Bank of England and BCCI - From Supervision to Closure

The Bank of England played a central role in BCCI’s regulatory history and in the events that led to its closure in July 1991.

For many years, the Bank of England supervised BCCI’s banking activities in the United Kingdom. It later became a leading member of the international College of Regulators established to exchange information about the BCCI Group.

The Bank of England knew that BCCI had serious financial and management problems. It received information from BCCI’s auditor, Price Waterhouse, concerning losses, problem loans, weaknesses in internal controls and irregularities within parts of the Group.

Abu Dhabi was also aware of the problems. An internal Task Force established by BCCI with Abu Dhabi’s involvement had examined major problem accounts and related transactions during 1990. Its findings were reported to Price Waterhouse and Abu Dhabi and contributed to further investigation, additional financial support, management changes and the restructuring programme supported by Abu Dhabi.

The Bank of England’s initial response was not closure. It supported an Abu Dhabi-backed restructuring intended to replace BCCI’s existing organisation with separately capitalised, managed and regulated successor banks.

This was not simply an outline written on paper. Abu Dhabi had committed billions of dollars, internationally recognised financial, management and legal advisers were involved, new management was being recruited, and detailed regulatory applications, business plans and financial projections were being prepared.

The Bank of England’s position changed rapidly after Price Waterhouse delivered a draft report under Section 41 of the Banking Act 1987 on 22 June 1991. Within days, it moved from considering the restructuring to organising coordinated closure action.

The central questions are therefore:

Why did the Bank of England confidentially commission a further Section 41 investigation when the restructuring was already at an advanced stage, and what materially new and unverified information caused it to abandon the programme only days after receiving Price Waterhouse’s draft report and before it was finalised?

How BCCI was supervised

BCCI was an international banking group rather than a single bank incorporated and supervised in one country.

Its principal banking companies were incorporated in Luxembourg and the Cayman Islands. It operated through branches, subsidiaries and affiliated institutions in many other countries.

This structure created supervisory difficulties. No single central bank originally exercised consolidated supervision over the whole Group. The principal central banks later formed a College of Regulators to exchange information and coordinate their supervision.

The College included the Bank of England, the Luxembourg Monetary Authority, the UAE Central Bank and other European central banks.

The division of responsibility became especially important when the Bank of England supported by certain European central banks moved towards closure without involving the UAE Central Bank in the decisive discussions.

Problems known before 1991

BCCI’s financial problems did not first become known immediately before closure.

During its audit of BCCI’s 1989 accounts, Price Waterhouse raised concerns about substantial international loans and related transactions, particularly accounts associated with the Grand Cayman branch of BCCI Overseas.

At Price Waterhouse’s request, an internal Task Force was established in March 1990. It consisted of senior BCCI officers drawn from finance, Treasury, credit and operations. Working with Price Waterhouse, it examined the accounts identified by the auditors, interviewed responsible officers, reviewed documents and considered the provisions required against possible losses.

The Task Force was an internal examination rather than an independent statutory investigation. Nevertheless, its work is important because it shows that significant losses, problem loans, questionable transactions and weaknesses in management were already being examined during 1990.

The response at that stage was to identify the losses, obtain additional financial support, change management and reconstruct the Group.

In May 1990, Abu Dhabi interests became BCCI’s controlling shareholders, holding approximately 77 per cent of the Bank. They did so when serious financial problems had already emerged and when it was clear that substantial support and structural reform would be required.

Abu Dhabi did not withdraw when the scale of the problems became clearer. It accepted the financial exposure, supported further investigation and committed substantial resources to stabilising BCCI.

By May 1991, the overall support arrangements reportedly amounted to approximately US$5.1 billion. They included capital subscriptions, cash, guarantees, promissory notes and commitments relating to certain unrecorded liabilities.

This support became the financial foundation of the restructuring.

A restructuring developed with external professional advisers

The restructuring involved much more than BCCI management preparing its own rescue proposal.

Abu Dhabi brought in major external professional advisers to help establish the Bank’s financial position and design the successor institutions.

