Abstract
Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon. To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974. The rush to internationalize, the conflict between rules and norms, and the failure of internal and external checks all contributed to the largest single loss of any British bank to that time. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system.
Highlights
Rogue trading has been a persistent feature of international financial markets over the past thirty years, but there is remarkably little historical treatment of this phenomenon
To begin to fill this gap, evidence from company and official archives is used to expose the anatomy of a rogue trading scandal at Lloyds Bank International in 1974
Rogue Trading at Lloyds Bank International, 1974 / 107 be portrayed as an operational risk arising from a rational response to incentives in banks and financial firms that encourage employees to engage in bounded risky behavior to maximize profits
Summary
Rogue Trading at Lloyds Bank International, 1974: Operational Risk in Volatile Markets. The analysis highlights the dangers of inconsistent norms and rules even when personal financial gain is not the main motive for fraud, and shows the important links between operational and market risk. This scandal had an important role in alerting the Bank of England and U.K. Treasury to gaps in prudential supervision at the end of the Bretton Woods pegged exchange-rate system. Rogue Trading at Lloyds Bank International, 1974 / 107 be portrayed as an operational risk arising from a rational response to incentives in banks and financial firms that encourage employees to engage in bounded risky behavior to maximize profits. The Lloyds Bank losses in 1974 were at the lower end of comparable rogue trading scandals, and senior executives were not affected
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