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31. My bank examiners, who had been working with Price
Waterhouse, reported to me on Sunday afternoon that they considered that a relatively modest amount of additional specific provisions might be required against some of BCCH's problem loans and also against BCCHK's trade finance business with the rest of the BCCHK Group.. A total of $100mn of additional provisions was agreed with the auditors. This reduced the bank's capical adequacy ratio to just above its minimum level of 11%. Thus, the bank's capital position had become less comfortable, though it was still meeting the requirements of the Banking Ordinance and remained solvent as a going concern. As a result, I contacted my representative in Abu Dhabi to ask him to request the Government there not only to provide a statement of support but also to back this up with a further injection of capital (if necessary in the form of a loan) to increase the margin of comfort in BCCHK's capital adequacy rat:o. I considered that a further injection of capital would also provide a powerful demonstration to the public that the shareholders stood behind the bank
32. In the absence of such support, the assessment of
ayself and my advisers was that a run on the bank on Monday could not be ruled out, particularly in the light of the growing publicity about the problems of the rest of the BCC Group. A clear statement of support, particularly if accompanied by an injection of new capital, from the majority shareholders would have helped to reassure counterparties and depositors about the bank's viability and allowed it to open for business on Moncay. A draft press notice prepared to cover that eventuality is at Enclosure VI.
This press notice was not issued because I was informed on Sunday 1ight that the (overnment of Abu Dhabi felt unable to provide the written statement of support for the bank which I requested. This left the bank in an isolated position, without any source of long-term financial support.
33. the question has been raised as to why the Exchange
Tund could not have provided that support, either by acquiring the bank or guaranteeing its liabilities. The
tragegic use of the Exchange Fund is governed by #tatute. It may be used for those purposes the l'inancial Secretary thinks fit affecting the exchange value of the Hong Kong dollar. There can be <ircumstances where the troubles of a bank are of such magnitude that they adversely affect the dollar's exchange value. For example, the collapse of a large bank with significant obligations to other large banks could lead in turn to difficulties for these banks.
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