What Happened Between the Decision and the Announcement?
The importance of the final days before BCCI’s closure lies not only in the Bank of England’s decision to abandon restructuring, but also in the timing of its implementation.
Price Waterhouse delivered its draft Section 41 report on the night of Saturday, 22 June 1991. Following discussions within the Bank of England and meetings with United States authorities in New York, the Bank’s position changed decisively on 27 - 28 June. By 1 July, coordinated regulatory action leading to closure was being organised and led by the Bank of England.
Yet closure was not announced until 5 July 1991.
During that interval:
- Price Waterhouse was not informed until 3 July that closure was being pursued;
- Price Waterhouse strongly objected and warned that liquidation would produce a “nightmare scenario”;
- Abu Dhabi was not told that restructuring had been abandoned;
- the UAE Central Bank was excluded from the decisive regulatory discussions; and
- Abu Dhabi transferred a further US$650 million on 4 July, only one day before closure was announced.
The central question examined on this page is:
Was the interval between the decision to abandon restructuring and the announcement of closure connected in any way with the anticipated transfer of US$650 million from Abu Dhabi?
No publicly available document presently proves such a connection. However, the chronology raises questions that require disclosure of the Bank of England’s internal records, its communications with the United Kingdom Government and its discussions with other regulatory authorities.
After the announcement
Abu Dhabi immediately recalled the US$650 million and acted concerning its remaining financial commitments.
This sequence raises a question distinct from what was contained in the draft Section 41 report:
Why was closure not announced until 5 July, after the US$650 million had been transferred on 4 July?
The Background to the Sudden Change of Course
The Bank of England had previously agreed in principle to an Abu Dhabi-supported restructuring involving three separately regulated successor banks and a fourth institution to hold and manage problem assets.
The proposed restructuring involved:
- new boards and senior management;
- additional capital and financial guarantees;
- stronger regulatory supervision;
- the separation of viable banking operations from impaired assets; and
- successor banks principally based in London, Abu Dhabi and Hong Kong.
Price Waterhouse’s draft Section 41 report contained extremely serious material. However, many of the underlying financial and management problems had already been identified and were being addressed through earlier investigations, management changes, substantial shareholder support and the proposed restructuring.
However, whether the draft report established sufficiently new and conclusive evidence to justify abandoning that programme is examined separately in What Did the Section 41 Report Add Beyond the 1990 Task Force?
The Bingham Report establishes that the Bank of England’s abrupt change of course followed not only its receipt of the draft Section 41 report, but also its discussions with United States authorities in New York from 23 to 25 June 1991. Bingham considered that the information and intended action communicated by the US authorities, when added to the draft report, helped shift the balance decisively towards closure. The Bank of England then moved rapidly from supporting restructuring to organising BCCI’s closure - but did not announce it immediately.
From Restructuring to Closure
The Bank of England’s position changed rapidly during the final week of June 1991.
From 23 to 25 June, Bank of England officials visited New York and held discussions with United States authorities. The American dimension and its possible influence are examined separately elsewhere on this website. It is sufficient here to note that those discussions occurred during the same brief period in which the Bank moved from restructuring towards closure.
By 28 June, the Bank of England had decided that the restructuring could no longer proceed. By 1 July, it was organising coordinated action with regulators in other jurisdictions.
Price Waterhouse- the firm that had prepared the draft Section 41 report—was not informed until 3 July that closure was being pursued.
Price Waterhouse strongly objected. It maintained that closure would not serve the interests of depositors, referred to the substantial support already provided by Abu Dhabi and warned that liquidation would lead to competing international claims, prolonged litigation and a disorderly outcome.
On 4 July, Price Waterhouse reportedly described liquidation as a “nightmare scenario” and considered the action precipitate and prejudicial.
These objections were significant. They came from the firm whose draft report was being relied upon as a principal basis for abandoning the restructuring.
Why Did the Bank of England Wait Until 5 July?
By 28 June 1991, the Bank of England had decided that the restructuring could no longer proceed. By 1 July, it had begun organising action leading to BCCI’s closure.