Price Waterhouse was closely involved in identifying losses and liabilities, considering provisions against problem loans, examining the financial condition of the Group and helping to develop the financial arrangements required for restructuring.

Booz Allen & Hamilton, an international management consultancy, worked on the business and organisational design of the proposed successor institutions. Its role included considering the structure and strategy of the proposed new banks, the activities they should retain, their management arrangements and the basis on which smaller and more focused banking businesses could operate.

Allen & Overy, a leading international law firm, acted as legal adviser in connection with the restructuring. Its involvement included work on the legal and regulatory arrangements for the proposed new UK bank and participation in detailed discussions with the Bank of England.

These appointments added professional independence and credibility to the programme. They also demonstrated that Abu Dhabi and BCCI were treating the problems seriously. The work involved financial investigation, organisational design, legal documentation, regulatory applications, management recruitment and committed funding. It was not merely an attempt to preserve the existing BCCI structure under a different name.

The proposed successor banks

The restructuring proposed replacing BCCI’s existing structure with three separately capitalised, managed and regulated banks centred on:

London;
Abu Dhabi; and
Hong Kong.

Each bank was intended to have its own capital, board, senior management and national regulatory supervision.

The programme also included:

new boards and senior management;
stronger capitalisation;
clearer responsibility for national regulators;
closure or consolidation of branches;
substantial staff reductions;
transfer of important Central Office functions from London to Abu Dhabi; and
separation of viable banking operations from problem loans and other impaired assets.

The existing BCCI structure would not simply have continued. Viable businesses would have been selected for transfer to the new institutions, while the old legal entities and problem assets would have been dealt with separately.

What were the problem or impaired assets?

The expressions “problem assets” and “impaired assets” referred mainly to loans and advances whose full repayment had become doubtful, delayed or unlikely. They could also include certain investments and other financial claims whose recorded value was uncertain.

They included:

non-performing loans on which principal or interest was overdue;
bad or doubtful loans whose full collection was uncertain;
loans supported by inadequate security;
large connected exposures;
loans involving nominee or external companies;
unpaid interest added to outstanding loan balances; and
investments or other assets carried at more than their likely collection value.

This did not mean that every such asset was completely irrecoverable. Some might have been collected in full, others only partly, and some might ultimately have produced little or no collection.

The restructuring therefore contemplated a separate institution or recovery companies to hold, manage and pursue these assets over time. This would have allowed the proposed successor banks to begin with viable banking operations, new capital and clearer financial statements.

Unrecorded deposits, guarantees and other undisclosed obligations were liabilities rather than problem assets. They also affected BCCI’s financial position and formed part of the financial-support arrangements, but they should be considered separately.

Agreement in principle by the Bank of England

On 27 November 1990, the Bank of England agreed in principle that the three-bank restructuring could be pursued, subject to outstanding requirements concerning independence, capitalisation and supervision.

That agreement did not amount to final authorisation of the proposed new banks. Important details still had to be completed and approved. It nevertheless established the framework within which Abu Dhabi, BCCI and their professional advisers continued working.

During the first half of 1991, the programme moved from general principles towards implementation. Financial-support arrangements were negotiated, businesses were reviewed, management structures were designed, senior appointments were considered and regulatory applications were prepared.

The proposed new UK bank

The proposed UK institution became one of the most advanced parts of the restructuring.

It was intended to be smaller and more focused than BCCI’s existing UK operation. Selected viable activities would be transferred to a newly capitalised institution. It would have a new board, new senior management, new directors and closer supervision by the Bank of England.

On 29 May 1991, the Bank of England received a draft application for the proposed new UK bank.

On 31 May, representatives of BCCI, Price Waterhouse, Booz Allen & Hamilton and the Abu Dhabi majority shareholders presented the restructuring proposals in greater detail to the Bank of England.

On 4 June 1991, Brian Quinn of the Bank of England recorded that he had seen nothing that caused him to believe that the Bank should object to the proposed restructuring.

