Cablegate: Bahrain International Bank (Bib) Liquidation

Published: Wed 19 May 2004 12:45 PM
This record is a partial extract of the original cable. The full text of the original cable is not available.
E.O. 12958: N/A
REF: 03 MANAMA 850
1. SUMMARY: A May 4 Asset Realization Protocol (ARP)
formally launched the liquidation of Bahrain International
Bank (BIB) after nearly three years of post-9/11
creditworthiness problems. While poor bank management and
strategy caused the failure, the Bahrain Monetary Agency
(BMA) should have acted sooner and more decisively. While
BIB is the only bank to collapse recently in Bahrain, it is
one of three banks troubled during the past year. Taken
together, these have tarnished Bahrain's image as a well-
regulated banking center. The BMA is taking steps to
enhance its regulation of the sector, which should restore
its reputation. END SUMMARY.
2. Bahrain Monetary Agency (BMA) and investor efforts to
resolve the financial standing of bankrupt Bahrain
International Bank (BIB) have failed. The BIB was delisted
from the Bahrain Stock Exchange, as recommended by the
bank's temporary committee to the BMA's Capital Markets
Control Directorate, which approved the move. In a move
sponsored by the BMA, On May 4 BIB shareholders, lenders,
and depositors formally agreed to an Asset Realization
Protocol defining the terms of sale to liquidate BIB assets
to repay lenders, shareholders, and depositors.
3. Bahrain International Bank (BIB) was established in 1982
as an offshore commercial bank with approximately 7,600
shareholders, primarily from the GCC and predominantly from
Bahrain and Kuwait. The bank's principal operations included
direct corporate investment and real estate development in
the United States and Europe, as well as financial advisory
services, according to Capital Intelligence (CI) ratings
service. CI highlighted the recessionary period in the Gulf
during the early to mid-eighties as a factor in the bank's
early troubles in developing its commercial banking
activities. This served as a rationale for the bank's focus
on investment operations run primarily from its subsidiaries
in the US and UK. However, subsequent downturns in the
bank's investment portfolio, most significantly since 2001,
had forced the bank to liquidate its U.S. and European
corporate bond portfolios. The move intended to allow BIB to
gain temporary liquidity in order to refinance the bank's
debt, according to CI.
4. BMA Executive Director of Banking Supervision, Dr. Khaled
Ateeq, highlighted September 11 and the subsequent risk
climate as overriding factors in the bank's downturn.
Significant investments in the United States and the
subsequent dramatic slide in investment returns hurt the
bank's financial standing, he told EconFSN May 9. Although
agreeing with the post-2001 trend, BIB term lender Gulf
International Bank (GIB) Managing Director for Risk
Management Mohannad Farouki stressed to EconFSN on May 18
faults in BIB's broader strategy, which involved investments
of short-term liabilities into long-term assets. Farouki
noted that BIB's post-2001 high yield investments were hit
badly, while the impact on the bank's private equity
portfolio was even more severe.
5. Dr. Ateeq told EconFSN May 9 that the BMA had been aware
of BIB's troubles from the outset and notified the bank's
board of directors to increase capital in order to
reestablish creditworthiness. However, Ateeq added, BIB's
board could not raise the necessary capital and therefore
did not fulfill the bank's obligations to its investors and
depositors. In response to questions of effective financial
supervision, Ateeq noted the significant efforts of the BMA
over the past two years in seeking to find a recovery
formula for the bank to save it from liquidation. Such
measures were regarded as the BMA's preferred course of
action in order to bolster the capacities of institutions
and substantiate the regulator's supportive role in a
banking hub. This is in line with BMA Governor Ahmed Al
Khalifa's December 13, 2003 statements in the local press
that the failure of financial institutions could impose
significant costs on society as well as impact confidence
Bahrain's banking system.
6. The BMA cooperated with creditors to assist BIB's
recovery. The bank was unable to overcome its liquidity
problems due to bad management, Ateeq told EconFSN May 9. As
a result, negotiated efforts undertaken by the BMA,
creditors, depositors, and shareholders determined the
corrective actions for the bank and eventually
considerations of asset liquidation. In January 2004, an
extraordinary general assembly meeting undertaken by the
bank's principal shareholders resulted in an agreement to
settle the bank's liabilities over the medium term. On May
5, local newspapers reported the agreement reached May 4 to
establish an Asset Realization Protocol (ARP) announcing
BIB's liquidation.
