A further element during the generally fraught early 1990s was the small-banks crisis. By all accounts it was the opportunity for George to provide a master class in crisis management, resulting in the safe winding up of many of the banks and the merger or acquisition of others. In late 1993 he made public the broad outlines of an episode that had unfolded largely in secret:
We had during 1990 been conscious of growing pressures on a sizeable group of smaller banks. They had some retail deposits, but were generally heavily dependent on large wholesale placers of funds: building societies, local authorities, big industrial companies, as well as other banks. All of these were under pressure of some kind and withdrew funds from the wholesale markets. Meanwhile, the assets of the smaller UK banks were becoming increasingly vulnerable to the recession, particularly as it affected the property values supporting their loans.
In early 1991, three small banks – Chancery, Eddington and Authority – closed their doors, after significant loan losses that were followed by a shrinking of their deposits. At that stage, we saw no clear evidence of systemic fragility so we did not intervene.
The wholesale markets continued to tighten. This process accelerated when BCCI [Bank of Credit and Commerce International] was closed later in the year, trapping some large local authority deposits. Meanwhile – and there is always a meanwhile for banking troubles come in a crowd – there was, quite coincidentally, a run on a building society and growing talk of banks in difficulties overseas.
We had been engaged in prophylactic supervision for some time. But as the bigger picture got more threatening, one particular institution [National Mortgage Bank, a subsidiary of National Home Loans] did run into an immediate liquidity crisis: its auditors could not certify that it had enough assurance of liquidity to allow it to continue to trade. It was then that we decided to provide support to that and to a small number of other banks.
It is, of course, impossible to be sure what would have happened if we had not provided support in this, or any other, particular case. It is easy to slip into the position of the man on the train to Brighton who kept snapping his fingers out of the window to keep the elephants away. Since he saw no elephants, his technique was self-evidently effective. But in the early 1990s, we were quite clear that had we failed to intervene, the pressure would have spread and we would then have found it harder to stop. It was the first time since 1973–74 that we had offered such widespread support …
Overall, reckoned George subsequently about the crisis as a whole, ‘we were monitoring 60-odd institutions and I think we lent to about seven or eight’; in the case of National Mortgage Bank, the Bank eventually acquired it for £1, thereby assuming some £100 million of losses on its balance sheet that in due course were worked out.6 Throughout the ultimate fear was contagion, and among bigger houses giving cause for concern was the merchant bank Kleinwort Benson. But, as so often in these situations, the Treasury was inclined to suspect the Bank of being trigger-happy: it was a thought that lingered in the institutional memory.
One bank above all, though, really worried the Old Lady in the early 1990s. ‘It is a bank which is shrinking and will continue to do so,’ declared The Times in December 1990 after the increasingly enfeebled Midland had suffered the humiliation of its main minority shareholder, HSBC, deciding temporarily to walk away from a long-mooted union. Or as the Investors Chronicle put it: ‘Midland is now fully exposed for what it is: a troubled, financially weak, second-rank clearer.’ The following month, in January 1991, the governor and his senior colleagues met to consider Midland’s future – a far from easy meeting that ended with a decision in effect to withdraw support from McMahon, its beleaguered chairman and chief executive. Within weeks the Bank had put in place a duo – Sir Peter Walters from BP and Brian Pearse from Barclays – to replace him. ‘Sir Kit indicated that he did not necessarily agree with the need for such radical changes but had seemed to accept the Bank’s right to impose them,’ recorded the tactful note of the conversation in which the governor indicated to his former deputy that he had run out of road. Market reaction was positive; and indeed, before making his move, Leigh-Pemberton had carefully checked with the senior partners of Cazenove that it would be.
