The Bank of New England was a former regional banking institution based in Boston, Massachusetts, USA, which was seized by the Federal Deposit Insurance Corporation (FDIC) in 1991 as a result of heavy losses in its loan portfolio and was placed into Chapter 7 liquidation
The failure of the Bank of New England (BNE) in January 1991 provides another important comparison in examining the treatment of the Bank of Credit and Commerce International (BCCI). The comparison is especially relevant because BNE failed only six months before BCCI was closed, yet the regulatory response in the United States was directed towards protecting depositors, preserving viable banking operations and arranging an orderly transfer of the business, rather than allowing the collapse to spread through the wider financial system.
Bank of New England was a major regional banking group based in Boston, with operations across Massachusetts, Connecticut and Maine. By 1990 it had assets of approximately US$22 billion and hundreds of branches. Its rapid expansion during the 1980s coincided with a regional boom in commercial property and real-estate lending. When the New England economy weakened and property values fell sharply, the quality of the Bank’s loan portfolio deteriorated and losses mounted. The FDIC’s subsequent history of the banking crisis identifies excessive commercial real-estate lending, weak underwriting and the regional recession as central features of the problems affecting banks throughout New England.
Serious Management and Supervisory Failures
The failure was not regarded simply as an unavoidable consequence of recession.
The US General Accounting Office conducted a detailed investigation and concluded that the Office of the Comptroller of the Currency (OCC) had identified serious weaknesses years before the Bank finally failed but had not acted in a sufficiently timely or forceful manner. Its 1991 report was pointedly titled OCC’s Supervision of the Bank of New England Was Not Timely or Forceful.
The Bank had expanded rapidly between 1985 and 1989, particularly in commercial real estate. Regulatory examinations had identified deteriorating asset quality, weaknesses in lending practices and other safety-and-soundness concerns before the eventual collapse. The later FDIC history similarly records criticism of the supervisory treatment of BNE and notes that problems had been detected through the examination process several years before failure.
There were also questions concerning insider activity and management. The GAO investigation specifically examined whether insider conduct had contributed to the failure, in addition to assessing management weaknesses and supervisory shortcomings.
The official record therefore presented BNE as more than simply the victim of external economic circumstances. It was an institution suffering from poor lending decisions, inadequate controls, management shortcomings and regulatory failures.
Insolvency and a Depositor Run
By late 1990 and early January 1991, confidence in the Bank had deteriorated sharply.
Losses had become substantial and depositors began withdrawing funds. The prospect of a major bank run concerned US regulators because of the danger that panic could spread beyond BNE to other regional institutions.
On 6 January 1991, federal regulators closed Bank of New England and two affiliated banks — Connecticut Bank and Trust Company and Maine National Bank — and placed them under FDIC control.
The intervention was immediate and extensive.
Rather than allowing depositors to bear losses while the institutions were liquidated, US authorities invoked what became associated with the “too big to fail” doctrine. Depositors were protected, including accounts above the normal federal deposit-insurance limit.
This was an exceptional step.
At the time, standard FDIC insurance covered deposits only up to US$100,000 per depositor. In the BNE resolution, however, the authorities effectively protected all depositors because they feared that imposing losses on large uninsured depositors could destabilise other banks and intensify the regional crisis. Contemporary accounts described the intervention explicitly as an effort to prevent a wider panic.
Public Resources Were Used to Contain the Failure
The eventual cost to the US deposit-insurance system was enormous.
The FDIC later estimated losses from the BNE resolution at several billion dollars. Contemporary assessments placed the cost at approximately US$2.3–2.5 billion, making it one of the most expensive bank failures in US history at that time.
The Federal Reserve had also supplied substantial liquidity before the failure as the Bank attempted to survive mounting withdrawals.
Thus, public institutions were prepared to deploy significant resources not because BNE had remained financially sound, but because authorities concluded that an uncontrolled failure could damage confidence in the wider banking system.
The regulatory objective was therefore not simply:
Instead, the objective became:
contain the failure, protect depositors, preserve financial stability and transfer viable banking operations to stronger institutions.
Sale of the Viable Business
Once the FDIC assumed control, it sought purchasers for BNE’s operations.
In April 1991, the principal banking assets and operations were awarded to a consortium led by Fleet/Norstar Financial Group and Kohlberg Kravis Roberts & Co. The transaction allowed much of the branch network, customer relationships and viable banking business to continue under new ownership.
