The Bingham report into BCCI is a thorough, sensible, balanced piece of work. It is a detective story about crime on an enormous scale. The BCCI fraud is almost certainly the largest such crime ever committed, outgunning the transgressions of the late Robert Maxwell by a factor of five. But in the best detective stories, the good guys chase the baddies though each twist and turn, tracking each lead, and in the final chapter catch them up. In this story the good guys bumble away, always one step behind.
Here is a bank that everyone with any knowledge of banking knew was fishy. But finding any positive evidence of just how fishy was extremely difficult. This writer, with a colleague, examined BCCI in 1976. We were met with polite obfuscation; we were told about its commitment to customers; our attention was drawn to the very real deficiencies of the British competition; we saw earnest ranks of young clerks; and we learned virtually nothing. In the end we packed up the papers, filed them under 'grope', and wrote about the sterling crisis instead. But then we were not charged with regulating the bank.
There is an element to the Bingham report that is ultimately not credible. You can see at each stage why sensible, honest, honourable people made individual decisions that might have been right but proved to be wrong. Each decision, in itself, is perfectly understandable, though some do look rather sloppy. What is astounding is that no one in the regulatory world stood back from the whole story and saw the big picture.
The structure of regulation was dreadful, split between Luxembourg and London. But while efforts were made to change this, it was allowed to continue. BCCI's legal and organisational structure was dreadful, for it was designed to confuse. It was controlled from Abu Dhabi, legally located in Luxembourg and the Cayman Islands, and to a large extent managed in London. But again, while efforts were made to change the structure, it was allowed to continue.
The bank's financial performance by any conventional criterion was poor, even on the known figures, particularly after 1985. But again, while new capital was sought and obtained, it did not occur to anyone that the bank might fail until failure was more or less inevitable.
So time and time again in the Bingham report there are gently phrased criticisms of the Bank. For example: 'The Bank's reponse was so off-hand as to suggest a lack of interest . . .', 'I find it surprising no effort was made . . .', 'it is unfortunate that this promising initiative was so quickly snuffed out', 'I find this puzzling and think the omission was very unfortunate', 'at the very least it would have expected the investigators to be acutely concerned . . .', and so on. Page after page after page, the criticisms continue. Individually they might seem quite innocuous; cumulatively they are utterly devastating.
Why did sensible people, for the regulators are both decent and sensible, make mistakes on this scale? Two answers seem to emerge from the Bingham report, though they are not properly developed in it. One is that the people in the Bank could not quite believe how dishonest the people at BCCI were, or at least they could not believe it until it was too late. The best detectives have criminal minds, a quality happily rare among Bank staff, coming in on commuter trains from their homes in the leafy suburbs and doing a stint in regulation before being transferred to economic policy or some other more congenial corner.
The other is that the structure of the Bank makes it difficult to focus attention sufficiently on this task. There is criticism of poor communications within the Bank in the report, but it rejects the proposal that regulation should be separated from central banking, as it is in many other countries. The case for this can be argued either way, but it is hard not to acknowledge that the Bank's overall reputation for competence has been damaged by this failure.
Damaged by crooks
This must be wrong. It must be wrong for the body whose prime job it is to administer monetary policy to be damaged by crooked foreign bankers. Had there been an independent banking regulatory authority, as there is for the securities markets or the building societies, there would have been a cadre of people who were determined to make their name doing this job well. There would be a single head of the body whose entire reputation would stand or fall on the quality of banking regulation.
As it is, this is just one more embarrassing incident for the Bank and its Governor. But it is one that will make the Bank's enemies even more determined that it should not have control over monetary policy; and one that will force its friends to acknowledge that before such powers were transferred, there would have to be substantial reforms within the Bank.
By contrast, had a separate banking regulator failed in a similar way, it would have been similarly damaged but there would be no contagion across to any other function.
To be sure, Bingham took the other view: that it was better to patch the present system than to take regulation away from the Bank. But there is no detailed justification for this view, and this - to borrow from the language of the report - seems a very unfortunate omission.
Regulating BCCI was a dreadfully difficult task. But ultimately regulation is only as strong as its weakest links. Those links have now been strengthened, and the precise formula adopted by BCCI will not occur again. But there will be frauds in the future of a different nature. It is very difficult to be confident about the ability of even a patched regulatory system to nail them before they do serious damage.Reuse content