The new team at Midland made a good go of it in impossible circumstances, but by the closing weeks of 1991 it was clear that both HSBC and Lloyds were seriously interested in taking over the ailing, recession-hit bank. In Threadneedle Street, the preference was unambiguous. ‘A merger with HSBC would not produce the same economies as would a merger with one of the clearers,’ George in late November frankly told Pearse, adding that HSBC ‘could not provide the same degree of credit rating enhancement as one of the clearers’. By contrast, he continued, the Bank would be ‘fairly supportive’ of a bid from Lloyds, not least since an ensuing merger would be ‘in the family’. Shortly before Christmas, the two men met again, with George emphasising to Pearse that, as far as HSBC’s top man William (‘Willie’) Purves was concerned, the Bank ‘were’, noted Pearse, ‘determined to see him off’ – some ten years after the far-from-forgotten episode of HSBC’s blatant defiance of Richardson’s wishes in relation to RBS. Everything changed, however, in the early months of 1992. The Bank reluctantly came to accept the near-certainty of a bid by Lloyds being referred by government to the Monopolies and Mergers Commission; Midland itself started to cool towards Lloyds; and on the vexed matter of ‘Hong Kong risk’, three years after the Tiananmen Square massacre and five years before Hong Kong’s handover to China, Quinn by early March was telling Leigh-Pemberton and George that ‘as he and the supervisors studied the Hong Kong situation more carefully, they were becoming slightly less concerned about the problem, especially given the integration of Hong Kong with the South Eastern PRC [People’s Republic of China]’. Soon afterwards, Midland’s board finally came down on the side of an HSBC bid, leading in turn to a series of increasingly harmonious discussions between the Bank and HSBC. For its part, the Bank laid down certain conditions: all major non-Hong Kong subsidiaries (including Midland) to become subsidiaries of HSBC’s UK-based holdings company; the ‘mind and management’ of HSBC Holdings to be exercised in London, which meant in practice that Purves and his top team would have to leave Hong Kong and become resident in the UK; the Hong Kong businesses to be entirely funded from local sources; and the Bank to be the overall lead regulator for the HSBC Group. HSBC was happy to accede on all these points and on 13 April the Bank gave an informal green light to its bid. That bid duly went ahead; the City’s institutional investors had their say; and Lloyds pulled out in early June, with its chairman, Sir Jeremy Morse, adamant that his bank had not been leaned on by the Bank to do so.7 Undeniably the outcome, whatever the Bank’s initial scepticism, strengthened the British banking system – and importantly, left it with four main high-street clearers, not three.
The other big banking story in the early 1990s, but going back a long way, was of course BCCI. Founded in 1972 by a charismatic Pakistani, Agha Hasan Abedi, the Bank of Credit and Commerce International expanded rapidly around the world (mainly servicing Muslim and Third World clients) and, although registered in Luxembourg, had London as its international operating headquarters. The Bank cast a beady eye. ‘I gave him a frank account of our reasons for taking a distinctly cautious view of BCCI and for impressing on them the need to pause for consolidation,’ noted Jasper Hollom in 1979 after a visit from the Conservative politician Julian Amery, hoping to become a consultant at BCCI. ‘I had no doubt that while Abedi would pay some heed to our advice, it would go against the grain with him and we should therefore have to continue to rein him in.’ Nor physically was BCCI allowed in the heart of the City: when the following year Royal Insurance was looking to develop an empty site at 1 Cornhill into a prestigious banking hall, and the only serious offer came from BCCI, the decisive word from across the road was that that bank would not be an acceptable tenant. Then during the rest of the 1980s, as BCCI lost huge amounts through ill-judged propri
etary trading and looked increasingly to provide money-laundering services to Latin America’s drug barons, while at the same time its structure became ever more byzantine, the Bank continued to view its UK activities with considerable mistrust. ‘Bank’s [that is, Bank of England’s] locus technically confined to UK branches of Luxembourg bank, and objective the protection of UK depositors,’ recorded a retrospective internal memo in July 1991:
Bank anxious to avoid being dragged into becoming supervisor for group world-wide, given the complexity and opacity of the group and the false comfort that could have been taken by depositors and the market.
Nevertheless, Bank’s supervision consistently more rigorous than for any other branch operation. In the last ten years, six special visits by Bank teams and six reports (by reporting accountants) commissioned under the Banking Act. Nothing material discovered; any remedial action quickly taken. Since October 1988, weekly statistics and monthly meetings with UK management.
That anxiety about taking on global supervisory responsibilities was for a long time very real. ‘We have a difficult matter over BCCI where Lord Callaghan [the former Labour prime minister] came in to try and persuade Brian Quinn and myself to allow BCCI to register in London and to come under B of E supervision,’ Leigh-Pemberton informed Blunden in May 1989. ‘We both feel that we must resist this, but this particular request from this particular source may need careful handling.’8
The endgame came fairly swiftly. To quote again the Bank’s July 1991 retrospective:
Firm evidence of dishonesty in the group emerged in 1988/89 through the Tampa drug-money laundering trials and, separately, in 1990 through evidence that BCCI had acquired control of a Washington-based bank by deception. In the first of these cases, there was no demonstrated link with UK management or with senior group management, but rather the evidence was that the problem was specific to Miami. And in the second case, the American investigations are still under way; no charges have yet been brought. We have been co-operating with the relevant US authorities.
Evidence of financial malpractice and fraud involving the UK operation was first suggested to us at the beginning of this year and this was immediately investigated by Price Waterhouse, with a section 41 report [under the Banking Act] being commissioned by the Bank in March. This was received 10 days ago, on the basis of which co-ordinated action was taken urgently by the main supervisory authorities concerned.