The FDIC subsequently continued to sell assets from the failed institution, including further transfers to Fleet/Norstar later in 1991.
The corporate parent itself went into bankruptcy liquidation, but the operating banking businesses were not simply extinguished. Their viable elements were preserved and transferred.
That distinction is important when BNE is compared with BCCI.
The Same Year as BCCI
The timing makes the comparison particularly striking.
Bank of New England failed in January 1991. BCCI was closed in July 1991.
In the United States, the authorities were prepared to absorb billions of dollars of losses and extend protection even beyond the normal deposit-insurance limit because they feared the wider consequences of allowing a major regional bank to collapse in a disorderly manner.
Six months later, BCCI’s international operations were closed through coordinated regulatory action.
The two institutions were obviously different. BNE’s principal problem was insolvency arising largely from bad lending and collapsing property values, whereas BCCI faced allegations of concealed losses, false accounting, fraud and other irregularities.
Those distinctions cannot be ignored.
But the comparison becomes relevant when considering what regulators regarded as possible once a bank was seriously impaired.
With BNE, regulators separated the failed corporate institution from its viable operations.
- Depositors were protected.
- Liquidity support was provided.
- A receivership was established.
- Potential purchasers were invited.
- Operating businesses were transferred to stronger banks.
And the cost of protecting confidence was borne substantially by the US deposit-insurance system.
BCCI Had Private Shareholder Support
The contrast is particularly significant because BCCI was not dependent upon the British or American taxpayer for a rescue of the kind provided to BNE.
By 1990, Abu Dhabi interests had become BCCI’s majority shareholders and were already providing substantial financial support. A restructuring programme was under development involving additional capital, management changes, branch reductions, separation of impaired assets and the proposed creation of successor banks.
The essential difference is therefore worth emphasising.
The Bank of New England was insolvent and required a government-supported resolution costing billions of dollars. BCCI had majority shareholders willing to commit their own resources to a restructuring programme.
This does not establish that BCCI’s restructuring would necessarily have succeeded. Nor does it prove that regulators were wrong to have serious concerns about the information available to them in 1991.
But it raises a legitimate question of proportionality:
if US regulators were prepared to commit substantial public resources to preserve the viable operations of an insolvent domestic bank, why was greater opportunity not given to a privately funded restructuring of BCCI?
Regulatory Failure Did Not Become a Case Against the Entire Institution
Another important difference concerns the treatment of supervisory failure.
The GAO’s investigation of BNE was highly critical of the OCC. It concluded that regulatory action had not been sufficiently timely or forceful, notwithstanding the fact that significant problems had been recognised before the final collapse.
Yet this regulatory failure did not lead to a narrative that the Bank of New England’s thousands of employees collectively belonged to a corrupt or criminal institution.
The failure was generally analysed in terms of:
- excessive real-estate lending;
- poor management;
- weak credit controls;
- economic recession;
- inadequate supervisory intervention; and
- the need to improve banking regulation.
This contrasts with the language that became associated with BCCI.
In BCCI’s case, allegations involving particular executives and operations increasingly became associated with the Bank as a whole through descriptions such as a pervasive “criminal culture.”
The distinction is significant.
One failed bank was analysed principally as a management and supervisory failure.
The other came increasingly to be presented as an institutional moral failure.
“Too Big to Fail” and Unequal Consequences
The BNE resolution became one of the most prominent examples of the contemporary “too big to fail” policy.
The policy reflected a difficult reality: regulators sometimes concluded that the normal consequences of failure could not safely be imposed upon a large institution because the damage might spread to other banks and the wider economy.
The argument was therefore based on systemic importance.
BCCI did not occupy the same position in the domestic US banking system, and regulators could reasonably take that distinction into account.
But systemic importance explains principally why public money might be used to rescue one institution.
It does not entirely explain why private shareholder money and restructuring could not be allowed greater opportunity in another.
This is an important distinction in evaluating the double-standards argument.
The criticism is not that BCCI should have been declared “too big to fail”.
It is that later and contemporary banking resolutions demonstrate that closure of a legal entity need not mean destruction of every viable banking operation attached to it.
The BNE authorities demonstrated that the institution could be separated into:
failed assets, viable operations, protected customers and successor institutions.
That principle bears directly on the alternatives that were potentially available in BCCI.
The Human Dimension
The regulatory response also produced very different consequences for employees and customers.
