Yuppies, Drugs and Tesco: Should the Bank of England Blame Itself for Bank Failures?
| DOI | https://doi.org/10.1108/eb027169 |
| Published date | 01 March 1998 |
| Pages | 39-48 |
| Date | 01 March 1998 |
| Author | Magda D'Ingeo,Philip Rawlings |
| Subject Matter | Accounting & finance |
Journal of Money Laundering Control —
Vol.
2 No. 1
Yuppies, Drugs and Tesco: Should the Bank of
England Blame Itself for Bank Failures?
Magda
D'lngeo
and Philip Rawlings
In the early 1980s Tesco had provisionally agreed
plans with the property developer, Provincial
Properties Wales, to build a new store in Barry.
Michael Hepker, the owner of Ravensbury Invest-
ments, was keen to buy into the project and per-
suaded Johnson Matthey Bankers (JMB) to lend
him the capital to purchase Provincial Properties.
JMB were to have the store as security for the
loan. Unfortunately, planning permission for the
building was refused, but, if accusations subse-
quently made in the House of Commons1 are to
be believed, this fact was never disclosed to JMB.
The bank never thought to check on the progress
of the building work, so it remained blissfully
unaware that its loan was unsecured. At the same
time,
JMB was lending ever increasing amounts to
another client, who was later convicted of fraud in
New York in October 1994. Together these two
concentrated exposures exhausted JMB's capital
base,
so that when repayments started to dry up
the bank faced collapse. The Bank of England (the
Bank),
as lender of last resort and UK supervisor
of the banking industry, became concerned
because JMB was regarded as playing a key role in
maintaining the UK's central position in the inter-
national gold bullion market. The Bank feared a
run on gold deposits which might have spread to
the ordinary and unconnected deposit-taking
industry and perhaps led to a currency crisis. The
markets were already edgy after the collapse of
Continental Illinois National Bank in the USA,
which had prompted a run on the dollar, and so
the Bank believed it might have been difficult to
persuade the markets that JMB's problems were
confined to its lending business only. As a result of
the JMB debacle, Barry never got its Tesco's and
the Bank of England found itself obliged to rescue
JMB using money from the government and City
institutions.2
Then came the notorious collapse of the Bank
of Credit and Commerce International (BCCI) in
1991.
BCCI was a huge multinational concern per-
meated by fraud and pivotal in a drugs money
laundering web. When the authorities finally
unearthed the truth, the option of rescuing it was
quickly dismissed by the Bank. BCCI's operations
were swiftly closed down by the coordinated
action of regulators worldwide, and its many indi-
vidual depositors were left to bear the brunt of the
losses, with a limited statutory deposit scheme
offering cold comfort to most.3
In 1995 the Bank was again faced with a high
level bank failure when it emerged that Barings, a
long established London merchant bank, had been
destroyed by losses incurred by a young trader,
Nick Leeson, working in their derivatives business
in Singapore. Leeson has since been convicted of
fraud, and, although blame has also been focused
on senior managers, none now seems likely to face
any criminal charges. A rescue was contemplated,
but, after consultation with major City institutions
during a hectic weekend after the news of the
problem broke, the Bank decided to allow Barings
to crash. Unlike BCCI, this time not so many
individuals were hurt since the bank did not deal
in traditional deposit-taking. Most of its clients
were institutional investors whose funds were pro-
tected by ring fencing and in any case the bulk of
liabilities was assumed by the eventual buyer of the
bank, the Dutch group, ING.4
It seems, then, that something has changed at
the Bank. While in the 1980s it was prepared to
launch a very expensive lifeboat for JMB, in the
1990s it has refused to rescue both BCCI, even
though this spelt bankruptcy for many innocent
depositors, and Barings, which as a blue-blooded
merchant
-
bank more than most might have
expected support. This is not to say that the Bank
had not risked and even lost money in supporting
banks.
In the early 1990s a number of small banks
— probably around 40 — began to wilt in the face
of the collapse of the property boom, the increase
in consumer bad debts, the nervousness of the
wholesale markets and the problems faced by large
US and Japanese banks at home. Initially, this was
seen as a liquidity problem, but it quickly became
a problem of the quality of their assets and, there-
fore,
a threat to their solvency. In view of this the
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