Barings Bank

The history and evolution of Barings Bank provides a convenient thumbnail sketch of the rise and fall of a modern financial institution. Originally founded on the first day of 1763 by the two Baring brothers, John and Francis, the company began as a London mer- chant house, the John and Francis Baring Company, engaged in the surging textile trade. Over the next decades, the Baring Company grew from a trading house to an institution that earned profit by arranging finance for other companies' trading, activities that today are known as merchant banking. It was quite a natural evolution for the Barings to move from financing private institutions to financing government activities.

Despite having been commissioned by the British government to help finance their army during the American Revolution, and then against the French, in 1803 Barings also aided the United States in the purchase of Louisiana, thus helping to finance Napoleon in his war against Britain. At this point in time the Bank was demonstrating signs of growing into a modern capitalist institution, one more loyal to its own profitability than its country of origin.

By the early nineteenth century Barings, at this point Baring Bros. & Co., had achieved a level of fame that prompted the famous quote, attributed to the Duc de Richelieu, that "There are six great powers in Europe; England, France, Prussia, Russia, and the Barings Brothers."

Barings had by this point in time become so powerful that they rivalled the Rothschild empire. As a family they were sharp businessmen, but unlike other family concerns they did allow non-family members into the inner sanctum.

For most of the nineteenth century the rise of Barings was steady and evolutionary, serving as a template to define how contemporary banking would proceed. The Baring family amassed great fortunes, art collections, and stately homes. The core of the business was still financing trade, but the practice of using the Bank's own holdings for investment opportunities was becoming a more important component of their business.

In 1886 the company issued shares in the Guinness Brewery. The issue of both pre- ferred and ordinary shares was in such demand that the shares allocated to the Barings Bank itself, and their contacts in the financial world, caused all concerned to achieve enormous profits.

This financial success encouraged the Bank to enter into more risky ventures. In the past the financing of America's financial infrastructure had gone well, owing to the rise of the US's place in the industrial world. Now they would involve the Bank in doing the same in the more risky South America.

In 1890 Barings made an investment in Argentina. The Buenos Aires Water Supply and Drainage Company was underwritten by the Bank in return for the building conces- sion. Barings sent the funding to South America before issuing the shares needed to raise the funds. Unfortunately the shares proved extremely difficult to sell.

Political upheaval in South America began almost immediately, and the Bank found it impossible to pay its bills. Almost simultaneously Russia withdrew large deposits from Barings Bank, and with tight credit owing to high interest rates the Bank's failure seemed imminent.

At this point in time Barings Bank was one of the greatest banks in the world, and it was thought that its failure could cause a domino effect and shake faith in the international merchant banking system.

A consortium was organized by the Bank of England that saved Barings Bank, though at the expense of the considerable fortunes of family members involved in the Bank. The value of being "too big to fail" saved the Bank, and after its re-capitalization the Baring Bros. & Co. Ltd was created. Never again would family fortunes be imperilled.

The twentieth century saw a new version of Barings Bank. Gone was the risk-taking bank; the new century ushered in a much more conservative institution.

The First World War did considerable damage to Barings' standing in the financial world. The war "in effect closed down the world of international trade and finance on which Baring Brothers had made its name and fortune in the nineteenth century", and by the time the war ended Barings "was no longer needed by the great foreign powers" (Gapper and Denton, 1996, p. 88). The Second World War increased the Bank's reluc- tance to be a risk taker. Now it would raise finance for large projects but seldom risk its own capital. By the mid 1960s the bulk of the Bank's work dealt with mergers and acquisitions.

As profits began to dry up from these conservative banking practices, the company started to look overseas, first to South America, and then to Japan. One of the new activities the Bank investigated was increasing their management of private clients' funds. This new initiative was fuelled in part by the massive rise in cash holdings, after 1973, of oil-providing Middle Eastern countries.

Barings Securities, the investment arm of the Bank, began to move into Asian markets by the mid 1980s. By the late 1980s the investment branch of Barings Bank was driving the profitability of its entire enterprise.

In 1989 Barings Securities hired a young margin clerk named Nick Leeson, who had ambitions to be a trader. By the early 1990s, he was in Singapore, and although the exact date is controversial, it is certain that by 1992 he was conducting hidden trading through Account #88888. Relying upon a dysfunctional management style, lack of communica- tion between different branches, lax regulation and outright fraud, Leeson brought about the collapse of Barings Bank in 1995.

No longer "too big to fail", Barings Bank was purchased by ING, a Dutch company, and after more than 200 years of banking Barings Brothers & Co. Ltd ceased to exist. In this regard, Fay (1996, p. 298) asks and answers a relevant question: "Will an event like the collapse of Barings happen again? Of course it will. Somewhere, it - or something like it - is happening now".

See also:

Investment banking; Merchant banks; Systemically important financial institutions.