7. The agreement allowed for the establishment of a
specialized committee including creditors and officials from
the BMA, as well the appointment of an ARP manager. Both
entities would be responsible for overseeing the liquidation
or sale of BIB's assets. The final agreement, as stipulated
under the ARP, called for 85 percent of revenue gained from
assets sold to be distributed to depositors and 15 percent
to bank creditors. Following the full repayment of
depositors, the remainder of the proceeds will go to bank
creditors, in accordance with BMA guidelines that give
depositors priority, Ateeq told EconFSN May 9. Any proceeds
remaining after full repayment to depositors and creditors
would be distributed to shareholders. GIB's Farouki
suggested to EconFSN May 18 that finding a resolution to the
BIB bankruptcy was not an easy matter and essentially a no-
win situation for those involved. As a lender to BIB,
Farouki did not expect GIB or other term lenders to receive
more than 23 cents per dollar of assets sold.
8. On April 14 local newspapers reported on parliamentary
inquiries into the BIB affair. Parliamentarians raised
questions of the BMA's role leading up to the bank's
bankruptcy, possible penalties to banking executives, and
questions about whether other banks in the country in the
same situation. According to these reports, Minister of
Finance and National Economy Abdullah Saif stressed the
efforts of the BMA to resolve BIB's liquidity problems and
highlighted that BIB's assets only accounted for 0.4 percent
of Bahrain's total bank assets. Saif placed the blame on
the bank's board members and executives who failed to
conform to BMA guidelines and were not qualified to
effectively manage BIB. BIB's circumstances were brought up
in later inquiries by parliamentarians into financial
irregularities relating to the Minister's (mis-)management
role as chairman of the national pension fund. Local
newspapers on April 21 further accused the Minister of not
taking assurances from the BMA regarding fund deposits in
the Bahrain Saudi Bank, another bank suspected of financial
9. Reiterating his position that BIB's chief executive and
board members were unfit to assume positions in Bahrain's
banks, Ateeq told EconFSN May 9 that shareholders,
creditors, and depositors were free to take legal action
against BIB banking officials and chief officers. Farouki
noted that the BIB collapse could have been avoided if the
bank had not risked client money to pursue its investments
in the first place. However, Farouki noted to EconFSN May 18
the evident complexities in imposing more direct BMA-issued
punishments on BIB and its executives. In the absence of
practical punitive solutions, Farouki told EconFSN that he
agreed with Ateeq's suggestion that legal cases brought
forth by investors, lenders, and depositors would be the
most effective course of action.
10. Farouki told EconFSN May 18 that irregularities
involving three Bahrain-based banks-Bahrain Saudi Bank
(BSB), Bahrain Middle East Bank (BMEB) and BIB--in the
course of a year did tarnish the country's banking image.
Potential collapse of BSB and BMEB was averted through BMA
action. Only the BIB has declared bankruptcy.
11. The only other bank in Bahrain currently facing
difficulties is Bahrain Middle East Bank (BMEB), Ateeq told
EconFSN May 9. By contrast to BIB, BMEB is now in the
process of arranging creditors and refinancing to re-
establish the bank. Ateeq emphasized that unlike the case
of BIB, BEMB has made a commitment to the shareholders and
others. As a result of the BMA's regulatory guidance and
supervision, the bank is very likely to survive, Ateeq
added. GIB's Farouki supported this assertion, stating May
18 that as long as the bank effectively manages its expenses
it will be able to recover. However, the Bahrain Middle East
Bank case was not as bad as the BIB affair, Farouki told
12. In response, the BMA is taking steps to improve bank
regulation. Pursuing initiatives to promote risk awareness
in the country's banking industry, the BMA sponsored a risk
survey conducted by PriceWaterhouseCoopers to gauge common
issues facing the banking industry. The BMA also issued new
corporate governance guidelines for banks in the country.
The new guidelines define operational and managing
supervision criteria for bank executives and board members
in order to ensure effective management as well as ensure
performance monitoring. In addition the BMA has sought to re-
define punitive measures for banks not abiding by BMA
regulatory guidelines and mandates, according to March 31
local news articles.
13. COMMENT: The BIB experience should serve as a case study
in the value of transparency. Through it, the BMA has
accepted the principle that ignoring a bank's problem or not
taking swift action in accordance with established
regulation is counterproductive in the long run.
Overlooking this problem for too long meant its resolution
was not in the best interest of stakeholders and caused
public embarrassment. FTA commitments to greater financial
services regulation and transparency combined with this
lesson could improve the sector and enable it in time to
recover its former luster. END COMMENT.
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