The protection of BNE’s depositors was central to the US authorities’ intervention. Even uninsured depositors were protected because of the concern that losses could destroy confidence in other institutions.
Viable branches and customer relationships were transferred to successor banks.
Many ordinary customers therefore experienced continuity rather than the sudden disappearance of their banking institution.
BCCI’s closure had a much broader international impact. Branches across multiple jurisdictions were closed abruptly, employees lost their jobs, customers temporarily lost access to funds in many countries and the reputational consequences extended to thousands of staff who had never been accused of wrongdoing.
From the perspective of former BCCI employees and creditors, the comparison raises a basic question:
why was preservation of confidence considered an overriding regulatory objective in the BNE case, while the consequences of abruptly destroying confidence in BCCI were accepted as part of the closure process?
Supervisory Failure - Different Accountability
There is also a wider supervisory comparison.
Both BNE and BCCI subsequently generated major official investigations.
In the United States, congressional and GAO inquiries examined why regulators had failed to intervene sooner in BNE despite knowing of serious problems.
The House Committee on Banking, Finance and Urban Affairs published a substantial 279-page staff report, The Bank of New England Failure and Resolution, in December 1991, examining both the causes of failure and the government’s handling of the resolution.
The GAO separately criticised the OCC’s supervision.
These inquiries treated weaknesses in supervision as an important part of understanding why the Bank failed.
BCCI similarly generated the Bingham Inquiry in Britain, which examined the Bank of England’s supervision. Yet the later public narrative surrounding BCCI became dominated much more heavily by allegations of criminal wrongdoing within the Bank itself.
A balanced historical assessment should examine both sides:
what occurred within the institution, and what regulators knew, when they knew it, and what alternatives were available to them.
The BNE investigations demonstrate why that second question matters.
The Double-Standards Question
The comparison between the Bank of New England and BCCI should not be taken to mean that the two institutions were identical. They were not. Nor is the argument that, because BNE depositors were protected with public funds, BCCI was automatically entitled to an equivalent taxpayer-funded rescue.
Critics of BCCI closure have comapres the regulatory philosophy, proportionality and the treatment of viable banking operations.
In the BNE case, the authorities recognised that even where a bank had failed:
- viable operations could still be preserved;
- innocent customers should be protected where possible;
- public confidence had economic value;
- stronger assets and businesses could be transferred to successor institutions;
- financial stability could justify extraordinary intervention; and
- supervisory failures should be examined separately from the interests of customers and viable banking operations.
These principles are particularly relevant to BCCI because there was no contemporaneous finding that all of its worldwide banking operations had ceased to be viable. On the contrary, the restructuring programme then under development specifically envisaged separating the stronger and viable businesses from impaired assets. Three new, separately regulated banks were proposed for London, Abu Dhabi and Hong Kong, while problem loans and impaired assets were to be transferred to a separate institution for recovery.
By 1990–91, the financial weaknesses identified within BCCI were also no longer simply undisclosed problems awaiting discovery. Substantial losses and provisioning requirements had been identified and disclosed to the Abu Dhabi majority shareholders, who had responded by acquiring approximately 77 per cent of the Bank and committing very substantial financial support. Contemporary restructuring proposals contemplated support of approximately US$5.1 billion, with total commitments potentially approaching US$7 billion. New management and boards were being recruited and impaired assets were to be separated from the continuing banking businesses.
A May 1991 communication from BCCI’s management described the reorganised group as having an asset base of approximately US$19 billion, customer deposits of around US$15 billion and loans of approximately US$11 billion, while stating that the substantial losses after provisions would be covered by the financial support then being provided.
The issue therefore was not simply whether BCCI had suffered serious losses. It had. The more important question is whether those losses, once identified and supported by the majority shareholders, necessarily justified abandoning the restructuring rather than testing whether the proposed successor banks could operate on a sound basis.
There was also an important distinction between balance-sheet weakness and an immediate failure of ordinary banking operations. The case for closure was not presented as the consequence of a conventional run in which BCCI had ceased meeting its obligations in the financial markets. Rather, the decisive change arose from the regulators’ assessment of the allegations contained in the Price Waterhouse investigation and their conclusion that the proposed restructuring should no longer proceed. BCCI’s own historical record accordingly challenges the later description of the Bank as having simply “collapsed” through an inability to continue ordinary business.
