Because BCCI operated in many countries, no single regulator was responsible for overseeing the whole bank.
Where BCCI Was Set Up
Bank of Credit and Commerce International S.A. was incorporated in Luxembourg in 1972. Its first branches were in Luxembourg, the United Arab Emirates and the United Kingdom. Karachi later became an important centre for its South Asian business.
Agha Hasan Abedi had first considered setting up the bank in the United Kingdom. According to the Bingham Report, this did not go ahead because the Bank of England asked for more capital than could be raised at the time. Luxembourg gave BCCI a European legal home instead.
From the start, BCCI was meant to be an international bank serving customers in the Middle East, Asia, Africa, Europe and other emerging markets. Its legal home, its management and its banking business were spread across different countries almost from the beginning.
Operated from London
BCCI's legal headquarters was in Luxembourg, but the bank was actually run from London. Its President, Chief Executive and most senior managers worked there, in an office later known as the Central Support Organisation (CSO). The CSO handled planning, finance, staffing, inspection and the coordination of regional offices, which is the work normally done by a bank's head office.
Lord Justice Bingham in his report on The Inquiry into the Supervision of BCCI by the Bank of England, published as the Bingham report, concluded that by 1979-1980, if not earlier, the "mind, management and central direction" of BCCI were in London. In his view, London rather than Luxembourg was the bank's real head office.
This gap between where the bank was registered and where it was run became central to the question of which regulator should have been in charge.
Two Banks Under One Group
As BCCI grew quickly, the Luxembourg regulator became uneasy about how fast it was expanding. In 1975–76 the Group was restructured:
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BCCI Holdings (Luxembourg) S.A. (BCCI SA) was the parent company. It was not a bank, so it was not supervised as one.
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Bank of Credit and Commerce International S.A. (BCCI Overseas) was registered in Luxembourg and ran mainly the European and Middle Eastern business.
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Bank of Credit and Commercial International Overseas) Ltd was registered in Grand Cayman and ran mainly the branches in Asia, Africa and other developing countries.
This allowed BCCI to keep growing without placing everything under Luxembourg's direct supervision.
There is no evidence of any formal agreement between the Bank of England and Luxembourg to leave BCCI's developing-country business unsupervised. The record does show, however, that neither was willing to take charge of the Group as a whole. Luxembourg felt it lacked the resources, since only a small part of BCCI's business was there. The Bank of England knew the bank was managed from London but did not want to become its lead supervisor.
Supervision in the United Kingdom
Before 1979, the Bank of England supervised foreign banks in London mostly informally, through meetings, its influence in the City and information from auditors and overseas regulators.
Concerned by BCCI's fast-growing UK network, the Bank of England required all UK branches of BCCI Overseas to be transferred to BCCI S.A. This took effect on 1 January 1979. From then on, the Bank of England received regular information on the UK branches and held routine meetings with management. Luxembourg remained the formal "home" supervisor.
A Licensed Deposit-Taker, Not a "Recognised Bank" in the U.K.
The Banking Act 1979 created two categories: recognised banks and licensed deposit-takers. BCCI S.A. applied to be a recognised bank. The Bank of England refused, saying BCCI had not yet built up enough standing in the financial community, and pointing to its complex structure and the lack of any single regulator overseeing the whole Group.
In June 1980 it granted BCCI S.A. a full licence as a deposit-taker, so BCCI could lawfully take deposits in the UK and conduct banking business. The two categories were merged by the Banking Act 1987.
In granting the licence, the Bank of England treated Luxembourg as BCCI's main supervisor and relied partly on Luxembourg's assurances. Bingham later found that this was a mistake: because BCCI was really run from London, it should not have been treated as a foreign-managed bank just because it was registered in Luxembourg.
However, BCCI operated with banking licences issued in other countries
Why No One Central bank Supervised BCCI
Normally, one regulator (the "consolidated supervisor") looks at an international bank's worldwide business as a whole. BCCI had no such supervisor. Responsibility was split among:
- the Luxembourg regulator, for BCCI S.A.;
- the Cayman Islands authority, for BCCI Overseas;
- the Bank of England, for the UK branches;
- the UAE Central Bank and other national regulators, for local operations; and
- the auditors, who became the main source of information about the Group as a whole.