Lord Justice Bingham recorded that on 6 June 1991, the Bank of England’s Banking Supervision Division envisaged approval in principle for the proposed new UK bank before the end of June, provided the outstanding issues were resolved and the US investigations did not reveal serious problems for the restructuring.

On 13 June, representatives of BCCI, Price Waterhouse and Allen & Overy met Bank of England officials to examine the draft business plan and application in detail. The Bank specified the capital ratio it required and the proposal was revised in response.

On 18 June 1991, twelve copies of a revised application, together with an updated business plan and financial projections, were submitted to the Bank of England. Lord Justice Bingham later described them as substantial documents.

These steps show that the restructuring was not a vague proposal awaiting serious work. The Bank of England was receiving and commenting upon regulatory applications, advisers were revising documents to meet its requirements, and approval in principle for the proposed UK bank remained under consideration.

The Bank of England’s own later public account confirmed that its approach before the final crisis had involved recapitalisation, reorganisation, management change and radical restructuring. Governor Robin Leigh-Pemberton subsequently stated that, on the information available at the time, that strategy had appeared capable of succeeding.

A confidential parallel investigation

While the restructuring was progressing, the Bank of England separately commissioned Price Waterhouse to investigate BCCI under Section 41 of the Banking Act 1987.

The investigation was commissioned confidentially on 4 March 1991. BCCI and the Abu Dhabi majority shareholders were not told that it had been initiated or that its findings might later become decisive in determining whether the restructuring would proceed.

Price Waterhouse was therefore involved in two parallel processes.

On one side, it was assisting with the financial restructuring and helping to put in place arrangements intended to address BCCI’s known losses, problem loans and irregularities.

On the other, it was conducting a confidential Section 41 investigation for the Bank of England.

A regulator may have legitimate reasons for keeping an investigation confidential. The more significant historical point is that the majority shareholder was simultaneously committing billions of dollars to a restructuring being developed with the Bank of England without being told that a separate investigation had been commissioned which would later become central to abandoning that programme.

The available public record does not adequately explain why a further confidential investigation was considered necessary at that stage, what Price Waterhouse was specifically instructed to establish, or how the investigation related to the restructuring already agreed in principle.

Nor does the public record contain a detailed comparison showing which parts of the Section 41 draft represented genuinely new findings and which concerned matters already known through earlier audits, the Task Force and restructuring work.

The commissioning of the investigation did not itself halt the restructuring. The detailed work during May and June continued while the investigation was under way.

Delivery of the draft report

Price Waterhouse delivered its Section 41 report in draft form to a security guard the Bank of England on the night of Saturday, 22 June 1991.

The Bank of England discussed the draft with Price Waterhouse on Monday, 24 June.

The circumstances and timing of this unusual delivery outside normal banking hours are not fully explained in the published record. More importantly, the document had not been finalised before it became central to the Bank of England’s change of course.

The draft addressed serious allegations concerning BCCI’s accounts, losses, liabilities, lending, nominee arrangements, external companies, Treasury activities and internal controls.

A detailed comparison is required to establish:

which findings were genuinely new and verified;
which confirmed, extended or reformulated matters previously identified;
which alleged practices were continuing under the changed management;
which allegations still required further examination; and
which findings were incapable of being addressed by Abu Dhabi through the funded restructuring.

Bingham recorded differing contemporary reactions. Cowan of Price Waterhouse considered that there was “not very much new” in the draft and suggested that part of its impact came from bringing different strands together. Bank of England officials reacted more strongly to its cumulative presentation.

Price Waterhouse did not recommend immediate closure in the draft.

The United States dimension

The Bank of England’s change of position cannot be considered solely by reference to the Section 41 draft.

Between 23 and 25 June 1991, Bank of England officials held discussions with regulators and prosecutors in New York. US authorities were investigating BCCI’s alleged concealed ownership or influence over First American and other US institutions and were considering further action.

Bingham recorded that knowledge of the beliefs, US opposition to the restructuring and intended actions of the US authorities, when added to the draft Section 41 report, helped the Bank of England to change course.

