Groundlearn / Case studies / Daiwa Bank, 1995
Daiwa Bank, 1995
Operational risk: concealment and late disclosure
Eleven years of losses, hidden by the man who kept the records.
At a glance
| When | Mid-1980s to 1995 |
|---|---|
| Who | A bond trader at Daiwa Bank's New York branch |
| Instruments | US Treasury bonds, with securities sold out of custody to cover losses |
| Loss | About $1.1bn, a $340m fine and the end of Daiwa's US business |
| Risk type | Operational risk: concealment and late disclosure |
What happened
A trader at Daiwa Bank's New York branch lost about $1.1bn trading US Treasuries over eleven years. He had started in the branch's back office and kept control of custody and settlement after moving to trading. To cover his losses he sold bonds belonging to the bank and its customers, then forged the custody statements that should have shown them. After roughly thirty thousand unauthorised trades he confessed in a letter to the bank's president in July 1995.
Why it went wrong
The custody records that were supposed to prove the securities existed were produced by the person who had sold them, and nobody checked them directly against the outside custodian's statements. Then came a second failure: after the confession, Daiwa waited about two months before telling US regulators. The Federal Reserve treated that delay as the more serious offence and ordered the bank out of the United States within ninety days.
What it teaches
The person who trades must never also confirm, settle or hold the custody records. Reconciliation has to go to an outside source such as the custodian or counterparty. And once a loss is found, how quickly and honestly it is disclosed matters as much as its size.
Key terms
- Separation of duties
- Keeping trading, confirmation, settlement and custody in different hands so no one person can conceal a trade.
- Custody
- Holding securities on behalf of an owner, with records that are meant to prove they exist.
- Independent reconciliation
- Agreeing internal records to a source outside the unit, such as a custodian or counterparty statement.
- Unauthorised trading
- Trades outside a trader’s mandate or limits, often concealed by falsified records.
- Regulatory disclosure
- A bank’s obligation to tell its supervisors promptly about material losses or misconduct.
- Back office
- The operations that confirm, settle and record trades after the front office executes them.
Where it sits in the course
Case studies like this one are used throughout risk management teaching, including FRM® preparation, as worked examples of operational risk: concealment and late disclosure. In OTC Learn the lesson runs in five steps: what happened, the position, why it broke, what it cost and what it teaches, followed by a worked example with the numbers. See the lesson outline.
Related case studies
- Barings, 1995One trader, both sides of his own desk
- Sumitomo copper, 1996One trader, a grip on world copper, and ten years of hidden losses
- Société Générale, 2008Fictitious hedges, and a €4.9bn exit
Educational content only. Figures are from the public record, such as regulatory reports, commissioned reviews and court judgments, and estimates are described as such. This is not financial, investment, legal or regulatory advice.
Go deeper in OTC Learn
Daiwa Bank, 1995 has a five-step lesson, a worked example with the numbers, and a bank of questions in OTC Learn, free to download on Android. The core catalogue of 36 products stays free; the case studies are part of the subscription.
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