The Board of Banking Supervision, which is expected to hand its report on Barings' demise to the Treasury within a week, heard evidence from several sources that the Bank of England was not equipped to regulate a firm active in the full range of securities instruments and markets.
Both present and dismissed Barings executives are understood to have pointed in particular to a lack of understanding of derivatives at the Bank.
The board is to make a wide range of recommendations about how control procedures need to be tightened up, both inside investment banks and with their external regulators.
But in apportioning responsibility for the Barings disaster, the report is expected to come down heavily on a handful of former senior executives of Barings. The Bank of England itself is believed to escape much of the blame.
The Singapore authorities, which have been conducting their own investigation into the Barings collapse, have also apparently reserved their strongest criticism for the London-based senior executives in what is seen as a concerted attempt to shift responsibility away from domestic control failings.
In particular, Peter Norris, the former head of Barings' securities, was said to be devastated when shown the passages on himself in the Singapore report.
The Bank of England has gone some way over the past year to bolster its supervisory department with professionals in the securities markets. But evidence from Baring's executives credits the Securities and Futures Authority, the main City watchdog for investment banking, with a good understanding of the practices and markets in its field, while the Bank of England is held to be competent essentially only on classic banking matters.
A specific problem was that the main line of communication between Barings and the Bank was between respective banking heads, which meant the right questions were not being asked about the derivatives business.
"On the sort of activities Barings was engaged in in the Far East, the Bank of England was in the dark ages compared with the SFA. It is wholly unsuited to monitor someone with a significant equity presence," said onesource who provided evidence to the inquiry.
Even though the SFA is the expert securities regulator it was only responsible for the conduct of business by Baring's UK entity.
Under the principle of avoiding duplication, the Bank of England was Baring's central regulator, so all capital requirements could be dealt with by one body.But evidence from Barings' executives criticised the Bank of England for relying on a crude approach, treating the assets as if for merchant banking operations alone, instead of distinguishing different capital ratios for different risk activities.Reuse content