Yet the closure was not announced until 5 July 1991- just one day after Abu Dhabi transferred US$650 million honouring its commitment towards the BCCI restructuring programme.
Why did the Bank of England wait?
The published record does not provide a satisfactory explanation. Nor have the Bank of England disclosed internal notes, communications with the United Kingdom Government or records of its discussions with the participating European regulators.
The action was planned in strict secrecy. Abu Dhabi - the majority shareholder that had committed billions of dollars to BCCI’s support - was not told that the restructuring was being abandoned. The UAE Central Bank was also excluded from the decisive discussions, despite being a member of the College of Regulators alongside the Bank of England and the participating European central banks.
During this period, Abu Dhabi was permitted to continue acting on the belief that the restructuring and associated financial arrangements remained active.
The timing therefore raises serious questions:
- Was the Bank of England waiting for confirmation that the US$650 million had been transferred before announcing BCCI’s closure?
- Was the US$650 million the final amount expected from Abu Dhabi under the agreed financial package?
- Did the Bank of England believe that this transfer, together with Abu Dhabi’s earlier commitments, would remain available after closure and provide full or substantial protection for depositors?
- Was the closure deliberately withheld from Abu Dhabi because advance disclosure might have caused it to suspend the financial package, withhold the US$650 million or take action concerning the promissory notes?
- Was the risk that Abu Dhabi would immediately recall the transfer considered before closure was announced?
- Did the Bank of England inform the United Kingdom Government that it was continuing to receive financial support from a majority shareholder that had not been told that the restructuring had already been abandoned?
- Was it considered proper to accept the transfer while withholding from Abu Dhabi the decision that destroyed the purpose for which the financial support had been arranged?
What is established is deeply troubling:
- the Bank of England had abandoned restructuring by 28 June;
- closure preparations were under way by 1 July;
- Abu Dhabi was not informed;
- the UAE Central Bank was excluded;
- Abu Dhabi transferred US$650 million on 4 July; and
- closure was announced on 5 July, after which the transfer was immediately recalled.
The secrecy cannot be explained simply by referring to the risk of withdrawals by ordinary depositors. Abu Dhabi was not an ordinary customer. It was BCCI’s majority shareholder, the principal source of the financial support on which the restructuring depended and the government behind the jurisdiction in which one of the proposed successor banks was to be established.
Similarly, the UAE Central Bank was not an outside party. It was a member of the College of Regulators and would have been responsible for supervising the proposed Abu Dhabi successor bank.
The question is therefore not merely why the closure arrangements were kept from the public. It is why the Bank of England and the participating European regulators excluded both Abu Dhabi and the UAE Central Bank while continuing to allow the financial-support arrangements to proceed.
Until the relevant records are disclosed, a powerful possibility remains:
The Bank of England may have delayed announcing BCCI’s closure until the US$650 million had been transferred, believing that Abu Dhabi’s financial commitments would remain available to provide full protections to depositors after closure. If that was the calculation, it failed immediately when Abu Dhabi recalled the transfer and acted to prevent use of its remaining commitments.
That possibility cannot responsibly be presented as proven. But given the chronology, it cannot responsibly be ignored either.
The US$650 Million Transfer
On 4 July 1991, Abu Dhabi transferred a further US$650 million under the agreed financial-support arrangements.
The transfer was received only one day before closure was announced.
When closure was announced on 5 July, Abu Dhabi recalled the US$650 million and took action concerning promissory notes and other financial instruments forming part of the wider support package.
The proximity of these events does not itself prove that the closure announcement was deliberately postponed until the transfer had been received. It does, however, make the timing a legitimate and important subject for examination.
Was the Timing Connected to the Transfer?
No publicly available record presently proves that the Bank of England deliberately delayed announcing closure in order to ensure that the US$650 million was first transferred.
That conclusion cannot be confirmed as an established fact before the relevant internal records are disclosed by the Bank of England.
Nevertheless, the chronology gives rise to troubling questions:
- Was there any connection between confirmation of the US$650 million transfer and the announcement of closure the following day?
