The Bingham Report on the Inquiry into the Supervision of BCCI records that one of the most serious episodes in BCCI’s history before its closure was the discovery of substantial losses in the Bank’s Central Treasury operations during the period 1984–1986. The Central Treasury was based at 100 Leadenhall Street in London as part of the BCCI Central Office, although it formed part of BCCI Overseas and its transactions were booked in the Cayman Islands. This created an unsatisfactory supervisory position, as the treasury activity was effectively being conducted from London while falling outside direct UK consolidated supervision.
In October 1985, Price Waterhouse was commissioned to review the investment activities of the Central Treasury. The review found that the Central Treasury had incurred substantial losses on option contracts, which had not been properly disclosed by the accounting methods used. Price Waterhouse initially quantified the losses at US$285 million, attributed as US$75 million to 1984, US$150 million to 1985 and US$60 million to 1986. However, when the Bank of England later became aware of the matter in May 1986, it understood the losses to be approximately US$400 million, representing nearly half of BCCI’s net worth. Bingham also noted that even this figure was later thought to be lower than the true amount.
BCCI management explained the losses as resulting from a failure to apply its own stop-loss policies. The losses were to be made good through a capital injection and a subvention of US$150 million from the ICIC Staff Benefit Fund. The Bank of England took the view that management had deliberately overridden the safeguards that had been established to prevent losses of this scale.
The subvention from the Staff Benefit Fund was an internal decision taken by BCCI management. It was made after obtaining legal advice that permitted the contribution on the basis that it was necessary to prevent the failure of the Bank and, in doing so, to protect the employment interests of staff.
The discovery of the Central Treasury losses had significant consequences for BCCI’s relationship with the Bank of England. It damaged confidence in BCCI’s management, led Bank officials to question whether BCCI could safely be incorporated in the United Kingdom, and reinforced concerns about the weakness of BCCI’s structure and the absence of effective consolidated supervision. Bingham concluded that the episode should have led to closer and more effective supervision, rather than allowing the Central Treasury to be moved further away from direct UK oversight.