This makes the contrast with BNE particularly significant. Bank of New England had actually failed and was placed under FDIC control. The estimated cost to the US Bank Insurance Fund was approximately US$2.5 billion, yet regulators still sought to protect depositors and preserve valuable banking operations rather than destroy everything associated with the failed institution.
BCCI, by contrast, had shareholders willing to commit their own resources to recapitalisation and restructuring. It was therefore not principally a question of asking the British taxpayer to finance a rescue comparable to BNE. The shareholders were themselves proposing to absorb substantial losses and provide new financial support.
That distinction strengthens rather than weakens the comparison:
BNE required extensive public intervention after it had failed; BCCI had substantial private shareholder support available before the proposed restructuring had been allowed to run its course.
Public Confidence and the Depositor Base
The treatment of public confidence also deserves closer examination. BCCI's depositor base was very different. In the United Kingdom, a significant proportion of BCCI’s retail depositors came from Asian immigrant communities, many of whom had chosen the Bank because of its familiarity with their countries of origin, languages, business practices and community networks. A substantial proportion of its other customers and operations lay outside Western Europe, particularly across the Middle East, Asia, Africa and other developing markets.
When BCCI was closed, these depositors were among those most directly affected. Yet, unlike the Bank of New England case, there was no comparable policy emphasis on preserving confidence by protecting the continuity of the institution or transferring viable operations before closure.
That cannot be established as a matter of regulatory motive. Nevertheless, the social composition of BCCI’s depositor base forms an important part of the wider debate about proportionality, public confidence and whether the consequences of closure fell disproportionately on immigrant communities whose interests carried less influence within the traditional financial establishment.
The immediate effect of closure was itself destructive of confidence and had consequences that were entirely foreseeable. Depositors across numerous jurisdictions suddenly lost access to their bank, employees lost their positions, and viable customer relationships were disrupted before the proposed restructuring could be tested. Whether the destruction of confidence was merely an accepted consequence of closure, or formed part of the regulatory strategy, remains a legitimate question.
The issue, therefore, is not simply whether regulators were entitled to be concerned about BCCI. They plainly were. The more important question is whether the economic and human consequences of abruptly destroying confidence were adequately weighed against the possibility of preserving the Bank’s stronger and viable operations through restructuring, as was done in the case of the Bank of New England, where regulators sought to protect depositors and preserve viable banking operations despite the institution’s failure.
Allegations Known Before July 1991
The timing of the closure also deserves closer scrutiny.
Many of the financial weaknesses that concerned regulators in 1991 had not suddenly arisen in the final days before closure. Treasury losses, problematic loans, deficiencies in BCCI's structure and other supervisory concerns had emerged over a period of years. The US Senate investigation later recorded that the Bank of England had known of very substantial Treasury losses well before 1991.
By 1990, significant financial problems had been disclosed to the Abu Dhabi shareholders and were being addressed through recapitalisation, management changes and restructuring. The majority shareholders had accepted responsibility for substantial losses and had entered into a programme intended to restore the financial position of the group.
This does not mean that the later Price Waterhouse findings were irrelevant. Regulators were entitled to reassess the position in light of new evidence concerning the nature and extent of irregularities.
But it does raise an important question of causation and proportionality.
If the underlying losses and many of the problematic accounts had already been identified, and financial support had been committed to address them, was closure necessary because the Bank could no longer operate, or because regulators had lost confidence in the institution and its previous management?
If the latter, other regulatory remedies were available: replacement of management, stronger supervision, separation of impaired assets, prosecution of those responsible and continuation of viable operations under newly constituted banks.
Indeed, these were substantially the remedies already contemplated by the restructuring programme.
Viable Assets and the Proposed New Banks
The structure of the proposed reorganisation is important because it directly challenges the assumption that BCCI had to survive or fail as a single indivisible entity.
The plan envisaged three independently capitalised and separately regulated successor banks, based in London, Abu Dhabi and Hong Kong. Stronger assets and viable operations were to be transferred to these institutions, while problem loans and doubtful assets would be placed in a fourth vehicle dedicated to recovery.
This was conceptually similar to techniques subsequently used repeatedly in bank resolutions: separate the impaired assets, preserve the viable franchise and transfer sound businesses into stronger or newly capitalised institutions.
The relevant historical question is therefore not whether every part of BCCI was financially healthy. Clearly it was not.
It is whether the stronger parts of the organisation were capable of being preserved once the impaired assets had been isolated and the required capital supplied by Abu Dhabi.