The available record does not establish whether US developments influenced the earlier decision to commission the Section 41 investigation or whether the investigation was intended from the outset to provide a basis for abandoning restructuring to please the US authorities. No such motive should be asserted without further documentary evidence.

Some allegations then circulating, including allegations concerning Ghanem al-Mazrui, the representative of the Abu Dhabi majority shareholders, had not been fully verified at the time.

The rapid change of course

By 27 - 28 June 1991, the Bank of England had decided that the proposed restructuring should no longer proceed. By 1 July, coordinated regulatory action was being organised without the knowledge of Abu Dhabi.

This was a major and rapid change from the position earlier in June, when the Bank was still considering approval in principle for the proposed new UK institution.

Bingham recorded several matters surrounding the decision: the cumulative impact attributed to the Section 41 draft, the prospect that Price Waterhouse might disclaim an opinion on BCCI’s 1990 accounts, developments in the United States, concerns about the restructuring timetable and possible action by other authorities.

His report recorded the decision and concluded that closure was an appropriate course. It did not, however, reproduce a complete account of the deliberations or provide an item-by-item explanation of how each factor was weighed.

In particular, it did not explain in sufficient detail:

why the Bank of England acted before requiring Price Waterhouse to finalise its report;
what materially new information made the restructuring unworkable;
why the prospect of a disclaimer on the 1990 accounts could not be addressed through the financial support and restructuring already being implemented;
why any further implicated individuals could not be removed;
why the restructuring could not be revised or made subject to stronger safeguards; and
why Abu Dhabi was not given an opportunity to address any additional concerns.

The position of the UK regional business

An important distinction recorded by Bingham concerned BCCI’s United Kingdom regional banking operations.

He wrote:

In its supervision of the UK Region the Bank encountered nothing to cause serious concern.

“In its supervision of the UK Region the Bank encountered nothing to cause serious concern.”

That observation is important because the proposed new UK bank was intended to preserve selected viable operations within a new institution, with new capital, new management, new directors and different regulatory arrangements.

It supports the need to distinguish between serious problems identified at Group level and the question of whether particular viable operations could have continued within properly supervised successor banks.

Why was the agreed restructuring abandoned?

The central issue is not whether another course could have been invented after receipt of the draft report. An alternative to closure already existed.

It was backed by:

approximately US$5.1 billion in financial-support arrangements;
new capital, guarantees and promissory notes;
separation of viable operations from problem loans and other impaired assets;
new boards and senior management;
regulatory applications and detailed business plans;
the work of Price Waterhouse, Booz Allen & Hamilton and Allen & Overy; and
the continuing involvement of Abu Dhabi as majority shareholder.

The relevant questions are therefore:

What specific findings caused the Bank of England to abandon the restructuring?
Which findings were genuinely new and verified?
Why could additional concerns not have been addressed by revising or strengthening the programme?
Why were Price Waterhouse and the Abu Dhabi majority shareholders not given a fuller opportunity to respond?
Why was the report not finalised before it became a principal basis for closure?
What assessment was made of the consequences of abandoning restructuring?
How much weight was attached to the beliefs and intended actions of the US authorities?

These questions do not deny that BCCI had serious financial and management problems. They concern why a substantially funded restructuring addressing BCCI’s problems, already agreed in principle and approaching implementation, was suddenly abandoned altogether.

Restructuring activity continued

Although the Bank of England was moving away from restructuring by the end of June, it did not immediately inform those implementing the programme.

Leonard Kingshott, formerly of Lloyds Bank International, was reportedly beginning work on the proposed new UK institution on 1 July 1991.

Further restructuring documents continued to circulate. An updated composite plan for the three regional successor banks was sent to the Bank of England and the Luxembourg authorities on 3 July 1991.

Price Waterhouse was informed by the Bank of England on 3 July that closure was being pursued. It expressed serious reservations and warned the Bank of England of damaging consequences for depositors and BCCI’s international operations. It reportedly regarded liquidation as a possible “nightmare scenario” and considered the proposed action precipitate and prejudicial.

