LONDON, 28 June 2004 — Millions of depositors hoping to get more of their money back from the long-collapsed BCCI (the Bank of Credit & Commerce International) through a multibillion-dollar claim brought by the liquidators against the Bank of England, may be in for a rude awakening.
The Bank of England, one of the regulators of BCCI, believes that it has “a strong defense” against the claim brought on behalf of depositors by the liquidators, and has vowed to fight the claim “vigorously”.
The claim came to trial in the London High Court in late 2003, and is still in process.
Mervyn King, who has just finished his first financial year as the governor of the Bank of England, stresses that the BCCI case is putting a “considerable financial burden — around 10 percent of the overall budget” on the bank.
In his first annual report (for 2004) which has just been released, King strongly defends the bank’s action against the claim: “The trial will place significant personal burdens on witnesses, few of whom still work for the bank,” explains King.
“We have been advised that the bank has a strong defense. There are important policy reasons for resisting claims of this kind against public bodies; and it is in any event impossible to contemplate settlement in an action in which 22 present and former members of this country’s central bank are accused of dishonesty. With the full support of the court (of directors) I am therefore determined that the claim will be vigorously defended.”
Former members of the Bank of England whom King is referring to, is, of course, his predecessor Sir Eddie George, who retired as governor on June 30, 2003 after some 41 years with the bank. Sir Eddie at the time of the BCCI collapse in 1991 and the subsequent years came under heavy criticism especially from some Middle East shareholders, and from depositors, for failing to adequately supervise BCCI whose operational headquarters was after all in London, and for not doing enough to rescue the bank.
One major shareholder, the government of Abu Dhabi and its ruler Sheikh Zayed ibn Sultan Al-Nahayan, was reportedly willing to underwrite a multibillion dollar rescue plan for the bank, but this was rejected by the Bank of England and the UK Treasury at the time.
According to the Bank of England, it has set aside legal fees inclusive of VAT (value-added tax) of £21.2 million for the financial year budget 2004/2005 for the BCCI case.
This is the same amount the Bank of England set aside for financial year 2003/2004 for the case. The actual expenditure or out-turn was marginally lower at £21 million. This is out of a total expenditure budget for the Bank of England for 2004/2005 of £225.1 million (excluding the BCCI legal fees).
For the British taxpayer, the continuing saga and legacy of BCCI is indeed proving to be very expensive. BCCI’s hapless depositors could suffer further, should the Bank of England win the action against the claim, and especially if costs are awarded to the Bank of England. This will have to come from the liquidators’ coffer of leftover BCCI assets. The liquidators themselves are earning a fortune, thus far almost $500m over the last decade or so of trying to unravel the BCCI collapse.
The BCCI legal expenses is tantamount to a ‘specific provisioning’ for the Bank of England, and is treated as an extraordinary item in the central bank’s accounts. As King stresses in his ‘Governor’s Foreward’, the BCCI case is not included in the year under review “because it has nothing to do with the bank’s current functions.”
It is no secret that Bank of England (and for that matter the UK Treasury) would like to wish away the BCCI case. But such complex financial and supervisory cases are notorious for dragging on, sometimes for years due to technicalities and delays relating to the technical complexities of regulation, supervision, and jurisdiction.
The BCCI reference aside, King’s first annual report underlines a dogged determination to build on the success of his predecessor Sir Eddie George especially in enhancing the Bank of England’s independent monetary policy role through the Monetary Policy Committee (MPC).
“This,” says King, “means both maintaining the MPC’s track record in meeting the inflation target and in explaining its actions, and applying to other parts of the bank some of the lessons that have been learned in building the MPC.”
Governor King has already restructured the lines of authority and responsibility of his senior management, opting for an executive director representing each of the bank’s five key business areas in the new executive team, as opposed to the old committee structure.
Perhaps more importantly, he seems to be attaching more importance to the first two of three core purposes of the bank — monetary stability (maintaining stable prices and confidence in the currency); financial stability (detecting and reducing threats to the financial system as a whole); and the efficiency and effectiveness of the financial system.
King acknowledges that while the first two are universally recognized as central banking concerns, the third is essentially a part of the first two. As such, “while the bank may from time to time wish to support particular initiatives in the financial sector, we have concluded that the possibility of doing so should not in itself be a core purpose.”
Other bank objectives include: The work on small firm finance; enhancing research and market intelligence functions; and the conclusion of various consultations and projects including the future conduct of open market operations and risks to financial stability.
With transparency, disclosure, and inclusion key practices, it is not surprising that even Sir Eddie George’s revised retirement pension details are public information.
Perhaps a practise that many countries in the IDB member countries should openly embrace. As the latest Transparency International Global Corruption Report stresses the power of publicising information on budgets, expenditure, tenders, and so on, is perhaps a most obvious disincentive for corruption.
As for the Bank of England, is the style and reforms of new the new governor turning the bank into a study group as opposed to a bank, to twist Governor Cobbold’s celebrated remark that the Bank of England should be a bank and not a study group?
Governor King rejects such assertions and stresses that the bank operates in markets daily; that it is at the centre of the payments system; and is closely involved in settlement systems. Others, however, sense that there may be a gradual if not deliberate retreat from the city.
