The losses in BCCI's Central Treasury became a major turning point in the Bank's history and in its relationship with the Bank of England.
The Central Treasury operated from BCCI's offices at 100 Leadenhall Street in London, but formed part of BCCI Overseas and its transactions were booked in the Cayman Islands. This meant that substantial treasury activity was being conducted from London while falling outside direct UK consolidated supervision - a situation Lord Justice Bingham later described as highly unsatisfactory.
Between 1984 and 1986, the Central Treasury accumulated substantial losses from trading in options and other financial instruments. In October 1985, Price Waterhouse was commissioned to examine its investment activities and initially calculated losses of approximately US$285 million. Price Waterhouse attributed the losses at that stage largely to inexperience and mistakes in a highly technical market, together with weaknesses in the accounting treatment of the transactions.
By the time the Bank of England learned of the losses in May 1986, it understood the figure to be around US$400 million, representing nearly half of BCCI's net worth. Bingham later noted that even this estimate was subsequently thought to be below the true amount.
BCCI management explained that its established stop-loss controls had not been properly applied. The Bank of England took a more serious view, concluding that management had overridden safeguards intended to prevent losses of this magnitude. The Bank was also deeply concerned that it had not been informed earlier.
The losses were addressed through additional capital and financial support, including a US$150 million contribution from the ICIC Staff Benefit Fund. The contribution was made after legal advice that it could be used to help prevent the failure of the Bank and thereby protect the employment interests of BCCI staff.
The episode had lasting consequences. It significantly weakened the Bank of England's confidence in BCCI's management and structure and raised fundamental questions about the effectiveness of supervision across the different jurisdictions in which the Group operated.
Bingham later concluded that the discovery of the Treasury losses should have led to closer and more effective supervision of BCCI. Instead, the episode became an early warning of the supervisory and structural problems that would continue to concern regulators during the years leading up to BCCI's closure in 1991.