The Abu Dhabi majority shareholders and the UAE Central Bank were not included in the decisive discussions. Abu Dhabi continued to act on the understanding that the restructuring and associated financial arrangements remained active.

On 4 July 1991, one day before closure, Abu Dhabi transferred a further US$650 million as part of the agreed capital and restructuring arrangements.

The timing demonstrates that the majority shareholders were still meeting substantial financial commitments connected with the restructuring immediately before BCCI was closed.

The US$650 million was subsequently recalled after Ghanem al-Mazrui, representing the Abu Dhabi majority shareholders, was informed of the closure decision at a meeting in Luxembourg on 5 July 1991 arranged by the Bank of England.

The reasons for the interval between the decision to abandon restructuring and the closure announcement, and the circumstances of the US$650 million transfer, are examined separately in The Timing of Closure and the US$650 Million Transfer.

5 July 1991

On 5 July 1991, the Bank of England and the Luxembourg Monetary Institute announced action closing BCCI in their jurisdictions, coordinated with authorities in a number of other countries.

The Bank of England did not possess authority to close BCCI throughout the world. Action depended upon the relevant supervisory and judicial authorities in each jurisdiction.

The response was not uniform. While branches were closed and assets frozen in several countries, authorities in a number of countries did not follow the same course of immediate closure and liquidation.

In countries including Pakistan, India, Bangladesh, Nigeria and Kenya, local BCCI operations were dealt with differently. These arrangements reflected concern for the continuity of banking services, customers, businesses and employees rather than a single worldwide regulatory response.

The restructuring programme involving Abu Dhabi, Price Waterhouse, Booz Allen & Hamilton, Allen & Overy, BCCI management and several banking regulators came to an abrupt end.

The proposed successor banks in London, Abu Dhabi and Hong Kong were never launched and therefore were never tested in operation.

The new management structures were never given the opportunity to take control.

The arrangements developed to separate viable banking operations from problem loans and other impaired assets were overtaken by liquidation in the jurisdictions where closure proceeded.

The regulatory applications, business plans and financial projections under consideration were superseded by closure.

For BCCI’s employees and customers, most of whom had no involvement in the matters leading to the crisis, the transition envisaged by the restructuring never took place.

An understandable feeling of betrayal

Bingham later recorded that the Bank of England’s dealings had given the Abu Dhabi majority shareholders reason to believe that, if its requirements were met, the restructuring could proceed. He described their resulting “feeling of betrayal” as understandable.

The Abu Dhabi shareholders had acquired control of a troubled international banking group, accepted substantial financial exposure, committed billions of dollars, agreed to major management changes and employed external professional advisers to develop new and separately regulated institutions.

They continued to support and implement that programme into the first days of July without being told that the Bank of England had decided it should no longer proceed.

The historical significance is therefore clear:

The restructuring did not end because the proposed successor banks had been launched and proved unworkable. It ended before they had the opportunity to begin operating.

Important sources

Statement of the Abu Dhabi majority shareholders following closure.
Sir Thomas Bingham, Inquiry into the Supervision of the Bank of Credit and Commerce International, HC 198, 1992, particularly the sections dealing with the 1990–1991 restructuring, Abu Dhabi support, Price Waterhouse, the proposed successor banks and the events of June–July 1991.
Bank of England, Annual Report 1992 and Banking Act Report 1992–1993.
Bank of England Quarterly Bulletin, 1992, “Policy after the ERM; supervision after Bingham”, including Governor Robin Leigh-Pemberton’s comments on the remedial and restructuring strategy pursued before receipt of the Section 41 report.
Hansard, House of Commons debates and written answers, July 1991, concerning BCCI’s closure, the proposed UK successor institution and Leonard Kingshott.
US Government Accountability Office, Bankruptcy: Complex Financial Institutions and International Coordination Pose Challenges, GAO-11-707, 2011.

Also read

Research Note

This analysis reflects the documentary record available at the time of writing. Where further official records remain subject to information and disclosure requests, the conclusions should be read as provisional and capable of revision in light of new evidence.