6.Multistage Stochastic

Credit risk

The credit risk implication of the client advances represented by the 'top-up' balances was significant if the total funds remitted to Singapore was to meet genuine client margin calls. Yet the Credit risk department did not question why Barings was lending over US$500 million to its clients to trade on SIMEX, and collecting only 10% in return. It did not seem to have an idea of who these clients were, yet Barings' financial losses would have been significant if some of these clients defaulted.

The Credit Committee under George Maclean insists that it was Baring's policy to finance client margins until they could be collected. But no limit per client or on the total 'top-up' funds was set. Indeed clients who were advanced money this way appear not to have undergone any credit approval process.

The Credit Committee never formally considered the credit aspects of the 'top-up' balance although they could see the growth of these advances as recorded on the balance sheets. Plainly put, the credit risk controls of Barings Securities were shambolic.