Bank on the rack over BCCI

THE Bank of England is squaring up for a bruising £1bn courtroom battle - an unprecedented event in its 300-year history.

In just a few weeks' time, it faces accusations of 'misfeasance in public office' over its role in the £13bn collapse in 1991 of the Bank of Credit and Commerce International, then the world's biggest banking failure.

The lawsuit is being brought by Deloitte & Touche, the liquidators of BCCI, who want damages to pay to the 500,000 or so depositors who lost money.

The liquidators believe they have a 'smoking gun' in the bulky form of files of internal memos that paint a vivid picture of the Bank's views on BCCI. The memos show that officials expressed concerns dating back to the late 1970s.

Peter Cooke, head of banking supervision from 1976 to 1985, met BCCI's then head man, Agha Abedi, in 1978. In a note to the Bank's then Governor, Cooke described Abedi as 'the living personification of Uriah Heep' and 'essentially a slippery customer'. The note was prescient. In Charles Dickens' novel, David Copperfield, Heep perpetrates a fraud on the Bank of England.

Nonetheless, the Bank granted BCCI a licence in 1980 and allowed it to operate for a further 11 years.

One area of contention in the case will be the fact that BCCI was officially based in Luxembourg, though the nerve centre of its operations was in London. The liquidators will focus on how the Bank saw its regulatory responsibilities in the light of this.

A Bank official wrote in November 1977 that he was 'perturbed' at the spread of BCCI's business in the UK. He added that 'it would be possible to push most of the responsibility for any collapse on to the shoulders of either the Luxembourg-banking authorities or Bank of America' - at that time a big BCCI shareholder.

In June 1982, an official sent a paper to Cooke saying: 'The situation cries out for one supervisory authority to take a deep look at the whole group.' It went on to say that the Luxembourg location 'has always been something of a fiction'.

Three years later, another senior official wrote: 'To volunteer ourselves into a position as supervisor for an institution about which we have grave doubts, would be rather like attempting to take a stroll across a motorway - we might get away with it but there would be very high risks attached - particularly if the institution is as [a colleague] has said, a disaster waiting to happen.'

The risk being talked about here is, of course, to the Bank itself, not the danger to hapless depositors.

The Old Lady will conduct a vigorous defence. Former Governor Sir Eddie George is expected to emerge from his Cornish retirement home to take the witness stand.

The Bank privately admits its oversight of BCCI left a lot to be desired - indeed, it was one factor in Chancellor Gordon Brown's removal of its banking supervision to the FSA in 1997. But George is incensed at any implication that his senior staff knowingly or deliberately failed to do their duty.

The nub of the case will be whether the embarrassing memos and other evidence are enough to prove deliberate misfeasance as opposed to mere ineptitude.

A regulator cannot be sued for incompetence. The rationale is that, if watchdogs faced the threat of legal actions at every turn, they would end up having to regulate the financial services industry into obliteration.

But the obvious risk here is that officials might get away with cavalier, craven and buck-passing behaviour, since deliberate misfeasance is pretty hard to prove.

Though the BCCI events were 10 years or more ago, they remain highly relevant. The court case will be expensive and time consuming and may be an ordeal for some elderly former Bank staff. But it will provide a valuable service in bringing the conduct of regulators into the open.

The question of how regulators can be held to account when they fail to prevent major financial disasters is an important one. It is certainly close to the heart of Equitable Life savers as they await the long-delayed report by Lord Penrose.

Try harder

IT was pretty cheeky of Tesco to try to cash in on the fact that Jonny Wilkinson's mother was calming her nerves by shopping in one of its stores whilst her lad was performing his heroics in Sydney.

The store could at the very least have sent Mrs W a congratulatory hamper without having to be shamed into making a donation to charity.

But I suppose this can be seen as an example of the opportunism and cost control that keeps Tesco at the top of the supermarket tree.