The Bank of England played a central role in BCCI’s regulatory history and the closure of BCCI.
For many years, it supervised BCCI’s banking activities in the United Kingdom and later became a leading member of the international group of regulators responsible for overseeing the BCCI Group.
The Bank was aware that BCCI had serious problems. It received information from BCCI’s auditors, Price Waterhouse, about problem loans, financial losses and weaknesses in the Bank’s structure and management.
The Bank of England supported the Abu Dhabi-backed restructuring programme rather than closure. During June 1991, discussions were continuing between the Bank of England, BCCI officials and representatives of the Abu Dhabi majority shareholders as the restructuring plans were being finalised.
At the same time, the Bank of England commissioned Price Waterhouse to carry out an investigation under Section 41 of the Banking Act 1987. The precise reason why this investigation was commissioned at that stage is not clearly explained in the public record, particularly when a substantially funded restructuring programme was already under way. This leaves important questions about the purpose, timing and subsequent use of the Section 41 investigation that remain to be addressed.
Until the Section 41 findings were received, the Bank of England’s position was that restructuring appeared to offer greater protection to depositors than closing BCCI.
This makes the events of June and July 1991 particularly important.
On the basis of the Section 41 report it commissioned from Price Waterhouse, the Bank of England moved from considering a well-funded restructuring programme to leading coordinated action that closed BCCI internationally.
The central question is therefore:
What changed, and why did the Bank of England conclude that restructuring could no longer continue?
How BCCI was supervised
BCCI was an international banking group rather than a single bank incorporated in one country.
Its principal banking companies were incorporated in Luxembourg and the Cayman Islands, while it operated branches, subsidiaries and affiliated institutions in many countries.
This created a difficult supervisory structure. No single regulator originally supervised the entire BCCI Group.
As BCCI expanded, the principal regulators came together through a College of Regulators - a group created to exchange information and coordinate supervision between the countries responsible for major parts of BCCI’s operations.
The College was led by the Bank of England and included the Luxembourg supervisory authority, the UAE Central Bank, and other national regulators.
This arrangement later became an important issue because BCCI’s problems crossed national boundaries while responsibility for supervision remained divided among different authorities.
Problems were known before 1991
BCCI’s serious financial difficulties did not first become known immediately before its closure.
During the 1980s, the Bank of England had already become concerned about matters including BCCI’s structure, management and earlier Treasury losses.
By 1990, much more serious financial problems had been identified, particularly substantial problem loans and concealed losses.
Price Waterhouse was reporting to the Bank of England, while an internal Task Force established with the involvement of Abu Dhabi investigated problem assets and irregularities.
Many of the principal financial problems that later appeared in the Section 41 investigation were therefore already being examined before July 1991.
The regulatory response at that stage was not to close BCCI.
Instead, the emphasis was on identifying the losses, strengthening financial support, changing management and restructuring the Group.
Abu Dhabi steps in
In May 1990, the Government of Abu Dhabi and related institutions became BCCI’s controlling shareholders, acquiring just over 77% of the Bank.
They did so when serious financial problems were already known.
Abu Dhabi then committed very substantial resources to stabilising BCCI and dealing with its impaired assets.
By May 1991, the overall financial support arrangements amounted to approximately US$5.1 billion through a combination of cash, guarantees, promissory notes, capital subscriptions and commitments to cover certain unrecorded liabilities.
The majority shareholders also committed themselves to maintaining BCCI’s capital base while restructuring took place.
This was therefore not simply a promise that money might become available later. A substantial financial support programme had already been put in place.
The restructuring programme
During 1990 and the first half of 1991, a major restructuring plan was developed.
The proposal was to replace BCCI’s complicated international structure with three separately capitalised, managed and regulated banks based in:
- London
- Abu Dhabi
- Hong Kong
Problem loans and impaired assets would be separated from the viable banking businesses and transferred to separate recovery companies or another institution responsible for recovering their value.
The programme also included:
- replacing senior management
- transferring Central Office functions from London to Abu Dhabi
- closing or consolidating branches
- substantial staff reductions
- strengthening capital
- introducing clearer regulatory responsibility for the new banks
On 27 November 1990, the Bank of England accepted the three-bank proposal in principle, subject to appropriate independence, capitalisation and supervision.