- Did the Bank of England act in good faith by allowing Abu Dhabi to transfer the money without disclosing that it had already abandoned the restructuring?
- Was the Bank of England relying upon the US$650 million and the wider Abu Dhabi financial-support package to protect depositors from the immediate consequences of closure and possible financial loss?
- Was the decision based upon an assumption that Abu Dhabi would remain legally bound to honour all its financial commitments after BCCI’s closure?
These questions concern the transparency, judgment and accountability of a public regulatory authority during the final days before an international bank was closed.
The Exclusion of Abu Dhabi and the UAE Central Bank
Abu Dhabi held approximately 77 per cent of BCCI by May 1990 and had committed billions of dollars to its financial support and restructuring.
The UAE Central Bank was a member of the College of Regulators and would have been responsible for supervising the proposed Abu Dhabi successor bank.
Yet Abu Dhabi nor the UAE Central Bank were exclused in the decisive discussions leading to closure.
The explanation subsequently advanced was that effective advance warning could have resulted in mass withdrawals and jeopardised coordinated regulatory action. That concern may explain why customers and the general public were not informed.
It does not fully explain why confidential discussions could not have taken place with:
- the Abu Dhabi Government as majority shareholder;
- the UAE Central Bank as a participating regulator;
- the proposed new management; and
- Price Waterhouse, which had prepared the draft report and opposed closure.
Nor does it explain why Abu Dhabi was permitted to continue providing financial support after the Bank of England had decided that the restructuring supported by those funds would not proceed.
A Serious Miscalculation by the Bank of England?
One possibility requiring independent investigation with disclosure is that the Bank of England relied on Abu Dhabi’s financial commitments - including the US$650 million transfer - to remain available after closure and to provide full protection for depositors against its immediate consequences, despite Price Waterhouse’s warning that closure would not serve depositors’ interests and could produce a “nightmare scenario.
If that assumption was made, it proved seriously mistaken.
Once Abu Dhabi learned that BCCI had been closed while the restructuring it supported had been abandoned, it recalled the US$650 million and acted concerning the other financial instruments.
This led to negotiations between BCCI’s liquidators and Abu Dhabi, culminating in an agreement under which Abu Dhabi contributed approximately US$1.9 billion to the liquidation. This should be viewed against the substantially larger support package of approximately US$5.1 billion already signed by Abu Dhabi, including capital support, guarantees and other financial commitments. Further support then under consideration could have increased Abu Dhabi’s total commitment to approximately US$7 billion, had the Bank of England allowed the restructuring to be implemented in full.
What the Bingham Inquiry Did Not Record
The Bingham Report recorded the chronology and remains an important document but appears to have s number of omissions. It referred to the objections raised by Price Waterhouse - the firm commissioned by the Bank of England to conduct the Section 41 investigation - but did not set out those objections, their supporting analysis or their implications in sufficient detail. Nor did it fully examine Price Waterhouse’s objections against the Bank of England's move for proceeding with closure. Lord Justice Bingham nevertheless concluded that closure was an appropriate course of action.
The Inquiry conducted by Lord Justice Bingham did not separately determine:
- why closure was not announced until 5 July 1991;
- whether the transfer of US$650 million one day earlier influenced that timing;
-
Was the Bank of England pushing for the amount and what Abu Dhabi was told before it transferred the amount;
- whether Bank of England officials believed, or had obtained legal advice, that Abu Dhabi would remain liable for its commitments under the restructuring finance package after closure was announced; and
-
whether the consequences of abrupt closure raised by Price Waterhouse were properly assessed by the bank of England officials.
These matters were also not fully or independently determined by the subsequent parliamentary examination, nor were they raised in the court proceedings initiated and funded by BCCI’s liquidators against the Bank of England, using Three Rivers District Council and other depositors as the named plaintiffs.
The question at the centre of this issue therefore remains to be addressed:
Why did the Bank of England wait until 5 July 1991 to announce BCCI’s closure - one day after Abu Dhabi transferred a further US$650 million under a restructuring programme that the Bank had already decided would not proceed?