Law Relating to Banking in Hong Kong

9.The Collapse of BCCHK

Chapter฀9฀ The฀Collapse ฀of ฀BCCHK฀ 9.1฀Th e฀Failur e฀o f฀BCCH K฀ Hong Kong's system of regulating banks failed in July 1991, when the Bank o f Credi t an d Commerce Hon g Kon g (BCCHK ) close d its doors and ceased trading. The bank had 40,000 depositors with HK$10.85 bilhon in deposits. Newspapers reported that depositors broke down and wept. Some went on hunger strike; others organized protest marches. Queues of angry and nervous depositors demanded the immediate withdrawal of their funds. Ther e were runs on fou r other banks, including Standard Chartered and Citibank. Fears of a territory-wide ru n sen t th e Han g Sen g Inde x plummeting . Th e Government moved swiftly, injecting $6 0 million into the banking system. For any financial community , failure o f a bank of the size of BCCHK would be very serious. For Hong Kong, nervous about the uncertainties o f th e change o f sovereignt y i n 1997 , it could hav e been a disaster. Hong Kong is one of the world's largest commercial and financial centres. Sound banking is its backbone. In 1991 there were 16 5 fuU y Ucense d banks , 45 restricted Ucenc e banks an d a further 16 6 deposit-taking companies . At the en d o f March 199 3 there were 16 1 licensed banks, 58 restricted Ucence banks and 144 deposit-taking companie s i n operation . A surve y carrie d ou t i n September 199 1 showe d tha t 28 % o f peopl e surveye d i n Hon g Kong had no confidence in the banking system. 9.2฀Th e฀Closur e฀o f฀BCCH K฀ Seventy-seven per cent of BCCHK, a direct subsidiary of the Bank of Credi t an d Commerc e Internationa l (BCCI) , i s owne d b y th e Government of Abu Dhabi. BCCI was set up by a Pakistani businessman , Agha Hassan Abedi in 1972. It was registered in England with headquarter s i n Luxembourg . BCCI' s Londo n headquarter s 307฀ 308฀Law ฀Relating฀to฀Banking฀in฀Hong฀Kong฀ were closed on 5 July 199 1 when widespread fraudulent activitie s were revealed. On 3 January 1992 , a Luxembourg Cour t made an order liquidating BCCI's operations there. On 14 January 1992, the UK Hig h Court , findin g tha t BCC I wa s plainl y an d hopelessl y insolvent, allowed BCCI to seek liquidation. During 1990 , BCCHK's capita l adequacy ratio fell below th e minimum 11% . It had recorded a loss of $431,000,000. The situation was redeemed by a loan of $125,000,000 from the Abu Dhabi government. On 2 July the Hong Kong Commissioner of Bankin g (the Commissioner ) wa s informe d o f suspecte d frau d i n th e tw o main subsidiaries of BCC holdings, BCCI SA, incorporated in Luxembourg , and BCCI Overseas, incorporated in the Cayman Islands. On 3 July 199 1 the Commissioner briefed the Financial Secretary . On 5 July 1991 the Commissioner wrote a memorandum informin g the Financia l Secretar y tha t BCCH K wa s solven t an d viabl e bu t saying h e wa s considerin g th e option s o f placin g restriction s o n BCCHK, appointin g persons to advise BCCHK or assuming con trol o f it s busines s eithe r directl y o r indirectly . I n th e meantime , the Financial Secretary informed the Commissioner that he considered it to be in the public interest for the Commissioner to exercise his power s unde r B O s52 . The Commissioner , however , allowe d BCCHK t o remain ope n o n Saturda y 6 July 1991 , reassuring it s customers in a press release of 5 July that it was solvent, sound and viable. On 8 July 1991 , he closed BCCHK. Reportedly, the Commissioner 's action was prompted by two events — the blocking of BCCHK credit cards by Visa International on 6 July 199 1 and the refusal by the Government of Abu Dhabi to make a further loa n of $100,000,000. 9.3฀Rescu e฀Attempt s฀ Hong Kong' s Exchang e Fun d coul d hav e bee n use d t o rescu e BCCHK by taking it over and discharging...