Daiwa Bank - Lessons in Risk Management

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Case Details:

Case Code : FINC033
Case Length : 8 Pages
Period : 1996-2006
Pub. Date : 2004
Teaching Note :Not Available
Organization : Daiwa Bank
Industry : Banking
Countries : Japan / US

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This case study was compiled from published sources, and is intended to be used as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of a management situation. Nor is it a primary information source.

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Excerpts

Events Leading to the Loss

During the 1980s, Diawa's New York branch gradually increased its presence in the US government debt market.

It became a primary market dealer in 1986, emerging as one of the leading players in the US debt market.

The branch was also trading in bonds placing short-term bets on interest rate movements. Iguchi was entrusted with back-office work and there he learnt how to handle back-office paperwork for government-bond trading. In addition to his back-office duties, he was also promoted to the post of trader in 1984. Thus, Iguchi was simultaneously in charge of making trades and recording them in the department's back office.

In his early trading days, Iguchi lost $200,000 betting in the American government-bond market...

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Why Did It Happen?

Industry analysts said that a combination of blunders had led to the major losses at Daiwa. The bank's failure in implementing a proper risk management and internal control system was the biggest blunder.

The fact that Iguchi was able to conceal the losses for a period of 11 years showed that there was inadequate control and supervision of Iguchi's trading activities. Analysts felt that the scam had occurred due to the following reasons:

OVERLAPPING OF FRONT AND BACK-OFFICE DUTIES

The main objective of the back-office was to record and settle trades transacted by the front-office and reconcile them with the statements sent by the Bankers Trust for assessing the accuracy of prices. Iguchi was given charge of both trading and back-office duties and consequently, was well placed to manipulate the statements received from the Bankers Trust...

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