The restructuring then continued through the first half of 1991.
On 22 May 1991, the major financial support arrangements were signed. Further Abu Dhabi support was confirmed in June.
The important point is that by this stage the restructuring was not merely an idea being discussed.
Financial support had been committed, management changes were taking place, problem assets were being identified, and detailed plans for the proposed new banks were being prepared for the regulators.
Why was the Section 41 investigation commissioned?
While restructuring was progressing, the Bank of England asked Price Waterhouse to carry out a special investigation under Section 41 of the Banking Act 1987.
Section 41 allowed the Bank of England to require an investigation where it considered further information necessary for the protection of depositors.
The Price Waterhouse investigation became known as Sandstorm.
A draft report was delivered to the Bank of England on 24 June 1991. It brought together serious allegations involving false accounting, concealed losses and liabilities, problem lending, nominee arrangements and other irregularities.
The seriousness of these allegations should not be understated.
But an important historical question remains:
What significant new information did the Section 41 report disclose that had not already emerged through earlier Price Waterhouse work, the 1990 Task Force investigation and the restructuring process?
This matters because many of BCCI’s financial problems and related irregularities had already been identified, and the restructuring programme was specifically intended to deal with problem assets, management weaknesses and financial shortfalls.
The question is therefore not whether BCCI had serious problems.
It plainly did.
The question is why the Section 41 findings were considered to make the restructuring programme no longer a realistic solution.
June 1991 - from restructuring towards closure
The change in the Bank of England’s position appears to have occurred very quickly.
After senior Bank officials considered the draft Section 41 report, a meeting chaired by the Deputy Governor on 28 June 1991 concluded that the proposed restructuring and new UK bank should no longer proceed.
By 1 July, the Bank of England and other European regulators were moving towards coordinated action to close BCCI.
This was a major change of direction.
Only weeks earlier, financial support and restructuring had still been progressing.
The Bank of England's own later account stated that until it received the Section 41 information, remedial action had been considered more appropriate and more in the interests of depositors than closure. After the report was received, the Bank concluded that closure was necessary.
That makes the Section 41 report central to understanding the decision.
It also raises an important question:
Why did the Bank of England place such decisive weight on the Section 41 report when many of BCCI’s financial problems and related irregularities were already known and were being addressed through a funded restructuring programme?
The final days
The events immediately before closure raise further questions.
By the beginning of July, the Bank of England and other European regulators were moving in secret towards coordinated closure.
The UAE Central Bank, although itself a member of the College of Regulators, was excluded from the discussions leading to closure.
At the same time, the restructuring process had reached an advanced stage.
Final plans for the proposed new banks had been submitted to relevant regulators during May and June 1991.
At the request of the Bank of England and the Luxembourg Monetary Institute, the latest composite restructuring plan was sent to them on 3 July 1991.
On 4 July 1991, unaware that the move towards closure had already been decided and without having been informed of it, the Abu Dhabi shareholders transferred a further US$650 million in capital support.
The following day, 5 July 1991, BCCI was closed through coordinated regulatory action.
After Abu Dhabi was informed of the closure, the US$650 million transfer was immediately recalled.
This sequence deserves careful examination.
If the decision to abandon restructuring had already been taken, why were the majority shareholders not informed before they provided further capital?
And why was the UAE Central Bank, a member of the College of Regulators, excluded from the discussions that led to the closure of an institution whose majority ownership and major operations were by then based in Abu Dhabi?
Was closure the only realistic option?
The Bank of England maintained that the Section 41 findings made closure necessary to protect existing and potential depositors.
The seriousness of the findings provides an important part of the explanation.
But closure was not the only possible regulatory approach.
By July 1991, a restructuring framework already existed that proposed:
- removing existing management
- separating viable banking operations from impaired assets
- placing the viable businesses into separately capitalised banks
- bringing those banks under clearer national supervision
- providing substantial additional shareholder capital
- recovering problem loans through separate recovery operations
This raises a basic question:
Why was the proposal to separate BCCI’s viable operations from its problem assets not considered a serious and practical solution for addressing the findings of the Section 41 report?
The question becomes even more important because the Abu Dhabi majority shareholders had substantial financial resources and had already demonstrated their willingness to provide very large amounts of support. The restructuring programme was therefore not dependent on an uncertain source of future funding. It was backed by shareholders who had already committed billions of dollars to stabilising the Bank.