Bingham described BCCI Overseas as, for a long period, effectively unsupervised. Each regulator saw only its own part of the bank.
The College of Supervisors
By the mid-1980s it was clear that no regulator had a full picture of BCCI. In 1987 a solution was proposed: the main regulators would meet regularly, usually twice a year, to share information. The idea owed much to the Dutch central banker Huib Muller, who warned that looking at each country's operation separately could give a false sense of security.
The College held its first meeting in Luxembourg in 1988. BCCI's senior management and its auditors attended part of each meeting, and the auditors reported on the Group's overall financial position.
The College was meant to:
- share information between regulators;
- give a broader picture of BCCI's finances;
- bring regulators, management and auditors together; and
- make recommendations to BCCI.
It did improve the flow of information. But it had no legal powers of its own, could not issue a licence and could not make any member act. Each regulator stayed responsible only for its own country. Bingham called it an improvement on what went before, but a "second-best" solution compared with one regulator overseeing the whole bank.
Who Sat on the College, and Who Did Not
Membership. The College started with four European regulators: the United Kingdom, Luxembourg, Switzerland and Spain. Hong Kong and the Cayman Islands joined in 1989, and France and the United Arab Emirates joined later. The expanded College did not still reflect BCCI's global realities.
The College was largely a Western body
Of the eight members, five were Western European. Hong Kong and the Cayman Islands were both British territories at the time, with banking regulation shaped by British practice. The UAE was the only member from outside the Western regulatory tradition, even though BCCI was founded by a Pakistani banker, owned mainly by Gulf shareholders, and did much of its business in the Middle East, South Asia and Africa.
The College has never explained why, apart from the UAE, representation from other countries were missing. BCCI has a presence in 73 countries, yet many of the places where it had its deepest roots and largest banking operations had no seat in the College. These included Pakistan and the countries of Africa and the wider Middle East where BCCI operated as a licenced bank. The College reflected where BCCI was registered and regulated in the West more than where it actually conducted business.
How decisions were made
The College had no written rules on voting. It was an informal forum for sharing information, not a decision-making body. When BCCI was closed on 5 July 1991, each authority acted under its own national law. The Bank of England applied to the English court, the Luxembourg regulator acted in Luxembourg, and the Cayman authority acted in Grand Cayman. No vote of the College was needed, and no member could have blocked the closure.
The UAE's position.
By 1990 the Government of Abu Dhabi was BCCI's majority shareholder and was funding a restructuring programme. Any new Abu Dhabi-based bank would have needed the UAE Central Bank's approval and supervision. Yet, according to the Bingham Report, although the UAE Central Bank was a College member, it was not included in the final discussions that led to the closure. The Report also records that a proposal to send officials to Abu Dhabi before acting was dropped after strong opposition from the President of the Federal Reserve Bank of New York. The United States was not a member of the College.
The US Position
Although BCCI had a presence in the US, it was not a formal member of the College of Supervisors. Nevertheless, its view carried considerable practical influence after the US authorities were conducting major investigations into BCCI’s activities in the US.
Supervision by National Regulators
BCCI was not unsupervised. In every country where it held a banking licence, it had to follow local banking laws, capital and liquidity rules and reporting requirements. Regulators in the UK, Luxembourg, the Cayman Islands, the UAE, Hong Kong, Pakistan and many other countries received returns, carried out inspections and set conditions. Each one understood its local operation well, but none could see the whole Group.
A question: whether the College's make-up affected the move towards the BCCI closure?
The European regulators led by the Bank of England who decided BCCI's fate came from a shared Western regulatory background. The shareholder government and the countries where BCCI had most of its customers were either absent from the College or left out of the final decision. It raises the question if the College more fully reflected BCCI's global presence, would it have given more weight to the Abu Dhabi-backed restructuring?
Sources:
- GAO, International Banking: Strengthening the Framework for Supervising International Banks (1994) (College membership and joining dates)
- BCCI Insights – Report of Lord Justice Bingham (UAE excluded from final talks; New York Fed)
- Bank of England, Banking Act Report 1991/92 (how the closure was coordinated country by country)
- Senate Kerry Report, ch. 12 "The Regulators" (College formed 1987, first meeting April 1988)
- Federal Reserve press release, 29 July 1991 (Luxembourg and Cayman actions on 5 July)