The Bingham Report on the failure of BCCI - caused by financial fraud on a global scale - was published 25 years ago last Sunday.
It came in the middle of a decade that saw a run of bank failures - from Johnson Matthey in 1984, through the secondary banking crisis of 1991-93, to Barings in 1995. BCCI was the most sobering of them, and I still clearly remember my short spell on the Bank of England’s BCCI helpline.
But the chief reason the anniversary of Bingham is worth marking is that it provides probably still the best route into understanding regulators' thought processes, warts and all. And it's all the better for being completed within 18 months of the bank being shut down.
Of course regulation has changed greatly since, and partly as a result of, BCCI. But much of Bingham still resonates. Here are 5 reasons why BCCI is still a very modern story, relevant to firms and regulators alike:
1. What you see is all there is (WYSIATI): Popularised by Daniel Kahneman in "Thinking fast, and slow", this behavioural bias is prevalent throughout the BCCI saga. The pressure to act on the information available, instead of digging deeper first, remains a very live one for regulators.
2. Group Supervision: For all the subsequent reforms, including since the crisis, regulating (or managing) multiple entities in the same group, especially if operating in different countries, remains fiendishly difficult. Whatever the Brexit outcome, it is hard to believe this won't get harder before it gets easier.
3. Complexity: One of Bingham's insights is that the Bank should have been much harder on the complexity of BCCI's structure. This made it all but impossible to be confident that BCCI met the minimum standards, and correspondingly easier to perpetrate the fraud. Structural complexity also played an important, if underplayed, role in the financial crisis, and remains a live risk for senior management, regulators and auditors alike.
4. Group think: More discussed these days than it was in 1992, it is hard to read Bingham without concluding that greater diversity of approach and better exploration of alternative options would have improved the Bank’s supervision of BCCI. Encouraging and taking proper account of contrary or dissenting views remains a challenge for most organisations.
5. Wood and trees: At each stage of what was at least a 12 year saga, Bingham explains how the Bank chose to address the immediate issue, and to take a narrow view of its powers and remit. It is now common for regulators to talk about root causes, but deciding which level of a problem to try and fix remains one of their biggest challenges.
Bingham described BCCI as "systematic frauds ... on a scale which had never been known before", and also observed that "the supervisory problems which BCCI presented were tackled by busy men and women, often over-stretched and with other problems competing for their attention."
In the years since, the potential scale of fraud in financial services firms has grown, as has the workload of supervisors. And finding ways for both firms and supervisors to prioritise meaningfully remains a holy grail.
Lastly, it’s worth noting that BCCI was both a prudential and a conduct failure, and that in its day it was lauded as a competitor to the established clearing banks. Together with other corporate failures of the time, such as Maxwell and Polly Peck, it also prompted the formation of the Cadbury Commission, from which emerged the UK Code of Corporate Governance.
A generation on, therefore, BBCI's lessons still challenge us, and Bingham, a compelling narrative in its own right, is well worth a read.
THE BANK of England yesterday put a brave face on the Bingham report by accepting its criticisms and recommendations and announcing a new top-level appointment to investigate fraud.