AIB/Allfirst: Development of Another Disaster

Abstract

In February 2002, the banking industry and its regulators were shaken by the revelation by the Allied Irish Bank (AIB) that a trader at one of its subsidiaries, Allfirst Bank, had incurred financial losses of almost $700 million. Similarities between Allfirst and the sudden collapse of Barings bank in 1995 are striking. The losses were worrying to regulators since they and the industry had worked hard to implement new procedures and controls designed specifically to ensure that a situation like Barings would not happen again. Obviously the lessons of the Barings failure had not been fully learned by the industry.

The formal inquiry set up to investigate the situation found, as with Barings, that the seeds of a potential ”disaster” had been sown a number of years before the losses were discovered and management had ignored warning signs. In an often-cited work in decision literature, Turner identified a number of features that are common to the development of “man made” disasters, many of which are apparent in events leading up to the problems at Allfirst. This paper reviews the AIB/Allfirst case using Turner’s framework and identifies some lessons for banks’ management.

Keywords: Operational Risk, AIB, Allfirst, Turner's Framework

JEL Classification: M14