This makes it difficult to accept without further explanation that closure was the only realistic course available.
It also raises a more direct question about the role of the Section 41 investigation itself. Had that investigation not been commissioned and had the Bank of England not subsequently relied so heavily on its findings, the restructuring programme might have been allowed to continue and BCCI’s viable operations might have survived under new ownership, new management and stronger supervision.
The central issue is therefore whether the Bank of England still had a serious intention to allow the restructuring to succeed, or whether the Section 41 report became the basis for abandoning a restructuring programme that had already been substantially funded and developed.
If restructuring remained a genuine option, why did Bank of England commission the section 42 report and why was more time not given to implement it before moving to close BCCI’s entire international banking network?
What did Bingham later conclude?
Following BCCI’s closure, Lord Justice Bingham was appointed by the UK Chancellor of the Exchequer and the Governor of the Bank of England to investigate the supervision of BCCI.
His report was published in October 1992.
Bingham identified important errors of judgment and shortcomings in the Bank of England’s supervision.
At the same time, he concluded that the Bank’s decision to close BCCI in July 1991 was an appropriate course of action in the circumstances, although he recognised that it was not the only possible option.
That distinction is important.
The Bingham Inquiry considered the closure decision, but it did not provide a full comparative examination of closure against every restructuring alternative then available.
It did not fully test whether:
- the Abu Dhabi-backed restructuring could have succeeded
- viable operations could have been separated from problem assets
- additional management changes could have addressed regulatory concerns
- closer supervision involving the UAE Central Bank could have provided an alternative
- the shareholders should have been given an opportunity to respond to the Section 41 findings
- more time should have been allowed before abandoning the restructuring programme
The Bingham Report remains one of the most important official documents concerning BCCI.
But an important question remains:
Did the Inquiry sufficiently test the Bank of England’s own explanation for why a restructuring programme that had progressed for more than a year suddenly became unacceptable in the final days of June 1991?
Questions that remain
The documentary record leaves a number of questions that deserve further examination:
-
What was the motive of the Bank of England in commissioning the commission the section 41 when discussions on restructuring appeared to be at final stage?
-
What significant new findings did the Section 41 report disclose that had not already emerged from earlier investigations?
- Why did the Bank of England place decisive weight on the Section 41 report when many of BCCI’s financial problems and related irregularities were already known and were being addressed through restructuring?
-
Why was the restructuring programme not pursued when it remained backed by substantial financial support from the Abu Dhabi majority shareholders?
-
Was the UAE Central Bank excluded from the closure discussions because the European regulators feared that, if Abu Dhabi became aware that closure was being planned, the majority shareholders might withdraw or withhold the financial support on which BCCI’s restructuring depended?
-
Were the Abu Dhabi shareholders not informed that the move towards closure had already been decided so that the further US$650 million transfer on 4 July 1991, representing part of their commitment under the financial support arrangements — could first be secured?
-
Why was separating BCCI’s viable operations from its problem assets not considered a serious and practical alternative to worldwide closure, particularly when similar “good bank/bad bank” restructuring approaches were later used in cases such as Northern Rock?
-
Why did Lord Justice Bingham, in his Inquiry into the Supervision of BCCI, not examine these restructuring alternatives more closely before concluding that the Bank of England’s decision to close BCCI was appropriate, without setting out a detailed comparison of those alternatives or explaining why they were rejected?
These fundamental questions do not require denying that serious wrongdoing and financial problems existed within BCCI.
They ask something different:
Did those problems really make the closure of BCCI’s entire international banking network unavoidable across nearly 70 countries, including jurisdictions where local supervisory authorities had not reported fraud or comparable regulatory failures?
Why was such far-reaching action taken without first allowing the relevant national regulators to determine whether viable local branches, subsidiaries or affiliates could continue under stronger supervision, new ownership or restructuring?
And, most importantly, was a substantially funded restructuring programme - designed to separate viable operations from problem assets, replace management and strengthen supervision - abandoned before those alternatives had been fully tested?
These questions remain central to understanding why the Bank of England moved towards BCCI’s final closure while the restructuring programme had not yet been formally rejected, and substantial financial support remained in place
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