide his losses was available to London, but it was never analysed. No one within Barings accepted responsibility for Leeson's activities for the whole of 1994. Leeson's deception was made easier as he was not only a trader but also in charge of the so-called 'back office' which processed the paperwork associated with trading. In 1994 Barings' internal auditors recommended that as a trader he should not have this responsibility for the back office. Barings failed to implement this recommendation.
"There were also serious and consistent failures and errors in its exposure reports to the Bank, and other reports to the Securities and Futures Authority, which made it less likely that they would be alerted to evidence of a problem.
"Coopers & Lybrand Singapore were the auditors for Barings Futures Singapore for 1994. In preparing those accounts, they expressed the view that the controls of BFS were satisfactory. This conclusion is not easy to reconcile with the lack of segregation of duties within the Singapore subsidiary which I have just described. For both 1993 and 1994, the auditors of the London operations were Coopers & Lybrand London. The report also raises doubts over the effectiveness of their testing of Barings' internal controls. The board considers that more thorough tests would have been likely to reveal the inadequate support for the funding requests from Singapore. However, the 1994 audit had not been fully completed, and it will never be known whether Coopers would have raised with management the important issues which had not apparently been identified or addressed by the time of the collapse.
"The independent members of the Board of Banking Supervision were separately asked by me to review the role of the UK regulators, particularly the Bank of England, in the events leading to the collapse. They were assisted in this inquiry by a team of accountants, lawyers and derivatives experts all drawn from outside the Bank of England. The board does not consider that the events leading up to the collapse point to the need for any fundamental change to the framework of regulation in the UK. But there is, it concludes, a need for improvements in the implementation of the existing arrangements.
"The board considers that the Bank of England reasonably placed reliance on local regulators of the overseas operations, and was also entitled to place reliance on the explanations of the management for the profitability of those operations and on the other information provided by Barings. Though the regulatory reports from Barings to regulators did contain information that was relevant to the collapse, they did not contain material information which could have alerted the regulators to the existence of the unauthorised positions that had been taken.
"The board identified a number of shortcomings in implementation by the Bank of England. It considers that an error of judgment was made in 1993 in giving Barings Brothers & Co an 'informal concession' in relation to the normal obligation of a bank to notify in advance exposures representing over 25 per cent. of its capital base. The time taken by the Bank of England to address the policy issues involved resulted in what the board judged to be an unacceptable delay of almost two years in reimposing the 25 per cent. limit. The Board of Banking Supervision was unable to determine whether or not this delay on the part of the Bank in imposing this limit was a contributing factor in Barings' collapse.
"The report draws lessons for the management of banks like Barings, and for regulators and auditors. The Bank of England has accepted all of the recommendations relevant to it and I am placing copies of the Bank's detailed response in the Library of the House. The only other regulator for whom the Board of Banking Supervision draws lessons is the Securities and Futures Authority, which will respond once it has studied the report.
"The collapse of the Barings Group was clearly a very serious matter and caused damage to the reputation of the City of London. It has led to loss for a number of investors in Barings. However, the takeover by ING has stabilised the group and averted the prospect of far greater loss. Nothing has happened since my earlier Statement and there is nothing in the report to make me doubt my view that it would have been wrong to have used public funds to rescue Barings.
"Finally, I should like to remind the House of an important point. No regulatory system can provide a 100 per cent. guarantee against a bank failure, especially where there is a deliberate intention on the part of individual traders to conceal or deceive, combined with inadequate management controls. In cases such as this it is important that lessons are learnt quickly and promulgated widely so that all parties, including the management of other financial institutions, can learn from the unfortunate example. The speed and openness of the process is the best way to give confidence to the public and to the City. The Bank of England has already responded positively to the report. It is essential that management of all financial firms do the same".
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