From Restructuring to Coordinated Closure: June - July 1991
The Bank of England’s move from supporting an Abu Dhabi-backed restructuring programme to preparing for the coordinated closure of the Bank of Credit and Commerce International (BCCI) took place over a remarkably short period in late June 1991.
That change can only be understood against the restructuring already in progress.
By 1990, serious problems had been identified by BCCI’s auditor, Price Waterhouse, within parts of the Bank’s loan portfolio, financial reporting and management. An internal Task Force, established with Abu Dhabi’s involvement, was examining problem assets and irregularities. Management changes were being made, branches and staff were being reduced, and important central functions were being moved from London to Abu Dhabi.
Abu Dhabi had become the 77 per cent majority shareholder and was providing substantial financial support.
Following Abu Dhabi’s acquisition of control, it committed itself to a restructuring programme developed with the involvement of Price Waterhouse, BCCI management, Booz Allen & Hamilton, legal advisers appointed by Abu Dhabi and the Bank of England.
The programme proposed replacing the existing BCCI structure with separately capitalised and independently regulated banks centred on London, Abu Dhabi and Hong Kong, while problem assets were to be separated from viable banking operations. New management and boards were being identified, detailed applications were being prepared and substantial shareholder support had already been committed.
On 27 November 1990, the Bank of England agreed in principle that the three-bank restructuring could be pursued, subject to outstanding requirements being satisfied.
The position before the Section 41 report
While the restructuring was moving forward, the Bank of England separately commissioned Price Waterhouse, under Section 41 of the UK Banking Act 1987, to investigate specified concerns relating to BCCI’s financial position, accounts, lending and other transactions.
The decision was confidential. The Abu Dhabi majority shareholders and the UAE Central Bank, which participated in BCCI’s College of Supervisors, were not informed why the separate Section 41 investigation was commissioned while the restructuring was moving forward.
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 records 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 outstanding issues were resolved and the US investigations did not reveal serious problems for the restructuring.
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.
Then, on Saturday, 22 June 1991, a draft Section 41 report was delivered to the Bank of England. It arrived over the weekend, outside normal working hours, and was handed to a security guard.
The Bank of England’s own later public account confirmed that its approach before the final crisis had been one of 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
The Section 41 investigation had been commissioned on 4 March 1991, while Abu Dhabi, BCCI, Price Waterhouse, professional advisers and the Bank of England continued to work on the restructuring.
BCCI and the Abu Dhabi majority shareholders were still not told that a separate investigation had been initiated or whether its contents might be used to abandon the restructuring.
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 financial problems.
On the other, it was conducting a confidential Section 41 investigation for the Bank of England.
The fact that a regulator may require confidentiality in an investigation is understandable. The more significant historical point is that the majority shareholder was simultaneously committing billions of dollars to a restructuring being discussed with the Bank of England without being told that a separate investigation had been commissioned which would later become central to abandoning that same restructuring.
The available public record does not clearly explain why the Section 41 investigation was commissioned at that particular stage, when substantial losses, problem loans, false accounting and other irregularities had already been identified and were being addressed within the restructuring.
Nor does the published record provide a detailed comparison showing precisely what in the Section 41 draft represented genuinely new findings and what related to matters already known through earlier audits, investigations, the internal Task Force and restructuring work.
Bingham records 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 the different strands together. Bank of England officials reacted more strongly to its cumulative presentation.
The separate question of the extent to which developments and pressure from the United States influenced both the commissioning or subsequent use of the Section 41 work remains relevant to the wider chronology and is considered separately.
The change of course
The Bank of England’s position changed rapidly during the week following receipt of the draft.
Lord Justice Bingham records the principal factors preceding that change, but his report does not reproduce the detailed deliberations or meeting notes showing precisely how those factors were weighed at the decisive 28 June meeting.
He records the conclusion - that the proposed restructuring could no longer be pursued and the action by the Bank of England to close BCCI was appropriate - rather than a complete account of the reasoning or justification by which that conclusion was reached.
Bingham records that several matters were in play: the cumulative impact attributed to the draft Section 41 report, the prospect of a disclaimer on BCCI’s 1990 accounts, developments and information from the United States, concerns about the restructuring timetable and possible action by other authorities, and allegations concerning Ghanem al-Mazrui, the representative of the Abu Dhabi majority shareholders.
His report does not, however, explain in detail why the Bank of England was prepared to act on a draft Section 41 report before instructing Price Waterhouse to complete and finalise it before a decision of such consequence was taken. This is particularly relevant because Bingham records that Price Waterhouse itself considered that there was “not very much new” in the draft, while Bank officials reacted strongly to its cumulative presentation.
Nor does the report set out why the prospect of a disclaimer on BCCI’s 1990 accounts could not have been addressed within the restructuring and financial-support arrangements already being implemented by the Abu Dhabi majority shareholders.
The United States dimension also remains important, including opposition to the restructuring. Bingham records that developments and intended action in the United States influenced the Bank of England’s reassessment. What his report does not establish is whether those developments had also 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. The available public record does not establish such a motive, and that question requires further documentary evidence.
Bingham also refers to the possibility of action by other supervisory authorities, but does not in every instance identify those authorities or set out in detail what action each was contemplating and how that affected the Bank of England’s decision.
Some of the allegations then circulating, including allegations concerning Mazrui, were unverified at the time.
The US dimension, including the discussions of 23-25 June 1991 with the Bankf England officials visited New York and the position of the US authorities, is examined further under The United States and BCCI.
The position of the UK regional business
An important distinction recorded by Bingham concerns BCCI’s United Kingdom regional banking operations.
He wrote:
That observation is significant because the proposed new UK bank was intended to preserve selected banking operations within a new institution, with new capital, new management, new directors and different regulatory arrangements.
Restructuring activity continued
Although the Bank of England was moving away from restructuring by the end of June 1991, even after receiving the draft Section 41 report it did not immediately bring the UK restructuring process to a halt, and implementation of the wider Abu Dhabi-backed programme was allowed to continue.
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 plan for the three regional successor banks was sent to the Bank of England and the Luxembourg authorities on 3 July 1991.
Abu Dhabi also continued to provide financial support.
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 is important. It 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.
5 July 1991
On 5 July 1991, the Bank of England and the Luxembourg Monetary Institute announced the closure of BCCI in their jurisdictions, with coordinated action in a number of other countries.
The response was not uniform worldwide. While branches were closed and assets frozen in several jurisdictions, 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, reflecting the desire to ensure the continuity of banking services, businesses and depositors.
The proposed new 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 assets were overtaken by liquidation in the jurisdictions where closure proceeded.
The restructuring ended before the proposed successor institutions had the opportunity to begin operating.
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.