Full Effects Beginning to Surface in '84 Bailout by Bank of England

By Mendelsohn, M. S. | American Banker, June 28, 1985 | Go to article overview

Full Effects Beginning to Surface in '84 Bailout by Bank of England


Mendelsohn, M. S., American Banker


LONDON -- Almost a year after the event, the full implications of the official rescue of a relatively obscure British bank are only beginning to make themselves felt.

The rescue has exposed the Bank of England to unprecedented criticism and has precipitated proposals for a fundamental change in the way London's 600 British and foreign banks are supervised.

Such change -- envisaged as a shift from the informality of British supervision to more structured regulation -- might have come about in any case with the pending deregulation of the sterling securities markets.

However, the proposed shift has been hastened by the trauma of Johnson Matthey Bankers, commonly known as JMB. JMB had assets equaling about $2.7 billion (U.S.) on a capital base equaling about $97 million when rescued by the Bank of England last September.

Although JMB is small, it is one of the five members of the officially recognized London gold market. That is why the Bank of England rescued it, although that decision was widely criticized from the first.

Since the rescue, the central bank has poured into JMB some $228 million, or about 43% of Bank of England's modest resources of about $525 million. The hope is that most of that money will eventually be recouped, but the size of the commitment is one reason for the criticisms leveled against the Bank of England, which originally claimed that no taxpayer funds would be involved beyond the one pound sterling acquisition price.

Even more criticism has been leveled at the manner in which JMB's difficulties were allowed to accumulate undetected.

JMB was created in 1965 to conduct the banking and bullion business of its former parent company, Johnson Matthey PLC, a firm of precious metals refiners. Before 1981, JMB confined itself to bullion dealing and the foreign exchange dealing associated with that part of its business. Those activities remained profitable throughout.

However, four years ago JMB branched into commercial lending. By mid-1984 its reported exposure to two borrowers in Pakistan had risen to 72% of the bank's capital base. Subsequent investigations disclosed that the true exposure was actually 115% of JMB's capital base.

Even the reported exposure to just two borrowers should have alerted the Bank of England, but its reaction was sluggish. JMB's returns for March 1984 were provided to the central bank only in June. A meeting with the central bank's supervisors, arranged for July, was not held until August, and only then was the ture extent of JMB's exposure revealed.

On present estimates, JMB appears to have lost about $325 million, more than half its loan book of $520 million at the time of the rescue.

No Takers Found for Failed Bank

The official rescue, last Sept. 30, was mounted after a weekend's feverish negotiations had failed to find a buyer. …

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Full Effects Beginning to Surface in '84 Bailout by Bank of England
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