The restructuring programme was designed precisely to answer that question.
Closure prevented it from being fully tested.
The More Persuasive Double-Standards Argument
The BNE comparison is therefore strongest when expressed not as a demand that BCCI should have received a government bailout, but as a question of consistent supervisory principles.
In the BNE case, regulators accepted that:
failure did not mean that every banking operation lacked value.
In BCCI's case, the proposed restructuring similarly recognised that:
serious losses and misconduct within parts of the organisation did not necessarily mean that every branch, customer relationship and banking business was incapable of continuing.
The fundamental principle advocated by former BCCI employees and supporters is therefore straightforward:
wrongdoing should have been isolated, those responsible held accountable, impaired assets separated, and viable banking operations preserved wherever reasonably possible.
BNE demonstrates that regulators were prepared to make exactly those distinctions when dealing with a major American institution.
The contrast becomes more difficult to dismiss when it is remembered that BNE required billions of dollars of public support, whereas BCCI's majority shareholders in Abu Dhabi were offering substantial private financial backing.
This does not establish that the BCCI restructuring would certainly have succeeded.
It does establish that closure was not the only conceivable regulatory model.
The central question remains why the restructuring supported by Abu Dhabi was not given a fair opportunity to proceed before the most irreversible regulatory action - worldwide closure - was taken.
A Broader Pattern
Bank of New England should also be considered alongside the other cases examined in the Double Standards section.
- Johnson Matthey Bankers was rescued with Bank of England involvement when its failure was regarded as potentially damaging to the financial system.
- Midland Bank received discreet supervisory intervention during its 1991 difficulties and was ultimately absorbed into HSBC.
- Barings Bank collapsed in 1995, but its viable operations were acquired by ING.
Later major international banks involved in LIBOR manipulation, money laundering and sanctions violations were subjected to enormous penalties, criminal settlements, management reforms and continuing supervision rather than institutional extinction.
BNE adds another dimension because it was not merely accused of misconduct or suffering temporary difficulty.
It actually failed and became insolvent.
Yet even then, regulators sought to preserve what remained viable.
Perspective
The relevant question is therefore not:
Why was the Bank of New England rescued?
The intervention can readily be understood as an attempt to protect depositors and prevent a wider financial crisis.
The more important question for BCCI’s history is:
Why were the same underlying principles - preservation of viable banking operations, protection of innocent stakeholders, restructuring and an orderly transfer of business - not given greater weight before BCCI was subjected to worldwide closure?
BNE failed in January 1991.
BCCI was closed in July 1991.
One required extensive government intervention and billions of dollars of public support to protect the wider banking system.
The other had majority shareholders from Abu Dhabi prepared to provide their own financial support and pursue restructuring.
The circumstances were different, but the contrast remains highly relevant.
It reinforces the central issue explored throughout Double Standards: whether institutions rooted in the established Western financial system were afforded opportunities for rescue, restructuring and institutional preservation that were not equally available to BCCI - a bank whose origins, ownership, management and international relationships lay substantially in the developing world.
Also read:
- US House of Representatives, Committee on Banking, Finance and Urban Affairs, The Bank of New England Failure and Resolution (December 1991). A major congressional staff report of 279 pages examining the causes of the failure and the official resolution of BNE.
- US General Accounting Office, Bank Supervision: OCC’s Supervision of the Bank of New England Was Not Timely or Forceful, GGD-91-128 (September 1991). An important official critique of the supervisory response, examining the causes of failure, management and insider activity, and the OCC’s handling of deficiencies identified before the Bank collapsed.
- Federal Deposit Insurance Corporation, History of the Eighties - Lessons for the Future, Vol. I. Provides the broader history of the US banking crisis of the 1980s and early 1990s, including the New England banking crisis, commercial real-estate losses and criticism of BNE supervision.
- Federal Deposit Insurance Corporation, records concerning the BNE resolution and subsequent asset sales. Includes the FDIC’s records of assets transferred following the failure and its efforts to dispose of the remaining banking operations.
- Double Standards: The Forced Closure of the BCCI Bank. For the BCCI perspective, this should be read alongside the official BNE record as part of the wider comparison between the treatment of BCCI and the rescue, restructuring or continuation of troubled Western banking institutions.
- Lord Justice Bingham, Inquiry into the Supervision of the Bank of Credit and Commerce International (1992). The principal official British inquiry into supervision of BCCI and the circumstances leading to its closure.
