fiml.to/gmn/5.28.8
HM Treasury
Michael Stone Esq
Hong Kong Department Foreign Office
Miss 102/3
- 2
Parliament Street London SWIP 3AG Telephone 071-270 4670
Pa
Bcc tic. Все
Downing Street
LONDON
SW1
Dear N. Stome бюле
Deci
;
28 August 1991
BCCI
You asked me last week whether we had any view on how well the banking supervisors in Hong Kong had handled the BCCI affairs. I have now read the batch of papers which had been sent to the Treasury, including the Hong Kong banking supervisors' formal report.
The banking supervisors clearly had a very difficult decision to take. On the one hand, they knew from the Bank of England that there were major problems within the BCCI group, including massive fraud and huge, disguised and unquantified, losses. On the other hand, BCCI Hong Kong is a self- contained subsidiary with comparatively little exposure to the rest of the group, SO not only would the banking supervisors have been in a position to judge that the subsidiary was solvent and possibly clean but the case for closing the Hong Kong subsidiary would have been harder to defend in the courts. Moreover, unlike the UK branches, where the assets belong to the group as a whole and could not be ringfenced, the fact that the Hong Kong operation was a self-contained subsidiary meant that the assets could be ringfenced within Hong Kong. The subsidiary could, at least in principle, continue to function as a self contained legal entity separate from the group.
On the other hand, experience with British and Commonwealth Merchant in the UK demonstrates how a solvent, highly capitalised well-run bank can be brought down by contagion from an insolvent subsidiary in the same group. It demonstrated how easy it is for panic to spread from one part an organisation to another. The banking supervisors were clearly alert of the risk of a run on the Hong Kong subsidiary but decided to take the chance of keeping the operation going. I would not like to express a view on whether opening the bank
on the Saturday was a risk worth taking.
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