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Barings

4.51 p.m.

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:

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    "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 board also considers that the Bank of England displayed a lack of rigour in the analysis leading to the decision to permit Barings Securities Limited and

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    Barings Brothers to be supervised on a joint, or so-called 'solo consolidation' basis, and in failing to review the decision. Solo consolidation of the two companies need not have resulted in a reduction in control over the advance of funds to the Singapore subsidiary, but in the case of Barings that was the practical effect.

    "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".

My Lords, that concludes the Statement.


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