The global closure of BCCI in July 1991 was a huge event – though with only 6,500 of the bank’s 150,000 depositors being in the UK, and with no systemic threat to the British banking system, there was no real question of a government or Bank bail-out. ‘The Governors felt that this would not be appropriate,’ noted Leigh-Pemberton’s private secretary of the possibility of offering financial help to British depositors. ‘There was nothing obvious to distinguish BCCI from other deposit-taking institutions in this respect, so that offering help would be unjustified on its merits, could set an unfortunate precedent and might even prompt commentators to suggest that the Bank felt a degree of culpability.’ But was the Bank culpable? ‘Ministers are standing well back,’ and ‘none has had a word to say for the Bank’, observed Christopher Fildes in the Spectator later that month, adding that Leigh-Pemberton was looking ‘an isolated figure – flying to the Gulf to mollify the sheikh [in the context of BCCI having in 1990 moved its headquarters to Abu Dhabi], hauled to Westminster once a week for a grilling from backbenchers’; while, as Lamont had already told the governor, Major was ‘adamant’ that there had to be a formal inquiry into the closure of BCCI, with Lord Justice Bingham soon commissioned to produce a report.9 In the event, there would be no fewer than three reports on BCCI – from the House of Commons Treasury Select Committee and from the US Congress as well as from Bingham – and in all three the Bank featured prominently.
The British parliamentarians were in action, as Fildes intimated, within weeks of the enforced closure. Against a backdrop of mounting press criticism – typified by the Sunday Times’s claim that ‘even armed with a file of press cuttings the Bank of England should have done a better job’ – they interviewed the governor, accompanied by George and Quinn, over a two-hour session. Predictably, some of the most hostile questioning came from two Labour MPs. ‘Let me ask you this,’ Diane Abbott put it to the Bank team after summarising some of the information contained in two audit reports the previous year by Price Waterhouse on BCCI. ‘If 10 per cent of your [BCCI’s] capital base is shovelled out in unsecured, undocumented and dodgy loans does that not amount to evidence of fraud on a scale which justifies revocation [of BCCI’s licence]? How much of your capital base does, in fact, have to be shovelled out in dodgy loans for the Bank of England to raise an eyebrow?’ ‘I think the answer to Ms Abbott,’ replied George, ‘is it is actually possible with a sophisticated fraud of this kind for that sort of thing to go on undetected for a considerable period.’ The other MP, Brian Sedgemore, made much of how when several years earlier Leigh-Pemberton had appeared before the Treasury Committee (on that occasion with Blunden and Rodney Galpin) he – Sedgemore – had referred to BCCI’s West African desk as ‘a financial cesspit’. That comment, responded the governor now, ‘would have been noted down’, but it was ‘not the sort of evidence on which we can safely embark to revoke the licence of a bank’. Sedgemore, previously a vocal critic of the Bank in relation to the Johnson Matthey episode, was predictably unimpressed:
When somebody in a quasi responsible position, not obviously a complete lunatic, has had the benefit of a massive British education, when they gave you this warning – I did not think it up off the top of my head, I had a source obviously – did anybody around the Bank ever think to say, because they did not at this meeting: ‘What is their evidence’? Nobody wrote to me.
‘I am afraid we did not think of saying that,’ replied the governor. ‘Part of the difficulty of this is that the West African branch of a bank incorporated in Luxembourg is rather remote from the jurisdiction of the Bank of England in England.’ Further exchanges followed, ending with Sedgemore accusing the Bank of ‘a cover-up’. That was the Bank’s main evidence, but seven months later, in February 1992, the Bank’s two top supervisors, Quinn and Roger Barnes, appeared before the Committee. ‘We had no shortage, if I may use that term, of allegations and accusations about BCCI,’ accepted the former about the period going back to at least the mid-1980s. However, he went on, ‘Allegations and accusations are one thing. The provision of evidence on the basis of which we can act is something very different.’ And later Quinn elaborated:
The Section 41 report completely transformed our view of BCCI. What we had seen hitherto had been indications. We had seen suspicions voiced by the auditor. We had seen concerns expressed by the auditor. What we saw in June 1991 was hard evidence for the first time that fraud had been conducted and supporting information to corroborate that: information that could trace the money flows, could show how accounts in one institution were used, indeed established, to keep accounts in other institutions current and alive. It was a complete picture and the picture it painted was of widespread pervasive fraud over a long period of time …
The Treasury Committee, though, was unconvinced. Its report the following month accused the Bank of having been neither ‘adequate’ nor ‘speedy’ in its remedial action prior to July 1991; and in particular, it focused on how the Bank had failed to respond satisfactorily to the Price Waterhouse audit report of April 1990 identifying BCCI transactions, mainly booked offshore, that were either ‘false or deceitful’.
The other two reports appeared in October 1992. The Congressional inquiry had some unpalatable words for the Bank: it had ‘colluded in the suppression of the true facts concerning BCCI’s financial status and its involvement in fraud’; it had been a ‘partner not in crime but in a cover-up’ by discounting for too long evidence of fraud and not objecting to Abu Dhabi’s capital injection into BCCI; it had attempted to throw a ‘veil of secrecy’ over its actions; and al
together, its regulation of BCCI had been ‘wholly inadequate’ to protect depositors and creditors. As for the Lord Justice’s findings, perhaps the most lucid summary came from Quinn, once he had sight a few weeks ahead of publication:
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